The investment world is facing huge change. Our entire economy is being bent and twisted, scrutinised and tested. Whether it’s political instability or changing customer demands, our markets are reaching new levels of uncertainty and insecurity. But, where most industries are facing dread, there are some which are fast developing agility and insight that is seeing them outlast many others in the same race.
Against a backdrop of macroeconomic and geopolitical uncertainty, it has been anything but an easy ride. However, despite the uncertainty that this has created, “record levels of fresh capital and an abundance of cheap debt have led to even higher price expectations from sellers,” says PwC Private Equity Leader Steve Roberts. One thing is certain. The Private Equity times are changing – and it’s time to take notice.
But where some sing its ongoing praises, others are drawing attention to a much stronger, clearer sign of fatigue.
“The sector is known for turning round companies, slashing costs, increasing cash flow and using debt to reduce tax and mitigate risk, but the model is now looking fragile,” says John Colley, a Professor of Practice at the Warwick Business School. And he’s not alone in his thinking. In fact, he discusses a clear industry trend where “significant numbers of partners are leaving the major PE players and setting up their own funds. Some may have been pushed due to mediocre investment performance, but others are leaving to raise their own funds and compete with their former employer,” he adds. And Anuar Heberlein, a Finance Expert from Toptal, echoes that sentiment. Increased competition from cash-rich corporates, coupled to the entering of a phase of maturity of the Private Equity market and increased regulatory pressure means that marketing conditions are being created which are unfavourable for the asset class.
So what does this mean for the Private Equity space?
“Funds are having to innovate and find ways of remaining competitive and relevant,” says Anuar. This includes things like moving to non-traditional buyout sectors such as technology and new areas in healthcare. It includes greater emphasis on “buy-and-build” strategies of using portfolio companies as springboards through which to acquire similar or adjacent companies to build bigger portfolio assets. It includes an increased focus on portfolio management and generating operational efficiency in their investments, and it includes a greater use of technology and outsourcing to drive efficiency.
“The lesson here is that the market is getting tough,” says John Colley. “Private equity is traditionally viewed as an attractive destination for money with a ten-year time horizon. However the outlook right now is far less attractive. A major increase in competition and a shortage of opportunities suggest that the genre has more than reached maturity and decline is now the outlook. If investors want to look for the next big growth market, they could do worse than look to activist investors to shake up sleepy and self-serving boards of which there is no great shortage,” he adds.
In whichever camp you sit, one thing cannot be argued or discussed away – and that is that businesses, and their leaders, need to be, now more than ever, aware of market fluctuations and the implications that that holds on their own long-term strategic outlook. Whether they’re just starting an initiative, or whether they’re looking at their long-term established organisation’s track record and where they see it moving – not having clear and present insight could cost them, dearly.
And this is where we step in. If you’re looking for solid, operational excellence and strategic insight that will prepare you for your own market’s expectations, then speak to CFPro Ventures today about getting started.