NextWave Private Equity: Recent Episodes
Winna Brown, EY
The future of PE is inspired by purpose and transparency, focused on digital transformation, fueled by value creation and driven by a diverse workforce.
Join Winna Brown, EY Americas FAAS Private Equity Leader, as she explores the emergence of NextWave Private Equity and its impact on the economy and society.
Private equity firms remained active but selective in the first half of 2026 as market uncertainty continued to influence investment decisions. While technology-focused transactions declined year over year, non-technology sectors saw continued growth, highlighting a shift toward resilient assets. Exit activity remained steady, supported by trade sales and ongoing corporate demand. Looking ahead, GPs remain optimistic, with most expecting both investment activity and exits to accelerate over the next six months.
All data contained in this document is sourced from Dealogic and EY analysis unless otherwise noted. For detailed findings, please visit ey.com/pepulse
To explore the EY Exit Readiness Study, please visit ey.com/PEexitstudy
Private equity started 2026 with strong momentum, but fresh market volatility shifted dynamics toward greater selectivity. Investors are now focusing on high-quality, well-structured deals, particularly in asset-heavy sectors like energy, utilities, infrastructure and select real estate, where cash flows are visible and inflation linked. AI-led disruption is reshaping software investment strategies, prompting enhanced diligence and targeted investments in AI-ready companies. Exit markets remain steady, supporting a positive outlook centered on operational value creation. Overall, private equity demonstrates resilience and adaptability amid evolving geopolitical and macroeconomic challenges.
All data contained in this document is sourced from Dealogic and EY analysis unless otherwise noted. For detailed findings, please visit ey.com/pepulse.
Private equity entered 2026 with renewed momentum following a strong rebound in 2025, marked by a 57% rise in deal value and a significant recovery in exits. Strategic buyers and secondaries helped unlock long‑delayed liquidity, while improved macro conditions and stabilized valuations strengthened underwriting confidence. With most GPs expecting increases in both acquisitions and exits over the next six months — and signalling strong conviction in the quality of 2025 vintages — the industry heads into 2026 with clearer visibility, improved fundamentals and growing optimism.
In Q3 2025, private equity activity surged, achieving a record US$310b in deal value as firms capitalized on narrowing valuation gaps and renewed market confidence. With 156 deals announced, including six exceeding US$10b, the sector is pivoting towards larger transactions. Improved financing conditions and creative deal structures are facilitating this momentum. Looking ahead, 61% of firms anticipate increased exit activity, signalling a robust outlook as the market embraces a "risk on" approach, balancing optimism with discipline. All data contained in this document is sourced from Dealogic, PitchBook, and EY analysis unless otherwise noted.
The Dealogic data in this report are under license by ION. ION retains and reserves all rights in such data.
In the first half of 2025, private equity exits reached their highest levels in three years. Corporate acquirers became active buyers, and firms showed increased flexibility on valuations to facilitate the sale of long-held assets. Despite ongoing market volatility, global M&A activity rose by 30%, with private equity contributing significantly. Although fundraising challenges exist, many investors remain optimistic and expect increased deployment activity in the coming months. Firms are prioritizing exit readiness and operational enhancements across various sectors, reflecting a proactive approach in a dynamic private equity landscape.
Explore more at https://www.ey.com/pepulse
In Q1 2025, private equity firms saw a 45% rise in deal volume compared to the previous year. However, rising trade tensions are creating caution among investors. Many firms may limit capital deployment in the coming months, yet a higher-than-average risk tolerance indicates readiness to seize new opportunities. Firms are focusing on operational improvements within their portfolios and exploring sectors like aerospace and defense. Additionally, the return of corporate acquirers has boosted exit activity, reflecting a dynamic shift in the private equity landscape amid ongoing uncertainty.
Visit https://www.ey.com/pepulse to view this quarter’s summary.
Matt Breitfelder, Partner, and Global Head of Human Capital at Apollo in conversation with Bridget Walsh, EY Global Head of Private Equity. In this episode Matt shares his insights about the role of talent and optimising personal performance in the asset management industry.
The views of third parties set out in this podcast are not necessarily the views of the global EY organization or its member firms. Moreover, they should be seen in the context of the time they were made.
Angelo Rufino, Partner and Head of Special Situations in North America and Head of Corporate Special Situations in Europe for Bain Capital, joins Bridget Walsh, EY Global Head of Private Equity. In this episode Angelo shares his insights on the differentiated opportunities for Special Situations investing. 17 mins.
The views of third parties set out in this podcast are not necessarily the views of the global EY organization or its member firms. Moreover, they should be seen in the context of the time they were made.
Private equity enters 2025 with strong expectations amid favorable market conditions. In 2024, PE firms announced US$565b in deals, a 25% increase in value and 20% in volume from the previous year. Confidence is high, with 73% of GPs expecting increased deployment activity. Factors driving this optimism include narrowing valuation gaps, increased asset availability, and improved macro visibility. Exit activity is also expected to rise, driven by secondary buyouts. Additionally, GPs anticipate a surge in IPOs and a continued focus on AI and private markets buildout.
Visit https://www.ey.com/pepulse to view this quarter’s summary.
Key takeaways:
- PE firms enter 2025 with US$1.4t in dry powder; 73% of GPs expect increased deployment activity in the next six months.
- Supply chain issues ranked as a top concern, with 70% of GPs working with portfolio companies to assess these issues in light of proposed tariffs.
- GPs’ top expectation for this year is an increase in IPOs, with companies in strong market positions well placed to go public.
The private equity (PE) market is bouncing back, with deal activity picking up thanks to clearer economic indicators and better financing options. Despite this dealmaking boost, exits are slower, posing challenges for investors and firms. The tech sector stands out, attracting significant PE interest due to favorable financing conditions, signaling a trend of increased tech-focused deals ahead.
Visit https://www.ey.com/pepulse to view this quarter’s summary.
Key takeaways:
- PE deals experience a significant surge in 2024, especially in the second and third quarters, buoyed by growing market confidence, clearer economic indicators and improved financing conditions.
- The technology sector, fueled by advancements in artificial intelligence (AI) and cloud computing, leads growth, with a notable increase in demand for high-quality assets indicating a market primed for capital investment.
- Exit strategies encounter headwinds, with a downturn in value and sluggish IPO activity, prompting a shift in investor focus toward cash flow, while PE firms continue to pursue disciplined, strategic acquisitions and business expansion.
In this episode on the NextWave Private Equity Podcast, Matt Brown Founder, CEO and Chairman of CAIS, joins Bridget Walsh to discuss how technology can unlock private wealth for private equity.
Technology is revolutionizing the private wealth market, enabling independent advisors to access alternative investments and compete with larger firms. Founder, CEO and Chairman of CAIS, Matt Brown, shares his platform's role in streamlining the investment process and the importance of education in advisor empowerment. Listen to the discussion for insights about the future of private equity and the growing opportunities for asset managers in a market ripe for change.
Key takeaways:
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CAIS is leveling the playing field for independent advisors, granting them entry into the realm of alternative investments with cutting-edge technology.
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By simplifying the investment lifecycle, CAIS enhances accessibility and operational ease, broadening the scope for high-caliber alternative investment opportunities.
- Envisioning a shift in wealth management, CAIS is at the forefront, championing technology to foster a more inclusive and diversified investment landscape.
Pete Witte, EY Global Private Equity Lead Analyst, explores the key themes and market dynamics from Q2 2024 that are top of mind for Private Equity (PE) investors.
PE Pulse is a quarterly report and corresponding podcast miniseries that provides analysis and insights on private equity market activity and trends.
Visit https://www.ey.com/pepulse to view this quarter’s summary.
In this episode, Pete Witte, EY Global Private Equity Lead Analyst, explores into the market environment for private equity, offering a comprehensive analysis of the current trends, deals, and the overall financing landscape.
