The strategy will be co-advised by Franklin Templeton and Lexington Partners.

George Szemere, Head of Alternatives EMEA Wealth Management, says: “This upcoming launch will mark an important milestone for Franklin Templeton, in line with our commitment to build a diversified, market-leading alternatives business globally. Leveraging Lexington’s world-class investment expertise, we are excited to bring to market this new offering that will broaden access to private markets whilst offering wealth managers a more robust and sophisticated toolbox to help clients accomplish their long-term goals. This new offering is testament to our long history of innovating and providing investors with unique solutions to meet their evolving needs.”

The firm writes that the new open-ended strategy will be Luxembourg-domiciled and provide investors, principally in the wealth channel, access to a diversified private equity secondaries portfolio. The strategy will allow access to an asset class that, until recently, was primarily available to institutional investors, and to a lesser extent, the wider market, the firm says, adding that it is scheduled for launch in early 2025.

Franklin Templeton writes that private equity secondaries are a rapidly growing segment of the broader private equity market and an important source of liquidity for investors. They give wealth investors the opportunity to gain private equity exposure and can serve as a useful diversification tool to actively rebalance portfolios, the firm says.

Wil Warren, Partner and President, Lexington Partners says: “We are excited to partner with Franklin Templeton on this new strategy. This partnership is a significant step, enabling us to offer our investment strategy to the wealth channel. We look forward to working together to provide investors with access to a diversified private equity portfolio with a focus on long-term capital appreciation.”

The opportunity in private equity secondaries

Franklin Templeton writes that private equity fundraising has surged in recent years. “However, private equity (PE) exits slowed dramatically in 2022 and 2023 and continue to be relatively stagnant. While PE deals and exits have slowed, secondaries activity has picked up as institutional investors seek to rebalance their portfolios.

“Many institutions committed significant capital to PE in the last decade, given the potential for meaningful returns. In response to the positive liquidity environment of steady distributions experienced by institutions during that time period, they increased their allocations to private investments. As institutions now find themselves overallocated to PE with distributions slowing, they are accessing the secondary market to diversify their holdings and meet future commitments. In addition, secondary managers benefiting from significant inventory and institutions’ need for liquidity, have been able to select from broad pools of assets that are seeking attractive investment interests at favourable pricing. 

“The secondaries market has grown substantially over the last decade, from USD28 billion of market volume in 2013 to approximately USD130 billion in 2024. Secondaries represent a growing and vital part of the private equity ecosystem, providing liquidity, diversification, and potentially shortening the distribution period.”

Jake Williams, Head of International Alternatives Product Strategy, notes: “Over the last few years, the industry has made great strides in opening up access to private markets through the introduction of various fund structures. We have been working to develop a product that enables access to private markets while providing a degree of liquidity through periodic subscriptions and redemptions which are supported through a variety of liquidity levers. With this new open-ended fund structure, we are pleased that we will be able to offer investors in the wealth channel access to private markets with lower investment minimums and more flexible features.”

The firm writes that this further expands the offering of non-listed investments for Van Lanschot Kempen’s private banking clients. The fund focuses on small and medium-sized companies in Northwestern Europe and builds on our extensive investment expertise in this area.

Wendy Winkelhuijzen, Member of the Management Board of Van Lanschot Kempen, responsible for Private Banking Netherlands, says: “Van Lanschot Kempen advises its clients on the preservation and growth of their wealth. Together with the client, we set long-term financial objectives and based on that time horizon, we build an investment portfolio. Investments in private equity can be an attractive asset category to add to a portfolio from the perspective of potential returns and increasing diversification. We see a lot of demand from clients for these types of alternative investment products, in part because their value is not entirely dependent on the stock market. This new fund further strengthens our ongoing private equity offering, with a focus on small and medium-sized companies. This closely aligns with the areas of interest of many of our entrepreneurial clients.”

Kempen European Private Equity Fund III is a closed-end investment fund with a co-operative structure, and has a 10-year term. This is the fourth private equity fund that Van Lanschot Kempen has introduced in the past five years, following two successful funds with a focus on Europe and one fund focusing on North America. It is hybrid investment fund that combines investments in private equity funds with co-investments. This contributes to the objective of building a diversified portfolio while the addition of co-investments can help to reduce costs and accelerate the deployment of capital. As a result, repayments are also expected to occur sooner. The first subscription period runs until 7 March 2025, which may be followed by a second subscription period.

