Shifting Dynamics in Asset Management and Fund Regulatory Practices

The asset management and fund regulatory sector will continue to see a focus on several key themes including the increasing importance of High Net Worth Individuals (HNWIs) as a capital source for open-ended funds, the ongoing debate over the use of NAV lines with a need for clear investor communication, the prevalence of co-investment and continuation funds to manage asset acquisitions and liquidations, and the shift towards open-ended fund structures to avoid asset undervaluation pressures. Additionally, the secondaries market will continue to grow, driven by successful fundraising for dedicated secondaries funds.

HNWIs continue to be an increasingly popular source of capital for fund sponsors, particularly in the open-ended fund context. Partnering with third party providers that help manage the feeder vehicles and source the HNWIs or creating the feeder platform themselves (as EQT and KKR have done) are examples of how sponsors can implement structures within their fund in order to access HNWI capital.  

The use of NAV lines is expected to continue being a hot topic, with mixed reviews from LPs. Should sponsors opt to use NAV lines in their products, they must ensure they i) include the appropriate mechanics in the fund documentation to accommodate them and ii) are comfortable being transparent with investors and prospective investors regarding the proposed use of such NAV lines. 

Given the increase in fundraising timelines, whilst management fee discounts are welcomed by investors, they no longer provide a strong enough incentive if the sponsor has poor returns. Sponsors can therefore no longer rely solely on management fee discounts to lure investors into the first close, particularly if the management fee discount is being offered on a rolling close basis.

Lengthier fundraising periods (consistent with 2024) and a greater number of early bird and/or loyalty incentives/discounts to encourage investors to invest earlier in the fundraising cycle and to invest consistently across the sponsor’s funds.

An increase in the number of larger European funds adopting hybrid waterfall structures, including a small deal-by-deal component in addition to the larger component, adopting a traditional whole fund model otherwise favoured by European sponsors and investors.

Considerations regarding the UK government budget announcement and its impact on UK fund structures (such as loss of non-dom status for certain fund managers, and an increase in carried interest rates and in capital gains tax).

Continued prevalence of co-investment funds and continuation funds, such that sponsors are able to acquire assets that their primary fund is not able to acquire in full (due to exposure limits and/or outstanding commitments) or for their primary fund to offload certain investments in order to liquidate the primary fund.

We have seen an increasing number of sponsors  looking to adopt an open-ended structure, in part to prevent the ‘cliff edge’ currently being experienced by a number of sponsors that are pressured to dispose of assets at an under-value.

Sustained growth of the secondaries market is expected to continue, driven by the successful fundraising of dedicated secondaries funds and the number of high quality assets that fund sponsors are increasingly keen to hold on to within their platforms for longer timetables prior to a full exit.

Private equity secondaries to continue driving the deal volume but other asset classes secondaries are expected to grow—in particular, credit and infrastructure secondaries.

Single-asset GP-leds still expected to dominate the secondaries market.

The use of price deferrals (from 6 to 12 months) will become more common in both LP and GP-led transactions in a drive to reduce the discounts and bring the pricing as close to NAV as possible.