Pete Witte, EY Global Private Equity Lead Analyst, explores the key themes and market dynamics from Q1 2024 that are top of mind for Private Equity (PE) investors.
PE Pulse is a quarterly report and corresponding podcast miniseries that provides analysis and insights on private equity market activity and trends.
Visit https://www.ey.com/pepulse to view this quarter’s summary.
In this episode, we will provide a quick rundown on some of the trends and the themes that we're seeing in the market with respect to deals, the credit environment and how the macro situation is going to impact dealmaking over the course of the year.
In this episode, Avi Kalichstein, co-founder, and CEO of investment firm Hunter Point Capital, joins our host Bridget Walsh, EY Global Private Equity Leader, to discuss the growing market for GP stakes.
In this episode, Flor Kassai, Head of the Buyout Fund at Inflexion Private Equity Partners, a leading mid-market private equity fund, joins our host Bridget Walsh, EY Global Private Equity Leader, to discuss the evolving middle market landscape.
In this episode, Oi-Yee Choo, CEO of ADDX, joins our host Bridget Walsh, EY Global Private Equity Leader, to discuss tokenization and democratization of private markets.
Pete Witte, EY Global Private Equity Lead Analyst, explores the key themes and market dynamics from 4Q 2023 that are top of mind for Private Equity (PE) investors.
PE Pulse is a quarterly report and corresponding podcast miniseries that provides analysis and insights on private equity market activity and trends.
Visit https://www.ey.com/pepulse to view this quarter’s summary.
In this episode, we will provide a quick rundown of how last year shook out and some of the things that we expect for 2024. All the important themes and trends and how we think the macro environment is going to impact private equity in terms of deployment, fundraising, financing exits and some of the longer-term impacts as well. And we'll also take a look at some really interesting survey data that we've been collecting over the last few weeks.
Software’s been a powerful theme for PE investors for much of the last decade, representing between one-quarter and one-third of total PE deployment. David Humphrey, Partner in the Technology, Media & Telecommunications Vertical and Co-Head of Bain Capital’s North American Private Equity business, discusses the philosophy into investing in the tech space.
Pete Witte, EY Global Private Equity Lead Analyst, explores the key themes and market dynamics from 3Q 2023 that are top of mind for Private Equity (PE) investors.
PE Pulse is a quarterly report and corresponding podcast miniseries that provides analysis and insights on private equity market activity and trends.
Visit https://www.ey.com/pepulse to view this quarter’s summary.
In this episode, Pete reviews PE deal activity, which continues to accelerate while visibility into interest rate trajectories and macro volatility begins to recede.
Pete Witte, EY Global Private Equity Lead Analyst, explores the key themes and market dynamics from 2Q 2023 that are top of mind for Private Equity (PE) investors.
PE Pulse is a quarterly report and corresponding podcast miniseries that provides analysis and insights on private equity market activity and trends.
Visit https://www.ey.com/pepulse to view this quarter’s summary.
In this episode, Pete reviews the recent PE landscape and modest uptick on European resurgence.
Pete Witte, EY Global Private Equity Lead Analyst, explores the key themes and market dynamics from 1Q 2023 that are top of mind for Private Equity (PE) investors.
PE Pulse is a quarterly report and corresponding podcast miniseries that provides analysis and insights on private equity market activity and trends.
Visit https://www.ey.com/pepulse to view this quarter’s summary.
In this episode, we will provide a quick rundown of what we’re seeing in the private equity space. All the important themes and trends, and how today’s macro environment is impacting PE – in terms of deployment, fundraising, financing, and some of the longer-term impacts.
In this episode of the NextWave Private Equity podcast, Bridget Walsh, EY Global Private Equity Leader, will be discussing the entrance of retail investors in the private equity market with Jenny Johnson, CEO of Franklin Templeton.
In this episode, Mark Benedetti, Co-Head of Ardian US, joins our host Bridget Walsh, EY Global Private Equity Leader, to discuss the growing role of secondaries in the private equity market.
Pete Witte, EY Global Private Equity Lead Analyst, explores the key themes and market dynamics from 4Q 2022 that are top of mind for PE investors.
PE Pulse is a quarterly report and corresponding podcast miniseries that provides analysis and insights on private equity market activity and trends.
Visit https://www.ey.com/pepulse to view this quarter’s summary.
2022 was an incredibly dynamic year for the private equity (PE) industry, characterized by growth, innovation, creativity and the trademark resiliency that has defined the industry since its inception. The first half of the year saw a deal environment that carried over much of the momentum from 2021’s record levels of activity and the second half of the year saw PE firms become increasingly cautious in the face of rising inflationary pressures, the macro impacts of the war in Ukraine, a widening valuations gap, and widespread dislocation in the financing markets that restricted access to PE’s traditional sources of financing.
Pete Witte, EY Global Private Equity Lead Analyst, explores the key themes and market dynamics from 3Q 2022 that are top of mind for PE investors.
PE Pulse is a quarterly report and corresponding podcast miniseries that provides analysis and insights on private equity market activity and trends.
Visit https://www.ey.com/pepulse to view this quarter’s summary.
The PE sector continued to experience a number of cyclical headwinds in the third quarter, as rising interest rates, growing concerns of a recession, deteriorating macro sentiment and challenges in the financing markets all conspired to limit firms’ ability to execute new transactions. At the same time, however, firms continue to position themselves for long-term strategic growth, with new product launches and innovations, and by tapping new sources of capital that will allow the industry to continue to grow.
Pete Witte, EY Global Private Equity Lead Analyst, explores the key themes and market dynamics from 3Q 2022 that are top of mind for PE investors.
PE Pulse is a quarterly report and corresponding podcast miniseries that provides analysis and insights on private equity market activity and trends.
Visit https://www.ey.com/pepulse to view this quarter’s summary.
The PE sector continued to experience a number of cyclical headwinds in the third quarter, as rising interest rates, growing concerns of a recession, deteriorating macro sentiment and challenges in the financing markets all conspired to limit firms’ ability to execute new transactions. At the same time, however, firms continue to position themselves for long-term strategic growth, with new product launches and innovations, and by tapping new sources of capital that will allow the industry to continue to grow.
Greg Schooley, EY-Parthenon US Value Creation Leader, joins Winna Brown to discuss what tasks PE is outsourcing across business functions such as finance, IT, HR and customer service to create value.
The path to successful value creation in private equity (PE) today goes beyond typical levers such as G&A cost-cutting, sales force effectiveness and strategic sourcing. It’s about an approach that leverages digital tools including automation, strategic outsourcing and advanced analytics.
Going forward, PE-owned companies of all sizes may need to look at outsourcing as a way to access cutting-edge technologies and capabilities that can lead to revenue growth opportunities, in addition to reducing costs.
Pam Jackson, CEO of Level20, joins Winna Brown to reveal how mentorship programs can help women build long-term careers in PE.
According to a report that EY teams recently published on diversity, equity and inclusiveness (DEI), the private equity industry’s ability to meet stakeholder demands, access capital, win deals and compete for talent is increasingly contingent on progress against DEI metrics. Talent management has become the number two strategic priority across PE firms of all sizes, second only to asset growth. DEI initiatives are now proliferating in private equity as the industry begins to address how its culture has historically impeded diversity.
Level20 is a non-profit organization based in the UK that is dedicated to improving gender diversity in the European PE industry and specifically in senior leadership roles at PE firms.