Sven Smeets, Head of the Private Equity Strategy at Van Lanschot Kempen, says: “Small is beautiful. That is our motto for this new private equity fund. Small and medium-sized companies are a very important part of our economy and it is typically in this segment of the market that private equity investments with the highest return potential tend to be found. Investing in small and medium-sized companies is one of our strengths. Our extensive experience and expertise with regard to investing in this asset category enables us to identify opportunities with attractive growth potential. Our carefully selected private equity specialists utilise their expertise and networks in order to add value to the selected companies. Value is created for instance by improving a company’s operational management and strategy, by enhancing its professionalism or by means of internationalisation.”

Other key priorities include closer alignment with the European Union (33 per cent), easier access to finance for SMEs (23 per cent) and improving labour market flexibility and mobility (23 per cent).

The Investment 360 Index is based on research with 138 UK market stakeholders, including private equity investors, management teams, corporate finance providers and business advisors, and has been run by CIL, the independent international management consultancy, since 2017.

While views on the Labour Government’s performance are mostly mixed, with 49 per cent expressing uncertainty, 18 per cent of respondents believe it is doing a good job – marking the highest positive sentiment towards any government since the survey began. This compares to just 8 per cent in 2023 and 3 per cent in 2022, showing a notable shift in perception.

Almost half (48 per cent) of respondents think that fiscal policy should stay the same or it should loosen (40 per cent).  Meanwhile, respondents’ expectations about the BoE base rate also supports the general view that stability is possible, with 59 per cent expecting the base rate to level out at a healthy 3-3.9 per cent by Summer 2026.

However, despite this early positive sentiment, over two thirds (64 per cent) of respondents believe Labour will negatively affect the private equity industry. This apprehension largely stems from concerns around potential changes to capital gains tax, taxes on carried interest, and other wealth taxes.

Commenting on the findings of the Investment 360 Index, Alex Marshall, Senior Partner at CIL, says: “There’s growing optimism among dealmakers, but this could quickly evaporate if tax increases are disproportionate and deter investors and entrepreneurs, who are crucial for driving economic growth.”

“Despite the concerns over tax policy, our research highlights a relatively positive view of Labour’s performance. Nearly half of our respondents are from private equity, and they appear willing to accept some short-term pain to secure the long-term stability they crave. However, this balancing act is critical – the Government needs to raise revenue without stifling growth, and at the same time, the UK must increase spending to foster innovation.”

This will be the seventh vintage of HSBC AM’s Vision Private Equity strategy, which is designed to offer investors access to global private equity opportunities through a single vintage institutional-style discretionary portfolio diversified by geography, sector, and strategy.

The firm writes that the Vision Private Equity 2025 Fund will be underpinned by a high conviction and selective investment process spanning primary funds, secondary, and co-investment deals. The inclusion of secondaries and co-investments have generated encouraging early performance for prior vintages and, in combination with HSBC AM’s large commitment programmes, offers potential for lower fees.

Since its inception in 2019, HSBC AM’s annual Vision Private Equity programme has raised USD2.3 billion in aggregated capital commitments from international investors, including institutional investors and clients of HSBC Global Private Bank.

William Benjamin, Head of Indirect Alternatives at HSBC Asset Management, says: “We have been very pleased to see the ongoing investor interest in our Vision Private Equity strategy and look forward to the launch of the strategy’s seventh vintage later this year.

“Private equity markets have been growing more optimistic in recent months, with deal activity improving and performance dispersion widening as the tailwinds of recent years continue to calm. We aim to tap into this opportunity, deploying our private markets capabilities to offer investors access to diversified global private equity opportunities.”

Preqin forecasts also highlight that capital targeting Europe is set to have lower growth from the end of 2023 to 2029 compared with North America. While Europe may lose ground to North America in future years from lower relative growth in assets under management (AUM), Preqin sees the growth profile of Europe as containing greater certainty, or lower risk, owing to the region’s broader exposure to the lower-risk asset classes: private debt and infrastructure.

Anticipation of falling rates gives private equity momentum, while decelerating that of private debt

As the European Central Bank’s policy rates start to fall in Europe, the report highlights the potential impact on private equity and private debt fundraising.

