Growth in private equity and real assets markets sees PE firms’ governance risk increase

By the time private equity (PE) giant KKR closed its largest ever European fund, over a quarter of the €5.8bn had already been committed. The ever-increasing speed at which the titans of private capital are raising and deploying funds is something to behold.

Pension funds, sovereign wealth funds and other institutional players are fuelling a near insatiable appetite for deal-making in the industry. Preqin forecast that we will see the alternatives market grow to $14trn globally by 2023, as the demand for alpha intensifies.

A parallel, and connected trend is the decrease in the number of publicly listed companies. In the UK, we’ve seen the compounding effect of the pound’s weakness inspire cash-rich US firms to look across the Atlantic. Most recently, San Francisco’s Thoma Bravo took cyber security company Sophos from public markets, leaving the Main Market looking increasingly bereft of British tech champions.

This forms part of a wider trend that has been going on for some time now. ‘De-equitisation’, as Citigroup’s Robert Buckland has dubbed it, describes the shrinking supply of equity capital we’re seeing both in Britain and the United States. Since the start of 2018, the available pool of UK and US equities has actually contracted by 3 per cent and 2.5 per cent, respectively.

For equity financing, more and more companies are looking to PE firms, with record amounts of dry-powder ready to be deployed. With this, comes a growing challenge for the global subsidiary governance sector, as the industry adapts to the changing dynamics of equity financing and entity ownership.

PE firms tend to hold their entities for comparatively shorter periods than multinationals. They also, as investment rather than operational firms, tend to have much lighter corporate infrastructure and will not have the same governance and compliance resources as their multinational cousins. These factors can cause governance issues for PE firms, especially when they are looking to exit from a particular investment.

This is compounded by trends within the PE industry itself as we see increasingly complex deal structures and larger amounts of capital deployed. Furthermore, PE companies have an additional complexity in that they need to manage not only the portfolio entities, but will also often have a number of special purpose vehicles (SPVs) through which they may hold the portfolio companies. Notwithstanding the usual penalties, including fines, that can accompany the failure to comply with international obligations regarding portfolio entities, for PE companies there can be an additional cost. Where a firm is looking to secure an exit for a portfolio company, any issues that emerge during the Due Diligence process will have a knock-on impact on the speed at which the deal can be executed and also potentially the valuation.

While there are plenty of things that multinationals can learn from PE firms, when it comes to governance and entity management, there is a lot that private equity can learn from multinationals. As subsidiary governance matures as a discipline, multinationals, and their service providers, are moving toward codifying a set of best practices for managing their worldwide entities and global responsibilities.

These practices include creating control through transparency, performing regular compliance health checks across all the entities in a portfolio, assigning clear responsibility for tasks and, critically, the intelligent use of technology. This is why we’re introducing our Task Management System, which means for the first time companies will be able to get full visibility on the status of all their entity management workflows. They will also be able to derive insight from the data, slicing it by region, entity and status, to name just a few parameters.

We anticipate that the trends which have seen alternative assets become one of the fastest growing asset classes will continue, and that this will only increase the pressure on PE firms to ensure they are maintaining the compliance of their entities around the world. For these firms, it is also clear that bringing their subsidiary governance protocols up to best practice standard should be an important business priority.


Kariem Abdellatif, Head of Citco GSGS
Citco GSGS Focus – Winter 2020