Read “Can PE win deals if it doesn’t deal with DEI?”: https://www.ey.com/en_gl/private-equity/can-pe-win-deals-if-it-doesn-t-deal-with-dei
Calculate how long it will take to achieve your diversity goals: https://kenaninstitute.unc.edu/diversity-integration-model/
Ten ways male PE leaders can support and mentor their female colleagues:
- Serve as role models and mentors
- Engage with colleagues who are different from yourself
- Encourage women to realize their value
- Promote stories of inspiring women
- Engage in small interventions
- Embody inclusive leadership
- Give cultural shifts time to come to fruition
- Build a diverse talent pipeline from the bottom over time
- Recognize that recruiting senior women is not a “quick win”
- Model how long it will take to achieve your diversity goals with the EY Diversity Integration Model
In this episode, Laura Grattan, Managing Director at Crosspoint Capital, and Jeff Vogel, Head of the Software Strategy Group at EY-Parthenon, join Winna Brown to explore how PE firms can position themselves to win tech deals in today’s highly competitive market.
Contact Laura: lgrattan@crosspointcapital.com
Contact Jeff: jeffrey.vogel@parthenon.ey.com
According to the latest EY PE Pulse report, 2021 was the year of the tech deal: 30% of total capital deployed last year was allocated to technology companies. The technology sector, once just another industry vertical, now permeates every sector, claiming an ever-increasing share of deals as more companies differentiate themselves based on their technology regardless of the industry in which they sit or serve.
Crosspoint Capital focuses on the cybersecurity, privacy and infrastructure software sectors. PE firms that choose a niche specialization in the tech sector can bring deep sector expertise that translates to value creation for their portfolio companies. In an increasingly competitive tech environment, PE firms that focus on a highly targeted category of assets can find themselves in a differentiated position. They are able to quickly discern where to spend time, recognize the opportunities and limitations of an asset, and identify patterns indicative of future success.
Three characteristics of today’s tech deal environment include:
- Increasing presence of and need for club deals
- Increasing speed at which deals are clearing
- Developing deal theses early
To the NextWave Private Equity audience:
Since February of 2020, just before the covid-19 pandemic uprooted all of our lives, the EY global private equity team has turned to this podcast series to discuss the topics and insights that are top-of-mind for our audience of PE executives and practitioners.
From the bottom of my heart, thank you! For listening, for giving us your time and for trusting us to deliver best-in-class perspectives.
Over the next couple of months, we will re-publish some of our most downloaded and talked-about episodes about tech deals, DEI and other timely topics. These are some of our best episodes, and when you listen, you will surely understand why.
Thanks for tuning in!
Winna Brown, EY Americas ESG Private Equity Leader
winna.brown@ey.com
Maha Eltobgy, Chief Sustainability Officer and Managing Director at Brightstar Capital Partners, joins Winna Brown to explore how operating executives can effectively communicate the value prop of ESG at the portco level.
ESG is top of mind for PE executives right now. According to the 2022 EY Global Private Equity survey, ESG is one of the top four strategic priorities listed by PE firms. 42% of the largest fund managers seriously consider ESG in their decision-making process, while a further 39% say they consider ESG issues seriously in certain risk areas. ESG is a top priority for firms, but effectively implementing ESG strategy and principles across the portfolio remains challenging.
Five ways PE can navigate the implementation of ESG strategy and principles across the portfolio include:
- Win trust of management teams
- Start with employee retention and engagement
- Meet the portfolio company where they are in their journey
- Demonstrate how ESG values translate to business value
- Translate ESG principles into tangible, actionable initiatives
Pete Witte, EY Global Private Equity Lead Analyst, explores the key themes and market dynamics from 2Q 2022 that are top of mind for PE investors.
PE Pulse is a quarterly report and corresponding podcast miniseries that provides analysis and insights on private equity market activity and trends.
Visit https://www.ey.com/pepulse to view this quarter’s summary.
PE firms will continue to remain active as they seek to continue to deploy more than US$1.4t in dry powder available for new deals. While market volatility, inflationary pressures and rising interest rates are combining to make the investment landscape far more challenging than a year ago, in many instances, PE firms will look to new strategies and investment themes that provide increased resilience against a macro backdrop for which few modern playbooks exist.
Famke Krumbmüller, EY EMEIA Leader, Global Geostrategic Business Group, joins Winna Brown to discuss how shifts in geopolitical power will affect growth and investment opportunities.
As a result of the war in Ukraine, three major power blocs are emerging, and it has become critical for companies to understand the allies of the markets in which they are invested.
- Developed markets are leading one bloc, with the EU and the US having reached new levels of cooperation. Relatedly, the North Atlantic Treaty Organization (NATO) has been reinvigorated.
- Russia is leading a small bloc of countries, including several autocracies.
- A significant number of emerging markets, including China and India, are not aligning with either of these blocs, preferring to pursue a more neutral or transactional stance.
Several strategic sectors (i.e., farming and medical equipment, agriculture and food commodities, and critical infrastructure) have come into focus due to their relevance to national security and economic growth and the resulting geostrategic competition between these great powers in those strategic sectors. Cross-border deals have decreased as a share of global M&A in favor of more regional and intra-area deals. In this emerging multipolar world, companies are likely to see increased government intervention in their supply chains, limitations on or rejections of cross-border investments, export controls, restrictive trade measures and greater regulatory scrutiny.
Three priorities companies can incorporate to adjust to the new geopolitical environment include:
- Assess current and future political risks annually.
- Establish a cross-functional geostrategic team.
- Refine the company strategy to match new geopolitical realities.
Elizabeth Seeger, Managing Director of Sustainable Investing at KKR, joins Winna Brown to discuss why KKR views ESG as a business opportunity that both creates and protects value over time.
ESG has skyrocketed to the top of many PE firms’ list of strategic priorities in the past couple of years. PE firms that may have historically viewed ESG as a “nice to have” or a “check the box” exercise, are now increasingly considering ESG to be a business issue that is embedded in the business, not peripheral to it.
PE firms such as KKR that were early adopters of and believers in ESG are now in a position not only to lead the charge to net zero, but to share their learnings with other firms that may be earlier on their ESG journey. At KKR, ESG is viewed as a way to both protect and enhance value over time and is managed alongside other business issues.
KKR is focused on climate change, data and integrating ESG issues and subject matter expertise into the investment process. The firm views ESG data not as a way to score potential targets, but to identify a pathway to managing ESG-related risk sover the duration of the hold period. Lastly, KKR has identified three measurable ESG pillars across the portfolio regardless of industry: climate, human capital and data responsibility (cybersecurity and data privacy).
PE has an interesting role to play in the transition to net zero, and firms are likely to focus on 6 key areas:
- Creating and protecting value through ESG
- Building and deploying teams of resources and expertise
- Integrating climate and ESG considerations into investment processes
- Launching standalone ESG or impact funds
- Spotlighting portfolio companies that are addressing critical environmental and social challenges
- Collaborating and knowledge sharing to share solutions and best practices
Karim Anani, EY Americas Financial Accounting and Advisory Services Transactions Leader, and Mark Schwartz, Head of IPO and SPAC Capital Markets Advisory, join Winna Brown to explore why SPACs remain highly relevant despite market volatility and regulatory headwinds.
Contact Karim: karim.anani@ey.com
Contact Mark: mark.schwartz1@ey.com
In 2021, more than 40% of new public companies listed through mergers with SPACs. While SPACs have been around for decades, the boom of the last few years has dominated its narrative in the marketplace. Today, there are hundreds of SPACs seeking “transactable” targets that face potential liquidation in the next year or so if deals aren’t made. Against this backdrop, SPAC sponsors are operating in an extremely choppy market environment for SPACs and other new issues, and recently proposed SEC regulation has increased uncertainty in an already uneasy deal-making environment.
Today’s episode explores why SPACs remain highly relevant in EY dialogue with operating companies and their backers despite the market and regulatory headwinds.
What is in store for SPACs over the next one to two years and beyond?
- Recent innovation and complexity in SPAC mergers
- Evolving negotiation dynamics in recent dealmaking processes
- Ongoing evolution of what makes an attractive operating company for a SPAC merger
- Transforming and adapting of SPACs in the face of the current challenges
[Episode originally published 12/16/2021]
Tyler Brewster, Senior Director at EY-Parthenon, joins Winna Brown to reveal the drivers behind PE’s increasing presence in pro sports and explore both the opportunities and risks for investors.
