The private equity industry is shifting its focus from deal-making to value creation, driven by the persistent uncertainty across financial markets and global macroeconomics. As a result, general partners will need to work to maximize the value of their existing investments through a number of key strategies.
The private equity industry is shifting its focus from deal-making to value creation, driven by the persistent uncertainty across financial markets and global macroeconomics. As a result, general partners (GPs) will need to work to maximize the value of their existing investments through a number of key strategies.
“Private equity firms will take a closer look at optimizing the performance of their current investments. As financial services industry professionals look ahead to uncertain market conditions in 2023, finding the fastest and most reliable route to value creation will be key,” outlines Jeremy Swan, Managing Principal of CohnReznick’s Financial Sponsors & Financial Services Industry Practice.
Due to the current economic and market conditions, Swan expects that in the months ahead, quality deals will be more difficult to find. Further, the gap between a seller’s expectations and a buyer’s willingness to pay may slow or halt negotiations. “Even if sellers and buyers can agree to a purchase price, financing has become more expensive,” he adds.
In order to maximize the value of their existing investments, GPs should focus on a few key strategies. These include cash management and, sales and pricing strategies.
Swan comments: “Managing working capital rarely receives the attention it deserves until there’s a shortage of cash. Proactively prioritizing cash management can boost visibility to identify efficiencies and yield favorable results.” Additionally, customizing sales and pricing strategies to align with customer concentration and customer loyalty can help GPs optimize the earnings and value within their portfolio companies..
GPs would also do well to review their supply chain as planning, distribution, logistics, and operational efficiency can build resilience against shifting conditions.
Swan further notes they can consider the way they include interim management and outsourced operating partners: “When working with limited resources on a tight timeline, outsourcing talent and industry-specific knowledge can expand bandwidth, leading to a greater likelihood of long-term success.”
The impact an expected economic downturn could have on investment decisions, investment management, and value creation is the result of widespread uncertainty in the PE markets. The approaches described above can help GPs safeguard their investments in what is likely to continue to be choppy times.
“There are varying opinions on current market conditions, but given decreasing valuations and more expensive debt, the alternative investment industry must be prepared to do more with less in the coming year,” Swan advises.
From its perspective, CohnReznick is helping its PE clients navigate this environment as they face sector-specific challenges and issues like anticipated longer portfolio company holding times in 2023.
Despite this, Swan highlights that deal activity is likely to remain fairly robust throughout the coming year: “Though some industries, such as technology, may face challenges, others are primed to have a more successful year. These include suppliers to infrastructure projects, given significant US federal infrastructure funding is expected to roll out over the next three to six months.”
Jeremy Swan, Managing Principal, Financial Sponsors & Financial Services Industry, New York, NY – Jeremy Swan is the Managing Principal of CohnReznick’s Financial Sponsors & Financial Services Industry practice. Jeremy is responsible for management of CohnReznick’s Financial Sponsors and Financial Services Industry practice which includes all work conducted at the firm level, fund level, and across portfolio companies. Jeremy serves as the lead and/or relationship partner for many of CohnReznick’s largest private equity firm and portfolio company engagements, managing teams across service lines and maintaining a single point of contact at the private equity firm level. He also co-leads the Performance Improvement practice where he focuses on increasing collaboration across service lines and creating new services to help clients drive growth. With more than 20 years of experience advising financial sponsors and emerging private and large, multinational portfolio companies, Jeremy has extensive experience working with financial sponsors as both an investment banker and a consultant. He has expertise in mergers and acquisitions, IPO readiness, financing transactions, post-acquisition integration, and operational and financial due diligence. Prior to joining CohnReznick, Jeremy was a director at a global business consulting firm and a leader in the firm’s private equity, due diligence, and IPO readiness practices. Before entering consulting, Jeremy spent 10 years as an investment banker focused on financial sponsor transactions, executing over $90 billion of debt, equity, and M&A transactions.