Looking to Europe-based private equity fundraising, fund managers raised EUR118 billion in the first half of 2024. If the second half of the year were to replicate this pace, it would be a record year with EUR236 billion secured, 30 per cent higher than the previous record of EUR181 billion in 2018.

The firm writes that private equity’s success has been partly driven by Nordic-based managers who secured more capital in the first half of the year than in any other previous whole year. However, capital targeted by Europe-based private capital funds in market dropped in the first half of the year, from EUR812 billion to EUR760 billion, mainly driven by a decline in private equity funds. As fewer mega funds are raising in that asset class, fundraising’s pace may slow in the second half of 2024, the firm says.

Meanwhile, Europe-based private debt fundraising decelerated with EUR14 billion raised in the first half of 2024, compared to EUR103 billion cumulatively in 2022 and 2023. In the first half of 2024, UK-based private debt funds raised EUR6.9 billion, West Europe-based managers EUR5.3 billion, and Nordic-based managers EUR1.7 billion.

European AUM growth underpinned by lower-risk asset classes

Preqin data shows that Europe’s share of alternatives AUM was almost EUR3.3 trillion, or 20.9 per cent, of the global total, by the end of 2023 – the latest data available. Based on Preqin’s most recent forecast for the global alternatives industry, Europe’s share of AUM is expected to contract to 20 per cent, or EUR5.5 trillion, by 2029 due to lower forecast performance and a slower pace of fundraising compared to North America, the dominant region.

While European AUM growth may be lower than North America, the region demonstrates a lower-risk AUM profile, with higher shares of private debt (15.3 per cent of Europe’s private capital AUM) and infrastructure (18.9 per cent of Europe’s private capital AUM) compared with North America’s 12.4 per cent and 7.5 per cent, respectively.

Alex Murray, VP, Head of Real Assets, Research Insights at Preqin, says, “The anticipated reduction in interest rates is a driver of both the acceleration of private equity and deceleration of private debt given their contrasting prospects in a looser monetary policy environment.  The fervour for private debt seen over recent years may be showing signs of slowing down in Europe, in line with market expectations for prompter rate cuts compared with North America.”

Additional key findings include:

Europe buyout discount nears 10 per cent: Europe buyout deals show a persistent discount compared with North America, with entry EV/EBITDA consistently lower between 2018 and 2023. Preqin Transaction Intelligence data reveals an average 9.8 per cent discount over the period, with discounts rising substantially in the information technology and industrial sectors in recent years.

Actual performance against targets varies by asset class: Preqin data shows private debt 2018–2021 vintages outperformed managers’ expectations, as post-pandemic contractionary monetary policy drove tighter credit conditions. Conversely, venture capital and real estate performance in similar vintages fell below targets in the face of continuing valuation pressures.

Open-ended fund launches and private wealth’s access to alternatives: The trend of enhancing alternatives access to high-net-worth investors underpins strong growth in European Long-term Investment Fund (ELTIF) and UK-specific Long-term Asset Fund (LTAF) structures. Preqin data shows that 125 ELTIFs and 13 LTAFs had launched, as of August 2024. Of the 125 ELTIFs, 84 are domiciled in Luxembourg, 20 in France,11 in Italy, seven in Ireland, and three in Spain.

The HSBC NAV Financing Partnership Fund will provide senior loans secured by private equity portfolios, supporting both fund managers and investors’ portfolios. The majority of the underlying loans are expected to be investment grade rated. 

As part of the partnership with HSBC, the strategy will be managed by HSBC AM’s Capital Solutions team, providing independent origination, structuring and investment expertise, whilst leveraging on HSBC’s deep global origination and fund finance underwriting capabilities. 

Borja Azpilicueta, Head of Capital Solutions at HSBC Asset Management says: “For our institutional and wealth clients, this strategy provides access to an investment grade private debt opportunity that diversifies traditional direct lending exposures, with shorter duration, potentially attractive risk-adjusted returns and an independent, external investment grade rating.  By partnering with HSBC Bank, our strategy aims to provide investors with differentiated access to a scalable investment opportunity leveraging HSBC’s Sponsor network. 

“NAV finance is becoming a core part of the global private equity fund ecosystem as, in our view, fund managers and investors alike aim to continue building value in the context of longer asset hold periods. NAV finance provides investors the flexibility needed to drive portfolio growth and value creation.”