Contact Tyler: tyler.brewster@parthenon.ey.com
Private equity (PE) is now undeniably present in the world of professional sports. According to Pitchbook, over the past 18 months, PE firms have taken on passive stakes in professional sports franchises and leagues after the NBA, MLB and Major League Soccer loosened ownership rules to include institutional investors. In addition, funds focused on sports have begun to emerge. According to Pitchbook, the total value of PE investments in sports teams and leagues has doubled in the past three years from US$3.3b in 2018 to US$7.1b in 2021.
This episode dives into the current drivers, opportunities and risks shaping PE’s presence in the sports industry. We discuss why this is an attractive industry for investors, the opportunities for continued growth such as media rights, asset diversification, and digital transformation, as well as the reputational risks and considerations for PE as it steps into the sports industry spotlight.
Greg Daco, EY-Parthenon Chief Economist, joins Winna Brown to discuss how macroeconomic factors such as inflation, monetary policy and the labor shortage will impact PE investment decisions and theses.
To discover more PE perspectives and insights, visit ey.com/privateequity.
These seven gauges will indicate how much PE activity will take place in the coming year:
- The positioning of a company in its sector
- Whether the sector is positively or negatively impacted by inflation
- How much pricing power a company has
- A company’s ability to pass on higher input and labor costs
- The price at which a company is acquired considering the higher cost of credit due to higher interest rates
- How resilient a company is in this economic environment
- The long-term value potential of a company and the type of value it brings
Pete Witte, EY Global Private Equity Lead Analyst, explores the key themes and market dynamics from 1Q 2022 that are top of mind for PE investors.
PE Pulse is a quarterly report and corresponding podcast miniseries that provides analysis and insights on private equity market activity and trends.
Visit https://www.ey.com/pepulse to view this quarter’s summary and infographic.
Five takeaways from 1Q 2022:
- The macroeconomic environment is top of mind for investors as uncertainty impacts growth, inflation and interest rates
- PE deal activity decreases 27% from 1Q 2021: despite a softening in activity from the breakneck pace of last year, this level of activity is still quite robust
- Geopolitical uncertainty: PE firms are using the same playbook they used during the COVID-19 pandemic to manage the impact from the war in Ukraine
- PE exit activity decreases 60% by value from 1Q21: PE will continue to do what they have always done, which is execute on strategy and look to exit when conditions are more amenable
- Secondaries market reaches new heights: GP-led deals are key drivers of this trend, as they providing optionality for LPs
Greg Schooley, EY-Parthenon US Value Creation Leader, joins Winna Brown to discuss what tasks PE is outsourcing across business functions such as finance, IT, HR and customer service to create value.
The path to successful value creation in private equity (PE) today goes beyond typical levers such as G&A cost-cutting, sales force effectiveness and strategic sourcing. It’s about an approach that leverages digital tools including automation, strategic outsourcing and advanced analytics.
Going forward, PE-owned companies of all sizes may need to look at outsourcing as a way to access cutting-edge technologies and capabilities that can lead to revenue growth opportunities, in addition to reducing costs.
Danny Warshay, Executive Director of the Nelson Center for Entrepreneurship at Brown University, explores how the “See, Solve, Scale” entrepreneurial process can help PE investors screen potential investments.
Partnering with a private equity (PE) firm has become especially attractive for founders of lower and middle market companies that aim for transformational, sustainable growth. As active and engaged investors, PE brings not only capital, but specialized industry expertise and experience, and generally a large network of professionals and operating resources. But to which entrepreneurs and founders is private capital flowing and what factors are influencing those investment decisions?
Danny Warshay is the Executive Director of the Nelson Center for Entrepreneurship at Brown University in Providence, Rhode Island, and author of “See, Solve, Scale: How Anyone Can Turn an Unsolved Problem into a Breakthrough Success.” Danny asserts that much of the same “See, Solve, Scale” process that has empowered so many entrepreneurs can also be helpful to investors as a screen for potential investments. The episode also explores how the legacy culture, bias and ways of doing business in PE can shape investment decisions and cause investors to overlook promising opportunities and entrepreneurs.
Entrepreneurs should keep three things in mind when seeking to raise private capital:
- Seek to fix problems that actually exist rather than be “a solution in search of a problem.”
- Having abundant resources can burden the entrepreneurial process, while scarce resources can actually be beneficial.
- Aspire for diversity among founders, management teams and investment teams because diverse teams are better positioned for success.
Pam Jackson, CEO of Level20, joins Winna Brown to reveal how mentorship programs can help women build long-term careers in PE.
According to a report that EY teams recently published on diversity, equity and inclusiveness (DEI), the private equity industry’s ability to meet stakeholder demands, access capital, win deals and compete for talent is increasingly contingent on progress against DEI metrics. Talent management has become the number two strategic priority across PE firms of all sizes, second only to asset growth. DEI initiatives are now proliferating in private equity as the industry begins to address how its culture has historically impeded diversity.
Level20 is a non-profit organization based in the UK that is dedicated to improving gender diversity in the European PE industry and specifically in senior leadership roles at PE firms.
Read “Can PE win deals if it doesn’t deal with DEI?”: https://www.ey.com/en_gl/private-equity/can-pe-win-deals-if-it-doesn-t-deal-with-dei
Calculate how long it will take to achieve your diversity goals: https://kenaninstitute.unc.edu/diversity-integration-model/
Ten ways male PE leaders can support and mentor their female colleagues:
- Serve as role models and mentors
- Engage with colleagues who are different from yourself
- Encourage women to realize their value
- Promote stories of inspiring women
- Engage in small interventions
- Embody inclusive leadership
- Give cultural shifts time to come to fruition
- Build a diverse talent pipeline from the bottom over time
- Recognize that recruiting senior women is not a “quick win”
- Model how long it will take to achieve your diversity goals with the EY Diversity Integration Model
In this episode, Laura Grattan, Managing Director at Crosspoint Capital, and Jeff Vogel, Head of the Software Strategy Group at EY-Parthenon, join Winna Brown to explore how PE firms can position themselves to win tech deals in today’s highly competitive market.
Contact Laura: lgrattan@crosspointcapital.com
Contact Jeff: jeffrey.vogel@parthenon.ey.com
According to the latest EY PE Pulse report, 2021 was the year of the tech deal: 30% of total capital deployed last year was allocated to technology companies. The technology sector, once just another industry vertical, now permeates every sector, claiming an ever-increasing share of deals as more companies differentiate themselves based on their technology regardless of the industry in which they sit or serve.
Crosspoint Capital focuses on the cybersecurity, privacy and infrastructure software sectors. PE firms that choose a niche specialization in the tech sector can bring deep sector expertise that translates to value creation for their portfolio companies. In an increasingly competitive tech environment, PE firms that focus on a highly targeted category of assets can find themselves in a differentiated position. They are able to quickly discern where to spend time, recognize the opportunities and limitations of an asset, and identify patterns indicative of future success.
Three characteristics of today’s tech deal environment include:
- Increasing presence of and need for club deals
- Increasing speed at which deals are clearing
- Developing deal theses early
Pete Witte, EY Global Private Equity Lead Analyst, explores the key themes and market dynamics from 4Q 2021 that are top of mind for PE investors.
PE Pulse is a quarterly report and corresponding podcast miniseries that provides analysis and insights on private equity market activity and trends.
Visit https://www.ey.com/pepulse to view this quarter’s summary and infographic.
Five takeaways from 4Q 2021:
- 2021 was a year for the record books for private equity (PE) firms, with investment activity surpassing the trillion-dollar mark for the first time.
