b'ILPA PRIVATE MARKETS EDGE Q2 202114 15TOP OF MIND TOP OF MINDMacro TrendsMacro Trends Emerging From COVID Emerging From COVIDTOP OF MINDWith the COVID-19 pandemic entering its second year, LPs are working hard to distinguish between short-term phenomenonLESSONS FOR LPS AND KEY TAKEAWAYSand lasting effects; Ontario Teachers Pension Plan is one such LP.ILPA CEO Steve Nelson recently sat down with JonathanRegardless of the size or sophistication of the LP, the investment implications emerging from the OTPP study are relevant Hausman, Managing Director and Head of Global Strategic Relationships at OTPP, to discuss their study aimed at understandingto anyone active in private markets. Now is the time for LPs to initiate conversations internally about how the pandemic has the long-range investment implications of the pandemic.influenced their investment programs and what further opportunities there may be to reflect a fundamentally changed world into future commitments. IMPETUS FOR THE STUDY Though all LPs will approach the subject somewhat differently, speaking with a range of partnersfellow LPs, GPs, subject matter Early on, OTPP identified the COVID pandemic as being unique; unlike the GFC, it extends well beyond the world of financeexpertswas critical to the success of the OTPP study. And this range of perspectives could also help other LPs move from insight and into politics, sociology, global trade, consumer demand and societal norms. The depth, breadth and complexity of COVIDsto action.impact called for a new and unique investment assessment; one that spanned the globe and range of asset classes.FOUR KEY FINDINGS1 LOWER AVERAGE EXPECTED RETURNS 2 POLITICIZATION OF THE MARKET 3 ACCELERATION OF DIGITIZATION 4 SOCIAL ISSUES TO THE FOREGovernmentsaroundtheworldhaveemployedPrevious crises, such as the Global Financial Crisis,Around the world, businesses and consumers alikeThe OTPP study conclusively found that the pandemic massive fiscal stimulus alongside trillions of dollarsdeepenedinternationalcooperation.ThroughoutwentvirtualinresponsetoCOVID. Afterayearofexacerbatedinequalitiesaroundtheworld.Inthe in central bank interventions to prop up economiesCOVID,theoppositehasoftenbeentrue,withoperating remotely, OTPP believes the economy willU.S., the pandemic had twice the impact on the health in the wake of lockdowns and stay-at-home orders.governments competing against one another for PPEcontinue to be driven by the inherent convenienceofthepoorcomparedtothemiddleclass.Large OTPPtheorizesthatthescaleofthesefiscalandand vaccines. The rules-based order that underwroteassociatedwithservicesthatofferdeliverytosegments of the population were pushed back into monetaryprogramswillresultin:1)interestratesglobalization was fragmenting prior to the pandemicdoorsteps, video interactions and no or low-contactpoverty in countries like Brazil, where great strides remaining exceptionally low for an extended period ofand has only suffered further cracks. OTPP theorizessettings.OTPPsresearchconfirmedcorporatehad been made to grow the middle class. It is difficult time; and 2) governments seeking to plug epidemic- that geopolitical competition between large countriesdigitization as a major and sustainable value driver,to imagine that these changes will not alter political induceddeficitsandaddressinequalitieseitherisheretostayandwillfinditswayintofinancialespecially for mid-size companies.incentives and expectations.exposed or accelerated by the crisis through, at leastmarkets. TheprivateequityindustryisaleadingindicatorLPsshouldbepreparedtoexperiencetheripple in part, corporate tax increases. All else being equal,Thisoverarchingcompetitivedynamicoffersnewof these developments. A Bain & Company Reporteffect of these shifting expectations that will apply to these factors will put downside pressure on expectedchallenges to LPs. LPs may face pressure to promotefound the largest increase in multiples among virtualboth governments and companies. The Global Impact returns across asset classes. nationalinterestsintheirinvestmentprogramspaymentsandtechnologycompanies.ThebroadInvestingNetworkestimatesthatin2020Impact As investors in private markets reach for higher yieldingthroughactionssuchasdivestmentcampaigns.technology sector attracted the most private equityInvestments reached an AUM of 715 billion USD 2 . assets to meet return targets, interest in private equityGovernmentsarelikelytoattempttoplacemoreinvestmentin2020,accountingfor29%oftotalThere is good reason to believe many LPs will face and venture capital is likely to remain high. Privatecontrolsonsupplychainsandkeytechnologies.buyouts. further scrutiny as to whether their GPs and portfolio equity funds raised 989 billion USD globally in 2020And existing government entities charged with suchDigitalization has the ability to change LP processescompanies are aligned with the goals and values of and 180 billion USD globally in Q1 2021, evidenceoversight, like the Committee on Foreign Investmentmoving forward. Virtual interactions between LPs andtheir organization. of what is already elevated demand. Add to this ain the United States, are expected to become moreGPsarelikelytoremainpost-pandemic,including historicamountofprivateequitydrypowder(1.9active. duediligenceexercisesandAGMs.WithinLP trillionUSD)andstretchedvaluations,andtheriskHowever, this competition could provide investmentorganizations, flexible work schedules and locations becomes hard to ignore. Buyout multiples were 11.4opportunities for LPs as well. A realignment of alliancesareexpected.Whilenavigatingnewnormsmay times EBITDA in the U.S. and 12.6 times EBITDA inand partnerships may generate new trade deals andpresent challenges for LPs (e.g., maintaining culture Europe in 2020 1 . Of particular note, valuations in highnew channels for investment. And purely domesticand connectivity), it also potentially opens doors, such growth sectors that thrived during the pandemic andinitiatives designed to promote internal capabilitiesas the possibility of recruiting from a much wider pool stand ready to capitalize on a digitized world, such asand political goals could provide unique investmentof candidates.technology and healthcare, are primed for what couldopportunities (e.g., manufacturing, infrastructure). be a steeper trajectory moving forward.1 Information on both fundraising and multiples2Information on impact investments can be found at the can be found in Bain & Companys Global Private EquityGlobal Impact Investing Networks report Growing ImpactReport 2021'