The HSBC NAV Financing Partnership Fund is the second strategy managed by HSBC AM’s Capital Solutions team following the introduction of the first vintage of HSBC AM’s RCF partnership strategy in November 2023.  

However, the firm writes: “For context, the number of investors who believe that private equity is overvalued as of June 2024 is lower than in our June 2023 and June 2022 surveys, at 53 per cent and 66 per cent, respectively. Looking at investors’ views on future private equity performance, 45 per cent believe it will perform better over the 12 months from June 2024, compared to 26 per cent believing so for the 12 months from June 2023. Regarding private debt, 63 per cent of investors see the asset class performing about the same over the coming 12 months compared to the previous 12 months, up from 37 per cent in our June 2023 survey. However, 30 per cent of private debt investors expect performance to increase over the 12 months from June 2024, compared to 53 per cent stating so in June 2023.”

The report goes on to highlight that infrastructure investors’ risk appetite is growing. “Core-plus infrastructure funds are stated as offering the best opportunities for investors, as of June 2024, at 57 per cent of respondents. This has risen from 40 per cent of respondents as of June 2023. Notably, the typically highly leveraged asset class has exposed investments more so to the higher for longer interest rate scenario and may explain why investors are increasing their risk appetite. Indeed, 67 per cent of respondents cite interest rates as a key challenge for the coming 12 months from June 2024, as 55 per cent did in June 2023.

“Aligning with infrastructure investors, real estate investors see interest rates as the biggest challenge to returns generation over the 12 months from June 2024, with 78 per cent of respondents stating so.”

 The report notes that interest rates have affected performance of real estate investments more drastically than other asset classes. As of June 2024, 66 per cent of investors report that asset prices were lower than 12 months ago, with over half (51 per cent) of investors thinking their investments have fallen short of expectations. However, 52 per cent of real estate investors expect performance to improve over the 12 months from June 2024. This compares to 15 per cent of respondents believing so as of June 2023.

Additional key report facts:

Private equity: 80 per cent of surveyed investors cite the current exit environment as a key challenge for private equity returns generation for the 12 months from June 2024 – the highest of all possible answers. Preqin analysts highlight that this concern aligns with 57 per cent of investors’ opinion, seeing secondaries as the best opportunities in the next 12 months, as of June 2024.

Venture capital: Asset valuations and the exit environment remain the key concerns for investors over the 12 months from June 2024, with 63 per cent of respondents stating so for each answer. Lead author of the report and the venture capital chapter, Michael Patterson, notes how this is materially impacting capital commitment plans and fundraising. 59 per cent of respondents intend to commit to a venture capital fund in H1 2025 or later, as of June 2024.

Private debt: Direct lending funds remain the most favored strategy for investors, with 70 per cent of respondents saying so, as of June 2024. Direct lending has now been the most popular strategy for investors since 2021. Asset-backed lending is the most popular emerging strategy, with 58 per cent of respondents stating so.

Hedge funds: 35 per cent of investors state that they plan to reduce their allocations to hedge funds, in the 12 months from June 2024. This has grown from 26 per cent planning on reducing allocations from the 12 months from June 2023. Notably, 68 per cent of respondents intend to defer their next capital commitment to 2025, within which, 40 per cent state that being in H2 2025 or later.

Michael Patterson, Senior Associate, Research Insights at Preqin says: “Alternatives continue to be a key component of portfolios. The key reasons institutional investors cite for investing in alternative assets are diversification, return enhancement, and reducing portfolio volatility. It’s not surprising that over the coming year institutions expect to invest more; private debt, private equity, and infrastructure are expected to be the biggest recipients of more capital flowing from investors over the short term.”

With a 40-year track record for innovation and value creation in private markets, Pantheon writes that it invests across the full lifecycle of investments through secondary, direct co-investment and primary fund commitments, with specialist capabilities and expertise spanning private equity, real assets and private credit. Since launching its first listed private markets fund in 1987, Pantheon writes that it has been at the forefront of opening access to private markets to a wider range of investors, and it now offers a range of evergreen solutions with a combined USD7 billion in assets under management.

Providing a complete suite of technology and structuring capabilities, iCapital writes that it will help deliver enhanced access to Pantheon’s evergreen offerings globally, including the firm’s first open-ended, semi-liquid private equity offering available outside of the US, targeting markets with growing demand across Europe, the Middle East, Latin America and Asia.