- 30% of the total capital deployed in 2021 was allocated to technology companies, followed by firms in the consumer space, which saw 24% of aggregate deals by value.
- Growth equity funds raised US$102b throughout the year, up 53% from 2020 and up 74% from the average raised for growth funds over five years prior.
- PE exits saw record activity levels in 2021, with value and volume seeing increases of 107% and 56%, respectively.
- If 2021 will be remembered for anything, it will be the way that ESG and issues of sustainability catapulted to the top of PE firms’ agendas, driven by broad recognition that it’s the right thing to do and pressure from the whole gamut of PE’s stakeholder groups.
In this episode, Nic Humphries, Senior Partner and Executive Chairman of Hg, joins Winna Brown to explore how Hg’s philosophy of curiosity and experimentation has enabled it to become one of the most active technology investors in the world.
Contact Nic: Hg@hgcapital.com
As an early adopter of artificial intelligence (AI), machine learning and analytics, Hg has embraced an investment and organizational philosophy of curiosity and experimentation that has enabled it to become one of the most active technology investors in the world.
In this episode, Winna and Nic explore:
- Why AI and machine learning are a lead indicator and differentiator of Hg’s market position
- How AI has increased the sophistication of Hg’s origination process
- Where AI has made transformative impacts in the portfolio
- Why AI has caused job creation and retention rather than attrition
- How AI will drive the investment landscape moving forward
- Why people skills will remain vital in PE despite the increasing presence of AI and data analytics
4 areas where AI can create and unlock value in PE include:
- Churn propensity modeling
- Upsell and cross-sell modeling
- Target identification and origination
- Predictive analytics across the portfolio
In this episode, Tyler Brewster, Senior Director at EY-Parthenon, joins Winna Brown to reveal the drivers behind PE’s increasing presence in pro sports and explore both the opportunities and risks for investors.
Contact Tyler: tyler.brewster@parthenon.ey.com
Private equity (PE) is now undeniably present in the world of professional sports. According to Pitchbook, over the past 18 months, PE firms have taken on passive stakes in professional sports franchises and leagues after the NBA, MLB and Major League Soccer loosened ownership rules to include institutional investors. In addition, funds focused on sports have begun to emerge. The total value of PE investments in sports teams and leagues has doubled in the past three years from US$3.3b in 2018 to US$7.1b in 2021.
This episode dives into the current drivers, opportunities and risks shaping PE’s presence in the sports industry. We discuss why this is an attractive industry for investors, the opportunities for continued growth such as media rights, asset diversification, and digital transformation, as well as the reputational risks and considerations for PE as it steps into the sports industry spotlight.
Tricia Glynn, a Partner at Advent International, shares best practices from Advent’s renowned DEI program and discusses how private equity (PE) firms can build an inclusive culture and incorporate diversity, equity and inclusion (DEI) into their value creation thesis. Tricia has been a PE investor for over 20 years and currently serves on boards such as Lululemon and Olaplex, and co-leads Advent’s North American Retail, Consumer and Leisure sector team.
To read EY's new report on DEI in PE, visit ey.com/privateequity.
DEI is not PE’s strength. According to Preqin’s Women in Alternative Assets report, only one-fifth of industry employees and 12.2% of senior roles were female in 2020. The situation for underrepresented minorities in the industry is dismal, with only 2% Hispanic and 1% Black venture capital (VC) investors in the US (Gompers and Kovvali, 2018). As of December 2020, nearly 50 buyout firms and investors had signed a global initiative launched by the Institutional Limited Partners Association (ILPA) to improve diversity among their ranks; a substantive and public step in the right direction, but as Tricia says: "The industry has a long way to go.”
A PE talent strategy must incorporate a proactive approach to DEI with a strong tone set “from the top,” ensuring diverse employees feel wanted, valued and sponsored. Incorporating a comprehensive DEI strategy addresses a firm’s commitment to elevating society while expanding its talent pool and creating new perspectives in investing. Advent views DEI as foundational to its business model, competitive positioning and talent strategy so it can be both the chosen buyer and chosen employer.
Five things PE can do to build DEI companies and cultures include:
- Find, engage and learn from DEI experts in your network.
- Hire experts (i.e., advisors, academic researchers) who understand your industry and know how to drive DEI culture.
- Track data to identify your biggest problems, determine where you want to drive change and hold yourself accountable.
- Give permission to speak openly: fear of “saying the wrong thing” holds leaders back from engaging in DEI so allowing well-intentioned people to learn in real time is important.
- Hold everyone in the organization accountable.
Entrepreneurs and companies seeking investment may find a family office (FO) a compelling alternative to private equity (PE).
According to Preqin, family office deals currently represent 2.5% of total M&A deals, a small share but one that has been steadily increasing since the great financial crisis. The Economist estimates family offices manage assets worth an estimated US$4 trillion, with individual offices averaging $500 million to $1 billion in AUM according to Forbes.
Our guest is Katherine Hill Ritchie, Director and Board Member of Nottingham Spirk, a 50-year-old innovation firm with a family office. Katherine has 18 years of finance, investing and family office experience and started her own firm working with family offices and alternative investment funds and companies. Katherine is also an Angel Investor and advisor who supports and invests in female and diverse founded venture capital funds and companies and is on the board of several organizations. She has spoken at over 100 global investment conferences, lectured at universities, and was recently awarded a lifetime achievement award for her family office work.
Contact Katherine: KHillRitchie@nottinghamspirk.com
8 things companies should know about FOs:
- FOs can and do compete with PE for direct investments.
- FO fund structure, investment thesis, acquisition requirements, portfolio and shareholder mix are frequently opaque.
- FOs have flexibility to change their focus.
- FOs are not beholden to a 7-10-year exit timeline.
- IPO is not always the exit strategy for a FO.
- FOs don’t face the same regulatory requirements as funds.
- FOs may or may not care about ESG requirements for their investments.
- Companies must build relationships with FOs to ensure alignment of objectives.
Pete Witte, EY Global Private Equity Lead Analyst, explores the key themes and market dynamics from 3Q 2021 that are top of mind for PE investors.
PE Pulse is a quarterly report and corresponding podcast miniseries that provides analysis and insights on private equity market activity and trends. Visit https://www.ey.com/pepulse to view this quarter’s summary and infographic.
Five takeaways from 3Q 2021:
- Global M&A markets are on their way to a record year, with private equity (PE) in the driver’s seat.
- PE as an asset class continues to grow, with retail and insurance markets positioned to drive future asset growth.
- PE firms’ continued focus on the technology sector is driven by rising needs for security, automation and the digital transformation of critical organizational functions.
- Health care is garnering significant interest from PE due to favorable macro tailwinds, long-term growth expectations and an anticipated increase in consumer spending.
- Deal activity is not limited to large-scale deals; middle market deployment is the highest since the global financial crisis.
Hanne Thornam, EY Norway Head of Climate Change and Sustainability Services, joins Winna Brown to share why PE is in a unique position to lead our transition to a low-carbon, circular economy.
Contact Hanne: hanne.thornam@no.ey.com
As private equity (PE) firms focus on ESG, they must also pivot to a long-term, forward-thinking mindset.
For an industry accustomed to using historical data to project the next four to five years, this is no simple task; however, it is an existential one. Climate change will mean our world looks very different in a decade regardless of the action we take (or don’t take), and PE firms are uniquely equipped to lead this mission, should they choose to accept it.
ESG topics have both financial and commercial relevance, and PE must define and track KPIs that are specific to each portfolio company. It is no longer optional to engage in the ESG conversation, as a lack of awareness is an inherent business risk.
