New records and new challenges for the fund industry

As of year-end 2020, the fund industry has been remarkably resilient. Data from Bain's semi-annual private equity report confirms this trend for the first 6 months of 2021[1] and anticipates a record year.

In Luxembourg, after crossing the symbolic 5 billion Euro mark in January, net assets under management reached nearly 5.5 billion Euro as of June 30[2], an increase of almost 10% over the first half of 2021.

Globally, despite an overall decline in the number of transactions over the course of 2020, transaction values picked up significantly in the third quarter, allowing the industry to generate $592 billion in transaction values over the course of 2020, but more importantly $539 billion in the first six months of 2021 alone, close to the annual average since 2016.

Overall, growth has not been driven by the number of transactions: while it has increased by 16% between the first half of 2020 and 2021, it remains below its historical averages.

Deal size is therefore the key factor, reflecting continued industry concentration and very high asset prices: globally, the EBITDA multiple is x14 in 2020, driven by sectors such as technology (one third of the deals), telecoms, media and pharmaceuticals.

This trend is reinforced by a market flooded with cash: multiplication of recovery plans, continued low interest rates, record household savings[3], and a record of dry powder held by investment funds of $3.3 trillion as of June 30, 2021.

Private equity has thus distinguished itself as a formidable vector for economic recovery, but also as a first-choice tool for promoting and financing new projects, particularly in the service of environmental challenges.

In light of this, it is no surprise that the European Commission launched its EU strategy for retail investors, whose purpose is "to ensure that consumers who invest in capital markets can do so with confidence and trust, that market outcomes are improved and that consumer participation is increased [thus] channeling capital to private sector firms, that could help the process of economic recovery after the economic fallout from the COVID-19 pandemic "[4].

Within this initiative, some work should particularly attract the attention of fund managers, notably that related to MiFID and to the inducements question, or the much-maligned PRIIPS Regulation.

One may hope that these initiatives do not create new confusion, at the risk of proving counter-productive. The relative status quo on the AIFM directive, which everyone is calling for, illustrates on the contrary how much the industry needs stable reference points in a sufficiently complicated environment.

Finally, we must highlight the date of March 10, 2021 and the entry into force of the SFDR regulation, as from which managers must describe their sustainable investment strategy and the way they intend to integrate sustainability risks into their investment decisions.

This new consideration of extra-financial data responds to a growing concern of investors, which Claude Marx has perfectly summarized: "ESG is not another regulation; its objective is to save the planet"[5].

Author: Jérémie Schaeffer, Partner at ATOZ Services

[1] https://www.bain.com/insights/private-equitys-wild-first-half-ride/

[2] https://www.cssf.lu/fr/2021/07/actifs-nets-des-opc/

[3] https://www.banque-france.fr/epargne-des-menages : At the end of 2020, the annual savings flow of French households was amounting to 205.2 billion EUR (129.7 billion in 2019 and 102.2 billion in 2018)

[4] https://ec.europa.eu/info/law/better-regulation/have-your-say/initiatives/12755-EU-strategy-for-retail-investors_en

[5] https://www.cssf.lu/fr/2021/07/lesg-nest-pas-une-autre-reglementation-son-objectif-est-de-sauver-la-planete-ecoutez-claude-marx-directeur-general-de-la-cssf-parler-de-la-finance-durable-a-lesg/