Victor Mayer, Head of International Private Wealth at Pantheon, says: “iCapital’s global leadership in expanding the alternative investment marketplace makes it an excellent partner to bring our suite of products, providing access to high-quality, hard-to-access assets and fund managers, to a wider range of international investors. We look forward to working with iCapital to continue to bring the power of private markets and our unique expertise to help more people build secure financial futures.”

“We are very pleased to partner with Pantheon and support them in their mission to make their suite of evergreen private markets investment products available to the wealth management channel,” says Marco Bizzozero, Head of International at iCapital. “With wealth managers globally increasingly making private markets a strategic priority as they seek enhanced diversification and superior returns for their clients’ portfolios, iCapital is the trusted technology partner to asset managers expanding their offering to the growing pool of private wealth.”

According to the Financial Times CVC, which manages EUR186 billion in assets making it one of Europe’s largest private equity firms, has expressed interest in taking over EY’s Italian consulting arm, which posted revenues of EUR366 million last year.

If successful, EY will join Teneo and Deloitte’s UK restructuring arm in falling under CVC’s control, and will form part of a larger move by private equity firms into professional services operations.

Oliver Vaughan, Managing Director in investment bank Houlihan Lokey’s Business Services Group, says several factors are driving private equity’s burgeoning interest in the professional services sector. 

“Private equity firms are continuously searching for nascent markets and emerging opportunities with which to deploy capital, and up until the past five years or so, large sways of the people-based businesses were underserved by investment. In recent years, however, we’ve started to see that change, with firms recognising the ability for high-value-add consulting to drive outsized returns,” Vaughan says.

Vaughan says that private equity firms see parts of the consulting industry as a “safe haven” during market volatility, owing to what he calls the “metronomic nature of certain revenue streams and services, and enduring client relationships”. 

He adds: “These relationships provide the bedrock of an equity creation plan, underpinning retention and allowing companies to upsell supplementary services, even within more challenging economic environments.”

The impact of emerging technologies including artificial intelligence (AI) and machine learning are key to private equity’s interest in professional services. First the sector needs capital injections to support a transition to new working models. Second, as they adopt more efficient processes their profitability increases.

Vaughan says: “AI will reshape the consulting and accountancy sector, transforming the way consultants operate and provide value to their clients, as well as opening new avenues for growth and efficiency. Digital transformation is starting to disrupt the traditional pyramid consulting model, enabling firms to streamline processes, automate simpler tasks, and increase productivity.”

Vaughan says there is evidence of a virtuous circle in private equity funding for consultancies that traditionally favour a partner model. He argues that partners are willing to forgo some of the revenue, which is returned to investors, in return for equity value creation.

“As private equity continues to deliver success stories, partnerships are becoming increasingly comfortable seeking investment and it is also an obvious mechanism to deal with the big issue of succession in people businesses,” Vaughan says.

Whether the private equity sector continues to invest in professional services will depend on firms’ willingness to let go of their operations to investors that have not always had the best reputation. 

A string of disasters, notably in the healthcare sector, could make some consultancies nervous about relinquishing control.

However, Vaughan predicts acquisitions will continue fuelled by ongoing interest in pockets of growth and fragmented markets. 

“As seen in the accountancy sector, for example, there has been a flurry of activity but still ample opportunity for investment, and we can see that the broader legal services space is beginning to attract similar attention. Overall, the professional services sector remains dynamic, with continued potential for growth and innovation driving further investment activity.”

The firms writes that this novel index offers exposure to North American-focused buyout funds by mirroring their performances with publicly listed securities from the Solactive GBS United States 500 universe. It is aligned with the industry distribution of Net Asset Values (NAV) of Private Equity (PE) investments at a deal/portfolio company level in the respective market. 

Timo Pfeiffer, Chief Markets Officer at Solactive, says: “We are thrilled to collaborate with CEPRES on this first of many ventures, capitalising on their expertise in private equity data networks alongside our proficiency in index creation to introduce this pioneering product.”

Dr. Daniel Schmidt, CEO of CEPRES, says: “With our expansive data network covering global private equity markets, we have the means to accurately gauge performance and risks. Teaming up with Solactive on this endeavour combines our knowledge in private equity with their prowess in index construction, resulting in a highly valuable offering for investors.”