Two overarching climate scenarios are possible, both of which require comprehensive adaptation and imagination:
- A warming scenario in which rising temperatures impact access to raw materials, stoke political stability and disrupt value chains
- A transition scenario characterized by increasing regulation, bans and changes in technology and consumer preferences
Six ways PE firms can shift their mindset to increase their climate competence and confidence:
- Champion a long-term, forward-looking perspective
- Cross-pollinate climate data across workstreams
- Incorporate climate scenarios as core data points
- Engage diverse perspectives
- Embrace complexity and curiosity
- Verify competence on climate and environmental risks in investment teams
Political risk is creating challenges and opportunities for global organizations, including private equity (PE) firms and investors who are increasingly exploring cross-border deals as valuations soar across the US and Europe.
On a previous episode, we talked about why PE firms must embed a geostrategy so they are able to recognize unique opportunities and use that strategy to inform their investment decisions. Today, we dive into three specific areas of geopolitical risk that are especially impactful for and relevant to private equity funds right now:
- COVID-19 pandemic: increased tension and competition between big regional powers will lead to an environment in which PE must carefully consider and anticipate the implications for cross-border deals.
- Tech sector: governments and regulators will have a massive influence on the tech sector in the coming years and it will create both political risks and opportunities for investors.
- Climate change: increasingly active governments and regulators will create a patchwork of environmental legislation which will make it much more difficult to operate across markets.
Contact Famke: Famke.Krumbmuller@fr.ey.com
Luke Pais, EY ASEAN Private Equity Leader, explores why Southeast Asia is a vibrant region for PE investors who adeptly navigate local dynamics.
Contact Luke: luke.pais@sg.ey.com
According to the Preqin Investor Survey conducted in November 2020, Southeast Asia is among the top three emerging markets ideal for private equity (PE) and venture capital (VC) investment in the next 12 months. The region is welcoming to foreign capital, with entrepreneurs and family conglomerates actively seeking capital and focusing on succession planning.
PE’s field of play in the region is dynamic. Because the region demands quality infrastructure to support its burgeoning and young population, the field of play includes specialist funds focused on real estate, infrastructure, renewable energy and digital. The technology sector is especially vibrant and impact funds are becoming more prevalent. While credit has historically been a domain of banks, PE credit products are emerging in the region given balance sheets have become healthier since the great financial crisis of 2008. Lastly, family conglomerates in the region often function like PE funds and compete against PE funds in the deal space.
PE has historically done well in the region by carefully selecting the right companies and preparing them to expand internationally. As a result, PE-backed companies have been attractive to multinationals and trade sales to strategic investors in the US, China, Europe and Japan have been the dominant exit thesis in the region.
Learning outcomes:
- PE should consider localizing their strategy to include a regional headquarters in Singapore in combination with strong market coverage in various other Southeast Asian countries.
- PE firms must be clear about the value they bring to the table in a competitive deal environment in which discussions have shifted from valuation to value proposition and value creation.
- Successful PE funds have built local relationships over time as companies seek partnerships rooted in shared aspirations.
- ESG is increasingly important during due diligence, as access to capital depends on achieving ESG benchmarks and commitments.
Cybersecurity professionals John Nugent, Vice President at Apax and Paul Harragan, Associate Partner at EY-Parthenon, explore how PE can manage cybersecurity risk and why it should be viewed as a value creation lever rather than a cost.
Contact Paul Harragan: paul.harragan@parthenon.ey.com
Cyberattacks happen constantly, and companies display a wide range of preparedness. Private equity (PE), like any other industry, is not immune from this growing threat. 1H2021 saw increase in ransomware attacks in PE portfolio companies, which is especially troublesome for an industry that has traditionally taken a less rigorous approach to information security and cyber defense. PE has, however, begun to embrace the necessary investments needed to understand their intrinsic risk, prepare for the inevitable breach and respond quickly.
While it is inherently difficult to gauge or predict the monetary cost of a breach, PE must consider that a breach can degrade an asset’s sale price or, in rare cases, be a “dealbreaker” altogether. In addition to potential impact on transactions, skyrocketing insurance costs render the cost of negligence far greater than the cost of investing in a comprehensive cybersecurity strategy.
Cybersecurity due diligence is increasingly becoming industry standard and should focus on past, present and future. For PE, future risk is an especially critical consideration since capital deployment can dramatically change the threat landscape of an asset.
Five gold standard cybersecurity practices for PE include:
- Understand your threat landscape
- Identify what a hacker would find valuable and attractive about your company
- Identify critical business functions and adopt procedures to monitor, defend and preserve functionality in the event of an attack
- Inform security leadership of the technology strategy and broader business plan so they can anticipate changes to the attack surface
- Understand how new technology can generate new attack vectors and impact your threat landscape
Pete Witte, EY Global Private Equity Lead Analyst, explores the key themes and market dynamics from 2Q 2021 that are top of mind for PE investors.
The PE Pulse is a quarterly report and corresponding podcast miniseries that provides analysis and insights on private equity market activity and trends. Visit https://www.ey.com/pepulse to view the summary and infographic.
5 takeaways from 2Q 2021:
- Exit activity via M&A and IPO are seeing record levels of activity, which is impacting the entire PE life cycle, including fundraising.
- Fundraising is picking up as demand from investors strengthens and funds start to close in earnest once again.
- Deal activity and deal volume are on track to comprise the most active half-year on record.
- Deal sizes are increasing due to increasing post-pandemic certainty and the accumulation of dry powder.
- Club deals are increasing in prevalence for large-scale deals.
Lindsey Kiely and Bhakti Nagalla of the EY-Parthenon Consumer Industries and Private Equity practices join Winna Brown to explore the consumer product categories, behaviors and trends investors should keep an eye on.
Contact Lindsey: lindsey.kiely1@parthenon.ey.com
Contact Bhakti: bhakti.nagalla@parthenon.ey.com
The consumer products and retail sectors have certainly been ones to watch. The COVID-19 pandemic both accelerated existing trends and forced the industry to accommodate novel consumer need states and demand shifts.
Evaluating the sustainability of growth in these categories has become a key part of the diligence process as investors struggle to predict future consumer demand. In today’s competitive deal environment, investors are seeking proprietary deals or early LOI more aggressively and are also pivoting to industries that support consumer goods and services (i.e. contract manufacturing, logistics, technology).
Consumer behaviors have shifted as they spend more time researching products online, increasingly favor masstige price points and demand next-level experiences from brands and retailers both online and offline. These shifts are causing investors to more heavily scrutinize a brand’s online presence, pricing model and cost models.
Interesting categories for investors to watch include:
- Consumer health
- Pet health
- Home products
- In-home entertainment and hobbies
- Online retail
- Supporting industries
Greg Brown, Executive Director at the Institute for Private Capital and Finance Professor at the University of North Carolina (UNC) Kenan-Flagler Business School, joins Winna Brown to discuss what the Institute’s academic research says about PE’s performance and the role private capital plays in the global economy.
To get in touch with Greg, email uncipc@kenan-flagler.unc.edu
The Institute for Private Capital (IPC) is a non-profit, multi-university research initiative that’s housed at the University of North Carolina (UNC). Its mission is to improve public understanding of private capital’s role in the global economy by providing unbiased and independent research, conducted by a network of academic affiliates, with support from private sector companies. There are more than 35 member institutions involved in IPC – EY is one such institution – and these institutional supporters play a critical role in ensuring IPC research solves specific, practical issues affecting the PE industry.
Two topics are consistently top of mind for PE investors: PE’s role in the investment portfolio and the specific factors that predict future returns. IPC research explores an array of additional topics, and some of their findings include the following:
- Portfolios with private fund investments have superior returns on a risk-adjusted basis.
- There is a “risk-return pecking order” in which PE produces better risk-adjusted outcomes.
- The performance of individual deal partners is a reliable indicator of future fund performance.
- There are distinct determinants of performance at various stages of a fund’s life cycle.
- PE makes meaningful and direct contributions to portfolio company operations.
- After PE enters a new market, there is a positive spillover to the broader economy in the form of an overall productivity increase.
