The views reflected in this article are those of the author, and do not necessarily reflect the views of the American Investment Council.
By: Herb Engert, EY Global Private Equity Leader
It’s hard to believe it’s been nearly a full decade since the Global Financial Crisis. High valuations, readily available credit, record levels of M&A activity – it all feels very familiar. But while similarities between today’s environment and that of a decade ago certainly exist, and more noteworthy in our view, are the ways that the PE industry has grown and transformed.
Last month, EY released its EY Global PE Watch 2018, which examines the ways the industry has evolved over the last 10 years and attempts to provide some perspectives about how firms can remain relevant in today’s increasingly complex and competitive environment.
Clearly, today’s PE industry is more transparent, liquid and diversified than it was a decade ago. But while PE’s ability to raise funds, deploy capital and achieve successful exits over multiple economic cycles is well-established, today’s firms are facing a much more complex landscape than they ever have before; one that includes new sources of capital, new sources of competition, an expanded opportunity set and an increasing blurring of the lines between customers and competitors.
The result is an imperative for innovation across nearly all aspects of the enterprise, while at the same time remaining true to the differentiators that define a firm’s unique “edge.” Specifically, some of the areas of particular emphasis include:
Casting a wider net: an intense focus on the origination process – GPs are focused more than ever on optimizing their deal sourcing and origination efforts: they’re casting wider and wider nets, looking to intermediaries and others that are well positioned to identify high-quality deal flow. They’re getting increasingly creative about uncovering pockets of value, whether in carve-out opportunities, buy-and-build or consolidation plays, or new geographies. Perhaps most importantly, they’re increasingly focused on leveraging those unique skills or value-added services that differentiate them from their competitors, whether it’s sector expertise, a global reach or something else.
Developing new ways of partnering with competitors and customers – Ten years ago, the universe of potential deal partners was smaller than it is today. Between 2005 and 2007, PE consortium deals accounted for about 66% of all PE megadeals (deals of US$5b or more). However, with the increasing interest and involvement of many institutional investors in exposure to co-invest and direct investment, firms have a lot more choices than before. Indeed, over the last three years, the proportion has flipped, with just 33% of large deals put together by a consortium as firms increasingly:
- Partner with customers that can often bring something to the table that other financial buyers can’t, such as specific industry expertise, the potential to hold an asset for longer periods or origination potential.
- Partner with competitors – namely strategic partnership that can often leverage synergies to justify higher multiples and can sometimes provide a locked-in buyer for the asset at the end of its natural holding period.
Embracing the dramatically increasing role of digital – Finally, helping their investees fully embrace a digital mindset that permeates all aspects of their business is increasingly one of the most significant value drivers for PE firms of all types, regardless of their sector specialization, geography, strategy or size. While data analytics is at the center of this, it’s important to note that it’s just one component, with robotics, artificial intelligence, the Internet of Things and other emergent technologies all making their way into the PE ecosystem.
While there remain many uncertainties about the present environment, PE’s ability to apply the same transformational skillset they use with portfolio companies to their own businesses will help ensure that they continue to discover new ways of creating value for investors across economic cycles. To access the full report, click here.