Industry leaders define the firm of the future

What happened:

Blackstone Chief Investment Strategist Joe Zidle and former SEC Director Norm Champ shared what’s on the horizon for the private markets and insights about the intersection of technology and human innovation.

• The discussion took place at Ontra’s first-ever client conference, The Firm of the Future, on Feb. 28 in New York City.

The bottom line:

Participants said rising interest rates and increased regulation from the Securities and Exchange Commission are some of the big challenges ahead for the private markets, while new technology offers opportunities for savvy firms.

• Zidle expects interest rates to continue to rise as the U.S. Federal Reserve attempts to fight inflation.
• More regulation is coming for the private markets, and Champ expects the SEC’s cybersecurity rule to be the first rule adopted in the first half of this year. He called the cybersecurity rule one of the SEC’s less-controversial proposals.
• LPs are looking for speed, simplicity, and transparency from GPs, and those expectations stem from their experience as consumers.

Dig deeper:

• Blackstone’s Zidle said at the February event: “I think the consensus is now that short-term rates will need to go to at least 5.25% to probably 5.5%….Our portfolio companies expect to take wages up by about 5.8% this year. That’s totally inconsistent with the Fed’s 2% inflation target. Pre-COVID, that wage growth was closer to 1.7%. What we’re seeing tells us that wages are going to remain hotter, and as a result, the Fed’s going to have to do more damage.”
  • Despite the Federal Reserve’s March rate increase of 25 basis points, its statement no longer referenced “ongoing increases,” signaling rate increases might not go on as long as initially thought.
  • When asked at the Fed’s March press conference whether investors could count on interest rate cuts later this year, Fed Chair Jerome Powell said, “That’s not our baseline expectation.”

• Champ on the state of regulation in the private markets industry: “Even as the former head of investment management, I’ve lost count of the number of rule proposals currently aimed at our industry. That surge in regulation in our industry, it’s just a monumental change.”
  • Early in 2022, the SEC proposed several regulatory changes that would impact the private equity industry. The changes included standardizing cybersecurity risk disclosures, updating Form PF to create new reporting requirements for some large private equity advisers, and updating the Investment Advisers Act to increase disclosure requirements and prevent firms from doing certain activities that are against the public interest.
    • The trend toward regulation for private equity comes as the industry has seen increased investment from high-net-worth individuals, who tend to be less sophisticated than their institutional counterparts. The SEC believes these individuals may not understand the full scope of their private markets investments or have the institutional power to negotiate terms on equal footing with the larger investors.
  • The proposed cybersecurity rule that Champ said he expects to be announced first would require public companies to disclose a cybersecurity incident within four business days and amend the annual report form to require companies to disclose their procedures for managing cybersecurity risks.

• Elizabeth Muscarella, head of ESG legal and senior funds counsel at Carlyle, said: “Our investors expect the same sort of seamless interaction with technology with our business as they do with [an] app on their phone. There’s a lot of pressure for us to be able to use the information that’s been provided and bring it forward for a new investment or for bespoke reporting. The expectation here is that we’ll keep up with the times.”
  • Respondents to a recent survey by Ontra and Wakefield Research echoed that point. Thirty-six percent cited improving investor experiences as a top priority for their firm this year.