Private equity (PE) firms are benefiting from nearly ideal market conditions, yet the tide is changing and they should take this opportunity to think about their competitive edge and differentiation.
That is the main finding of a new article by The Boston Consulting Group (BCG), titled Capitalising on the New Golden Age in Private Equity.
Worldwide, PE firms had a record USD2.49 trillion in assets at the end of 2016, including nearly USD1 trillion in uninvested capital. As returns for the overall industry continue to beat other asset classes, particularly hedge funds, capital continues to pour into PE firms, and new competitors are entering the field. Not only are firms struggling to differentiate themselves in this new environment, but new money is bidding up deal multiples and putting future returns into question.
At the same time, some investors continue to challenge the firms’ traditional fee structure: 2 per cent of assets under management and 20 per cent of gains. And as the economic clout of the PE industry grows, firms will find themselves under increased scrutiny by the media and, potentially, governments.
“The current conditions are favourable in so many ways, but there are also challenges looming ahead,” says Tawfik Hammoud, a senior partner at BCG and the lead author of the article. “We think top managers will use this as an opportunity – or even an imperative – to sharpen their thinking, improve their discipline, and be bold in several dimensions of their businesses.”
