Intertrust N : UK private capital market faces slew of regulation and demands for data

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The UK private capital market faces twin challenges of increasing regulatory constraints and a surge in investor demands for more detailed fund data

The UK private capital market is facing huge challenges in terms of data collection and analysis.

Increasing demand from investors for more detailed information around funds, coupled with forthcoming regulatory changes within the UK and across Europe, means CFOs have a massive task ahead.

For UK private capital this has meant having to extract detailed data from illiquid funds to meet new benchmarking criteria, including portfolio performance and environmental, social and governance (ESG) standards.

To understand more about the changes in the market, Intertrust Group conducted research with Global Custodian to ask chief financial officers (CFOs) at private capital funds what trends they are witnessing in the industry. The report, The future private capital CFO: Unleashing potential in the ESG era, delves into data demands private capital CFOs anticipate from their investors in the years ahead.

LPs demand live or daily reporting from private capital CFOs

Daily demands from investors have grown compared with last year. Of the UK CFOs surveyed, 33% said their LPs were demanding live reporting into portfolio performance, with 57% saying it was either daily or weekly.

Coupled with regulatory changes and new reporting requirements, the survey makes it clear that UK private capital CFOs face a significant challenge. They need to be able to slice and dice that data into a format that will satisfy the reporting requirements of both investors and regulators.

To meet these demands, 24% of CFOs were planning to invest more in technology, 24% said they were planning to increase their finance team and 19% said they were planning to outsource more functions.

Partnering with a specialised provider with the right technology and applications can reduce the burden on finance teams. The outsourcing partner can manage technology updates, licensing and on-going staff training, and will ensure best practice processes and procedures are followed.

UK and EU regulatory pressure will increase for private capital CFOs

For UK private capital fund managers there is still uncertainty around the fallout from Brexit and how the Financial Conduct Authority (FCA) will implement new legislation (and its compatibility with forthcoming EU legislation).

In addition, UK managers involved in marketing and distributing their funds across Europe will also have to adapt to changes in European legislation. They will be affected by the EU Sustainable Finance Disclosure Regulation (SFDR), new rules that aim to make the sustainability profile of funds easier to benchmark.

There is also the EU taxonomy regulation, which classifies environmentally sustainable economic activities. While there is a massive appetite from investors for ESG investments, it creates a large data requirement for CFOs.

Over the next three years, UK private capital CFOs expect to complement the skill sets of their in-house finance teams by seeking outsourced expertise in technology (27%), operations (23%), accounting (21%) and tax (18%).

The increasing regulatory obligations make running a fund more complex. Smaller managers may find that partnering with a specialist provider is the best and most cost-efficient option, given the huge expense involved in maintaining and updating technology and hiring specialised personnel.

UK private capital funds to increase diversification into growth equity

Of the UK CFOs surveyed, 23% were currently invested in growth equity, followed by 20% in private debt and 20% in venture capital.

A fifth of UK private capital CFOs planned to diversify their portfolios over the next two years into growth equity (compared with 21% globally), 20% into venture capital (compared with 19%) and 18% into private debt (compared with 16%).

In Europe, just 11% were planning to diversify their holdings into private debt, 15% into venture capital and 22% into growth equity.

There is much demand in the private debt sector in the UK as small and medium-sized enterprises (SMEs) and corporates look to financing arrangements outside traditional bank lending post-Covid. Non-bank lending platforms are on the increase, with attractive solutions including faster processing and fit-for purpose arrangements for corporates and SMEs.

In the UK, there was a higher expectation that the fundraising climate will significantly improve in private debt, growth equity and venture capital. UK private capital fund managers expected the funding climate for buyouts and infrastructure to slightly improve over the next 24 months.

LP demands for information on ESG and D&I will grow

A higher proportion of UK private capital CFOs surveyed said they would describe LPs' expectations around ESG issues as very important. In fact, 68% said ESG was very important, compared with 48% in Western Europe and 58% globally.

In addition, a greater number of UK private capital CFOs believe that gender diversity, racial/ethnic diversity and carbon footprint play a crucial role when assessing an investment opportunity, compared with other regions. In the UK, 44% said gender diversity was crucial compared with 15% in Western Europe and 28% globally.

In terms of racial and ethnic diversity, 51% of UK private capital CFOs said this was a crucial element of their strategy, compared with 17% in Western Europe and 27% globally.

Minimising carbon footprint was also an important UK concern. In the UK, 48% said carbon footprint was crucial, compared with 43% in Western Europe and 34% globally.

CFOs also predicted that LPs would require more frequent updates on ESG data. Overall, 40% of UK private capital CFOs anticipated the review of ESG performance to be weekly and 55% of respondents were in the process of integrating ESG into their investment process across platforms.

UK private capital CFOs said they were meeting the demands for ESG reporting by investing in expanding their technology framework (28%), increasing the size of the in-house finance team (26%) and outsourcing more functions (21%).

Outsourcing frees the fund manager to concentrate on their portfolio performance without the need to retrain staff, invest in expensive technology infrastructure and manage regulatory updates.

Why Intertrust Group?

• Intertrust Group is a publicly listed company with more than 70 years' experience in providing world-class corporate and fund services to clients around the world.
• Intertrust Group provides a wide range of financial and administrative services to clients operating and investing in the international business environment. We help investment managers tackle the increasing complexity around investor reporting and regulatory change. We provide this through our fund administration, third-party AIFM and depositary services. Along with our new bespoke ESG reporting service offering.