Private Equity Growth In Transition (Deloitte)

Evolve To Meet Tomorrow’s Challenges

By: Doug Dannemiller, Research Leader, Deloitte Center for Financial Services, Deloitte Services LP

Profitability, growth, and performance are top objectives for private equity managers and investors. These will remain whether the industry experiences dramatic or slower growth. Counter this uncertainty by delving into past industry growth and how its evolution may impact your business. Consider below, a five-year growth projection, three possible growth scenarios, and key operational questions that may provide investment management organizations and private equity firms with valuable insights. How will you protect the value of your growth and position your firm for tomorrow?

Global growth models for private equity ($B)

REAL Global Growth in Private Equity #4

Global Growth Model for Private Equity 2

Global Growth Model for Private Equity 3

Perspectives on growth in the private equity industry

Private equity has grown dramatically over the past decade. Investor allocations, the outperformance of private equity versus public companies, and market appreciation have grown global assets to a new high of $3.6 trillion, excluding venture capital. Furthermore, private equity growth has outpaced other asset classes over the past decade, rising at a robust 14 percent compound annual growth rate (CAGR) since year-end 2005.

Yet even as the industry is celebrating this success, it will be critical to keep an eye on how the global environment may be shifting. Private equity growth has been slowing over the past few years. If this persists, managing to a new normal in private equity may be next on the agenda.

To counter the uncertainty of what lies ahead, we invite private equity managers to take a closer look at past industry growth and how its possible evolution may impact the business. Taking a deeper dive into these areas will arm private equity firms with information, ideas, and scenarios around how the growth story may play out. Deloitte’s perspective on potential industry growth scenarios is illustrated in our 5-year growth projection for private equity assets. This viewpoint takes into account both the current environment, and our positive outlook toward future growth. Important questions become not only “How do we grow?” but also “How do we protect the value And “How do we position the firm for tomorrow Evolving to meet the private equity industry’s future challenges.

As industry growth slows, private equity firms will continue to shift more time and resources from front office deal-making to growing profitability through restructuring and operational efficiencies. Key questions managers need to answer in this process include “What is the operational spend? Where can I improve our processes? And where can I take more cost out of the business?”

Challenges facing the industry are not solely related to growth and profitability management. Rising regulatory oversight, the tightening lending environment, and the impact of technology are creating new opportunities and challenges which have not previously affected firms to this extent. These challenges are discussed below as they impact both the private equity firms and the portfolio companies.

Evolving to meet the private equity industry’s future challenges

1. Evolve Through Robust Internal Operating Controls & Processes

The private equity industry is now actively engaged in trying to improve operational efficiency while addressing the rising costs of regulatory compliance. What does this mean? Private equity managers now need to actively address the full scope of operations and regulatory concerns by answering these questions:

  • What are the operational processes that are used to run the business?
  • What is the governance and oversight around the process and any resulting conflicts of interest?
  • What is the evidence that we are doing what we should be doing?

2. Evolve Through Value Creation & Operational Excellence

While private equity firms have historically focused on growing the value of the fund through securing favorable deal terms during the acquisition of portfolio companies, these terms have lessened in attractiveness due to lower available levels of financial leverage. As a result, managers have turned their attention toward post-deal value creation. Though the goal is still to focus on finding portfolio companies with good products, services, and distribution during the deal-making process, optimizing the performance of the acquired business is the first rule in the playbook after the deal is done.

3. Evolve Through Tax Transformation

Evolution of tax strategy is a pivotal issue for private equity firms. As the industry has matured, and rules and regulations have become more time-consuming, tax requirements have become overbearing. In particular, the Foreign Account Tax Compliance Act (FATCA) in the US and the international Common Reporting Standards (CRS) have become strong drivers behind the evolution in transparency and tax reporting. In addition, Base Erosion and Profit Shifting (BEPS) will begin to impact private equity firms and their portfolio companies later this year. These regulations represent the escalated pace at which various governments are looking for more transparency into private equity firms and who their limited partners are.


Deloitte is an AIC Tier 2 Associate Member.