Over the coming years, there are two major focus areas for research and discussion in the academic community regarding private equity:
- To more deeply understand how private assets fit into the broader portfolio management process
- To identify performance drivers at PE-backed portfolio companies and explore how this has changed over time
Jeff Vogel, EY-Parthenon US Managing Director and Head of the Software Strategy Group, joins Winna Brown to explore the complexities and key trends shaping the software deal landscape.
Visit ey.com to read our latest private equity perspectives.
The “software economy” is comprised of companies that sell or license software as well as software-enabled business services companies that differentiate themselves on the basis of their software.
Because a software asset is especially complex to valuate and diligence, PE firms and the advisors who serve them have transformed their talent strategy to attract a wide spectrum of operational experts ranging from serial CTOs to young entrepreneurs. A passion for technology combined with partnering experienced executives with curious young talent helps teams remain agile and responsive to rapid change.
A software asset is different from a traditional asset for three important reasons:
- Markets are amorphous and difficult to size.
- Revenue potential and gross margins are high; however, R&D expenditure is also high because the product is must constantly evolve to stay competitive.
- Technical debt, unlike traditional debt, is difficult to quantify and does not appear on a balance sheet, so a PE investor may unwittingly sign up for obligations requiring significant capex.
Five trends shaping the PE/software deal landscape:
- Role of PE: PE is shaping the software landscape by providing access to capital and focusing on building companies.
- Long-term value: PE is increasingly prepared to hold software assets for longer and are therefore optimizing for LTV.
- Growth: high valuations require PE to underwrite for growth, not solely for cash flow.
- Hybrid deals: PE firms that were traditionally majority stakeholders are now considering minority stakes.
- PIPE deals: private investment in public equity (PIPE) deals are leading to cross-fertilization in management and strategy between public and privately held companies.
Tricia Glynn, a Partner at Advent International, shares best practices from Advent’s renowned DEI program and discusses how private equity (PE) firms can build an inclusive culture and incorporate diversity, equity and inclusion (DEI) into their value creation thesis. Tricia has been a PE investor for over 20 years and currently serves on boards such as Lululemon and Olaplex, and co-leads Advent’s North American Retail, Consumer and Leisure sector team.
For more information on Advent's DEI program, visit https://www.adventinternational.com/about/diversity-and-inclusion/
DEI is not PE’s strength. According to Preqin’s Women in Alternative Assets report, only one-fifth of industry employees and 12.2% of senior roles were female in 2020. The situation for underrepresented minorities in the industry is dismal, with only 2% Hispanic and 1% Black venture capital (VC) investors in the US (Gompers and Kovvali, 2018). As of December 2020, nearly 50 buyout firms and investors had signed a global initiative launched by the Institutional Limited Partners Association (ILPA) to improve diversity among their ranks; a substantive and public step in the right direction, but as Tricia says: "The industry has a long way to go.”
A PE talent strategy must incorporate a proactive approach to DEI with a strong tone set “from the top,” ensuring diverse employees feel wanted, valued and sponsored. Incorporating a comprehensive DEI strategy addresses a firm’s commitment to elevating society while expanding its talent pool and creating new perspectives in investing. Advent views DEI as foundational to its business model, competitive positioning and talent strategy so it can be both the chosen buyer and chosen employer.
Five things PE can do to build DEI companies and cultures include:
- Find, engage and learn from DEI experts in your network.
- Hire experts (i.e., advisors, academic researchers) who understand your industry and know how to drive DEI culture.
- Track data to identify your biggest problems, determine where you want to drive change and hold yourself accountable.
- Give permission to speak openly: fear of “saying the wrong thing” holds leaders back from engaging in DEI so allowing well-intentioned people to learn in real time is important.
- Hold everyone in the organization accountable.
Pete Witte, EY Global Private Equity Lead Analyst, explores the key themes and market dynamics from Q1 2021 that are top of mind for PE investors.
The PE Pulse is a quarterly report and corresponding podcast miniseries that provides analysis and insights on private equity market activity and trends. Visit https://www.ey.com/pepulse to view the summary and infographic.
5 takeaways from 1Q 2021:
- The first quarter of 2021 was a blockbuster quarter for PE deals, and in fact was the highest of any quarter in the past decade.
- Technology gained maximum traction during the COVID-19 pandemic and remains a powerful thesis.
- The SPAC market expanded at an unprecedented rate during the COVID-19 pandemic.
- Holding periods could increase as a result of the pandemic, although IPO exits rebounded strongly in 1Q.
- Finding the right target at the right price remains a challenge in an uncertain market.
DeJeana Chappell, EY National Workplace Leader and Senior Manager in the EY Corporate Real Estate Practice, describes the focus areas and priorities of a robust workplace reimagination strategy.
Contact DeJeana: DeJeana.Chappell@ey.com
Visit ey.com to read our latest private equity perspectives.
The COVID-19 pandemic has given companies an opportunity to reimagine their real estate and talent strategies and self-disrupt legacy practices, philosophies and ways of working to shape their future workforce and workplace strategy.
While many companies have evolved their workplaces in recent years, not all have confronted and fully digested both the real estate and talent implications of flexibility and remote work. The COVID-19 pandemic has both accelerated existing momentum on this topic and catalyzed new, and perhaps overdue, conversations.
There is an undeniable disconnect between historical office occupancy metrics and executive perception. Industry data suggests that, pre-pandemic, average annual office occupancy in the US across sectors hovered around 40%; a stark contrast to leadership perceptions that teams were onsite every day. In addition, the legacy equation that high office occupancy equals high productivity has been proven obsolete over the last year.
As executives struggle to reimagine their workplaces, three key focus areas have become tablestakes:
- Health and safety considerations such as air filtration, circulation, elevator protocols and cleaning protocols
- Cost savings such as square footage per headcount, geographical location strategy, reducing or eliminating space altogether, and real estate capex needs
- Cultural implications of flexibility, autonomy, productivity, personal accountability, collaboration and connection
A robust reimagination exercise must do the following:
- Survey your employees to understand sentiment and needs, and know that feedback might shift over time
- Capture leadership insights on business needs and objectives
- Recognize that one size does not fit all
- Leverage both quantitative and qualitative data to build a holistic story around the opportunity
- Balance cost savings with human and cultural needs
- Identify employee personas and their respective scenarios
- Take a cross-functional and inclusive approach
Andrés Sáenz, Líder Global de Private Equity para EY, se une a los socios de EY-Parthenon, Ángel Estrada y Juan David Taboada, para explorar qué significa la NextWave Private Equity para Latinoamérica y cómo la digitalización, la transparencia, el propósito y el talento están transformando a esta industria en la región.
Visita ey.com para escuchar la conversación completa de 30 minutos.
Contact Ángel: Angel.Estrada2@parthenon.ey.com
Contact Juan David: juan.taboada@parthenon.ey.com
Andres Saenz, EY Global Private Equity Leader, joins EY-Parthenon Partners Ángel Estrada and Juan David Taboada to explore what NextWave Private Equity means for Latin America and how digitization, transparency, purpose, and talent are transforming PE in the region.
Ángel Estrada and Juan David Taboada, EY-Parthenon Partners in Mexico City and Bogotá respectively, join Winna Brown to discuss industries of interest for PE in LATAM.
Contact Ángel: Angel.Estrada2@parthenon.ey.com
Contact Juan: Juan.Taboada@parthenon.ey.com
Visit ey.com to read our latest private equity perspectives.
The number of Limited Partners (LPs) with exposure to Latin America (LATAM) continues to trend higher. According to the latest survey from the Latin American Venture Capital Association (LAVCA), about two-thirds of large LPs currently have exposure to LATAM, up from less than half five years ago. Moreover, allocations are rising: LATAM investments account for nearly 25% of LPs’ emerging market investments, up from about 15% five years ago.
