With private equity set to further blossom over the next decade and continue its AUM expansion, it will become incumbent upon industry leaders to explore new ways to deliver growth in their firms’ portfolios.
With private equity set to further blossom over the next decade and continue its AUM expansion, it will become incumbent upon industry leaders to explore new ways to deliver growth in their firms’ portfolios.
As Boston Consulting Group recently argued in a white paper “The next leadership agenda for Private Equity”, the asset class “has the potential to occupy a very different and far more powerful position in the business and financial markets by 2030”.
Its authors go on to suggest that PE leaders cannot hope to succeed using their current business practices and operating structure.
A key driver of evolution in the PE operating model relates to AUM growth. If, as we’ve seen in the last few years, record amounts of capital continue to be raised among the top-tier PE groups, CEOs will be required to steer a careful course; not only to identify suitable M&A targets in large-cap markets, but to ensure they are protected against recessionary fears. And, moreover, are positioned for growth in an increasingly digital world.
“Private equity is on a long-term secular growth trajectory and getting more intertwined with society and accordingly receives more visibility; there are tremendous opportunities for PE and they increasingly require new capabilities like digital and analytics, and additional frames of mind such as consideration of ESG and other social factors,” says Jonathan Croog, Managing Director & Senior Partner at Boston Consulting Group in New York.
PE could see AUM go from north of USD4 trillion in 2018 to USD5 trillion over the next 10 years, potentially creating a bifurcated market where the biggest firms diversify their businesses while smaller PE groups double down as specialists.
This is an industry that has grown to such an extent that dry powder levels have reached an estimated USD1.5 trillion.
McKinsey’s latest report, A new decade for private markets, reveals that while private equity deal volume last year remained at similar levels to 2018, and deal count fell slightly, the average deal size rose to USD157 million. That is a 25 per cent increase over five years and can partly be explained by the “megafund” phenomenon alluded to above. In September 2019, Blackstone announced that it had raised USD26 billion for its newest flagship buyout fund. Advent Global Private Equity IX closed in Q2 2019 with USD17.5 billion, and according to PitchBook data, US buyout funds had already raised north of USD246 billion through November 2019.
Croog and his fellow authors reveal that PE is gaining influence across major sectors of the economy as fund sizes grow. More than 50 megafunds have launched since 2010, each with more than USD10 billion in AuM.
As the influence of PE ownership in global markets grows, it will present an opportunity for the asset class to become an agent of change. To do so, though, will require new ways of doing business; what worked in the past what necessarily work in the future. Boston Consulting’s authors argue “those that want to win over the next decade must rethink their traditional strategy-setting, deal-making, and management approaches and craft a new leadership agenda”.
“As we move into a new decade, we wanted to take a broader look at where PE has come from and where it is going,” explains Croog. “Some of the things we wanted to grapple with in the study were the scale of the industry now, the degree to which it is intertwined with more aspects of our society – more public mentions of PE, more types of people involved, more skillsets involved.
“Add in to the mix some of the large-scale trends that are evolving, such as digitisation, climate change, diversity and inclusion initiatives, and the question becomes, ‘How do you, as a PE firm, factor that all together and still drive value for your investors and your expanding categories of interested stakeholders?’”
Croog is optimistic about and believes there is still a lot of runway for PE to grow. When you look at the share of PE in investable assets, he says, it is still in the single digits. As the asset class continues to grow and become more relevant for different types of company situations, “this will present an increasing number of realistic markets for PE firms to explore, when making acquisitions”.
With stock performance for newly public companies slumping and the postponement of several high-profile IPOs, including WeWork and Endeavor, he expects the public-to-private trend to gather momentum. As PE Wire reported recently, the UK saw a couple of notable take-private deals in 2019. These included the USD3.8 billion takeover of FTSE 250-listed software maker, Sophos Group by Thoma Bravo and the acquisition of defense contractor Cobham for GBP4 billion by Advent International.
PE firms will have an increasing responsibility to provide sufficient disclosures to investors when pursuing take-private deals. Regular earnings reports and ongoing shareholder interaction are key to price transparency in public markets. Private markets are an entirely different proposition.
In general, the way in which PE is so much more intertwined with the rest of the world suggests that good corporate stewardship is an important ongoing consideration, says Croog.
“For example, it is good to know that some PE firms are among the largest employers; that matters with respect to all of the issues faced by society. PE does increasingly comprise an increasing proportion of pension assets. And so ensuring investors understand that PE firms are doing good things in accordance with their values important for PE.”
There are plenty of reasons to welcome the private investment structure. Today, corporations of all shapes and sizes, especially those operating in asset-intensive industries such as manufacturing and energy production, must contend with rising digital threats and opportunities.
PE firms will need to develop a digital transformation strategy and as their funds get larger, it will be necessary to build deal teams with complementary skillsets: Boston Consulting cites combining growth in technology and real estate with leveraged buyout teams by way of example.
On the digitisation theme, Croog suggests that PE could play a few roles.
“One might be related to the reconfiguration of supply chains and helping the capital and growth partner to transform, restructure and improve how large portions of business are conducted.
“Another role for PE to play is…consider a classic, mature business that has been doing things a certain way for a long time. Then they get confronted with a new digital challenge, perhaps a rising digital start-up that causes them to think through what investments will be required to evolve; where might AI be used in the firm? Where might advanced analytics be used across the business for growth, for identifying new customers etc.?”
He concludes: “The PE space has a lot of favourable dynamics but it’s competitive. Where do you place your bets on how best to differentiate yourself? What we focused on in this study was: ‘How do you, as a PE firm, make sure you are playing the trend and building your own internal capabilities to be successful?’”
