As investment managers and the wider economy emerge from lock-down, thoughts will be turning to the opportunities and challenges the new landscape presents.
It is fair to say that there has been a lull in fundraising activity and, in particular, fund IPOs since the early part of this year. However, since April we have seen an uptick in secondary fundraising activity (more on which below).
A number of European managers have also been active on the acquisition trail during the first half of this year and some of the drivers for M&A in the sector have, if anything, been accelerated during this unusual period, with economic and fee pressures, technology cost and regulatory burden continuing to favour consolidation and achievement of synergies. Managers will also be assimilating the impact of the government’s decision not to elect to extend the Brexit transition period regardless of whether a comprehensive deal with the EU is achieved or not.
Jupiter Fund Management plc completed the acquisition of Merian Global Investors for £370m upfront equity consideration earlier this month. Schroder Real Estate very recently announced the acquisition of a majority stake in Pamfleet, the Asian real estate investment manager, with US$1.1bn of assets under management across four funds. This follows Schroders’ acquisition of German real estate specialist, Blue Asset Management, in 2019.
Other recently announced acquisitions include Liontrust Asset Management’s purchase of the UK multi-manager business of Architas from AXA SA for up to £75m and the acquisition by City of London Investment Group of New York-based investment adviser, Karpus Management Inc. for approximately £78m.
For listed funds, the vast majority of fundraising activity has been focused on secondary issues for existing successful strategies. The initial COVID-19 crisis in March and early April of this year led markets to fall sharply and many closed-ended funds to move to very high discounts – a sentiment that had improved considerably after the UK general election result in December 2019 was severely damaged. Since April, there has been an improvement and a number of funds have sought to raise capital through secondary issues. These include alternative asset funds in, for example, the infrastructure and energy sectors (e.g. the Renewable Infrastructure Group Limited’s £120m raised in May), REITs (e.g. Supermarket Income REIT (which raised approximately £140m), and Warehouse REIT (£153m)), debt funds (e.g. TwentyFour Select Monthly Income) as well as funds invested in equities and bonds. Asset classes that provide resilient contracted cash flow and income to investors are expected to continue to be amongst the most attractive opportunities as well as those strategies focused on healthcare opportunities.
The fund IPO market has been extremely challenging. A number of relatively high-profile fund IPOs were pulled in the first couple of months of the year and before the COVID-19 crisis materialised. There are signs that the market is becoming more receptive to potential IPOs, although as investors are increasingly undertaking very detailed due diligence on fund managers and new products, it remains to be seen how such processes will adapt whilst we still have in place social distancing restrictions and travel bans across a number of key global jurisdictions. For example, it is not entirely clear what investor appetite will be for virtual roadshows and other similar non-face-to-face interactions.
The amount raised by private funds has fallen this year, despite some notable closings. Whilst fundraising activity is expected to pick up in Q4, some reports suggest that it will be another two years before activity fully recovers and the environment remains challenging, particularly for first time managers.
Finally, a brief regulatory round-up. The COVID-19 pandemic has placed a spotlight on firms’ governance and operational resilience frameworks. Whilst a number of asset managers report that they have managed the effects of the pandemic better than initially anticipated, there is a clear need for many to re-evaluate their frameworks. Lisa Lee-Lewis and others consider this topic further in this update. Katie Stephen and others also consider in this update the heightened risk of market abuse in a remote working context. As we emerge from lockdown, two regulatory issues are again grabbing firms’ attention, the first being the sustainable finance agenda. This summer has seen a number of important papers concerning environmental, social and governance issues including the so-called EU Taxonomy Regulation being published in the Official Journal of the EU and the PRA issuing a Dear CEO letter on managing climate-related financial risk. Another important paper, which Daniel Nevzat discusses in this update, is the CFRF guide to climate-related risk management. Second, with an extension to the transition period seemingly ruled out, Brexit is again on every firm’s agenda. This summer we have seen the UK Government and the European Commission produce their own drafts of a proposed free trade agreement which Matthew Gregory and others analyse in this update..