LATAM is a heterogeneous region with a growing population and household income but is not yet mature, therefore providing attractive opportunities for private equity (PE). Industries with especially high potential for growth include:
- Agribusiness
- Renewable energy
- FinTech
- Education
- Health care
- Third-party logistics
In addition, one of the biggest regional opportunities is the consolidation of businesses into truly regional “multilatinas.” While this has proven to be a daunting aspiration, the size and scale of the opportunity remains compelling for PE investors.
A few critical data points PE investors must understand before investing in LATAM include:
- Each country has unique political, economic, regulatory and cultural factors to understand and navigate.
- Every country of interest should be analyzed separately.
- Reliable data is elusive, therefore increasing its value and importance.
- Many companies are family- or entrepreneur-owned.
- Corporate governance is less mature than in the US or Europe.
- Investors must be flexible in dealing with stakeholders.
In this episode, Karim Anani and Alex Zuluaga, EY Global SPAC Practice Co-Leaders, explore why SPACs attract PE investors and advise how they should manage SPAC transactions.
Contact Karim: karim.anani@ey.com
Contact Alex: alex.zuluaga@ey.com
Visit ey.com to read our latest private equity perspectives.
Special Purpose Acquisition Companies (SPACs) are rapidly evolving from an interesting option to a desired path of taking a company public. This malleable vehicle is becoming better understood, more widely accepted and is proving to be a highly adaptable way to meet the needs of both operating companies and investors. A key factor in this flexibility is because a SPAC transaction is a merger, not an IPO.
Unlike a traditional PE fund vehicle in which a fund invests in multiple companies, a SPAC will instead effectuate a single transaction. As a result, a PE fund’s investment philosophy, strategy and approach for a SPAC differs from its traditional investment model.
A SPAC appeals to private equity (PE) investors for several reasons:
- Speed at which capital can be raised
- Opportunity to expedite entry to public market
- Ability to tell the story with the aid of future projected earnings of the company
- Opportunity to explore a different investment thesis
- Potential for significant upside as SPAC sponsor
- Definition of minimum cash and financing structuring options on the front end create a lower risk of deals falling apart
PE funds interested in utilizing a SPAC as an exit vehicle should consider the following recommendations:
- Define transaction goals and value drivers
- Choose a SPAC that aligns with the industry of operating company
- “Get your house in order” to be more attractive for a SPAC exit
- Attend to backward-looking compliance procedures
- Ensure company is able to function like a public company from an operational and talent standpoint
- Anticipate the regulatory and compliance landscape to continue evolving
Sally Jones, EY UK Trade Strategy and Brexit Leader, recaps the current state of Brexit and advises PE executives how to navigate the transition.
Contact Sally: sally.jones@uk.ey.com
Visit ey.com to read our latest private equity perspectives.
The Brexit deal released at the eleventh hour of 2020 caught many businesses off-guard. According to research by UK in a Changing Europe, the economic impact of Brexit is projected to have twice the impact of the COVID-19 pandemic on the UK economy.
The path forward for service-based business remains especially uncertain. Services have become potentially unlawful to provide, as member state regulation, movements of people, and dataflows between the UK and Europe are either unclear or restricted. Questions service providers must now ask themselves include:
- Am I lawfully allowed to provide my services?
- Can I travel to my client to deliver my services?
- Can I legally deliver my services remotely?
Many private equity (PE) investors had already assumed a no-deal Brexit, choosing to pre-emptively migrate business operations from the UK to Europe so they could avoid disruption as Brexit negotiations progressed.
Foreign direct investment (FDI) into the UK fell to near zero in 2020, as wary investors allocated capital to other markets in which they had more confidence. It is possible the retrospective elements of the UK National Securities and Investments Bill and the resulting uncertainty and risk it creates for investors could be damaging to UK attractiveness. The US has now eclipsed the UK as the #1 most attractive G7 nation for investment.
Over the coming months, as the immediate disruption ends, PE investors will have a better idea of how to resize and reshape investments and operations as the “lay of the land” emerges in the UK.
PE firms must monitor how their portfolio companies are trading, as value can erode quickly.
Portfolio companies can employ five tactics to navigate post-Brexit uncertainty:
- Create a response team that includes senior decision-makers
- Communicate transparently and frequently to all stakeholders
- Monitor rapid changes to legalities around dataflow between the UK and EU
- Anticipate cost increases and decide whether to absorb them or pass them to customers or suppliers
- Understand new regulations as quickly as possible
Andres Saenz, EY Global Private Equity Leader, explores three hypothetical future scenarios and how they impact PE’s right-to-win in 5-10 years.
Visit ey.com to read our NextWave Private Equity report.
The future for private equity (PE) is going to look very different in the coming years. New technology, tighter regulation, retail investor empowerment, growing digitalization and increased competition are set to impact heavily on how the PE industry functions. To bring these impacts to life, we explore three hypothetical scenarios for PE in this new landscape.
“Democratization of investing”
Retail investors (investing relatively small sums) can participate in the PE universe in a way they have never been able to before. New PE fund structures combine with online trading apps and brokerage platforms to allow ordinary investors access to the same functionality previously reserved for pensions, endowments and foundations.
“First artificial intelligence fund raises over US$20b”
A PE firm competes with top Silicon Valley names for talent and resources to build the first fund driven entirely by artificial intelligence (AI) and data analytics. Pulling data from thousands of disparate sources, the fund algorithmically originates deal ideas, monitors portfolio companies and charts an optimal path for exit.
“A private equity firm becomes the world’s largest employer”
While this represents great success for the PE sector, it also increases levels of responsibility. Regulatory bodies scrutinize more heavily the duty of care that PE firms have to their employees, portfolio companies and the general public.
PE firms must begin to think now about how they will thrive in a future in which these scenarios are playing out in real time. Acquiescing to a lagging position is not an option for PE if they want to remain competitive in 5-10 years as the industry landscape and right-to-win continues to evolve.
Andres Saenz, EY Global Private Equity Leader, explains why PE must aspire to a long-term value (LTV) strategy if they want to thrive in the NextWave of private equity.
Visit ey.com to read our NextWave Private Equity report
EY NextWave is a global strategy and ambition to deliver long-term value to EY clients, EY people and society at large. The NextWave Private Equity vision represents the EY organization’s perspective on the most powerful trends and forces shaping the private equity industry’s future. It explores how drivers such as value creation, purpose and transparency, digital and talent are driving magnanimous change across the global PE landscape
While PE is a relatively young industry, it has grown quickly, matured immensely and is now at an inflection point. Preqin is anticipating an impressive 15% CAGR in AUM over the next five years, a trajectory that requires PE to remain competitive while simultaneously experiencing tremendous growth.
The long-term value (LTV) narrative in PE is shifting from “we contribute to society because we are successful and then give back” to “we are successful because we create shared value with society.” While LTV remains an aspirational goal, leading firms have already started moving in this direction because they view it as both inevitable and non-optional.
Four key drivers of the shift to LTV include:
- Demand from investors and resulting competition for capital
- Regulatory scrutiny threatening PE’s license to operate
- Competition for deals involving discerning entrepreneurs
- Talent landscape that seeks alignment of values
There are five stages of an LTV journey for PE firms:
- Compliance: establish compliance with initiatives, regulations and LP agreements
- Risk management: ESG is used as a tool to manage non-financial risks during the investment life cycle
- Opportunity-seeking: use ESG and LTV to identify opportunities for value creation during the entire investment life cycle
- Impact-focused: selected portfolio companies create value to increase the bottom line. Active ownership seeks to adapt or transform the portfolio and deliver superior returns
- Long-term value: find comparable and meaningful ways to measure and articulate strategic value creation for stakeholders
Jeff Vogel, EY-Parthenon US Managing Director and Head of the Software Strategy Group, joins Winna Brown to explore the complexities and key trends shaping the software deal landscape.
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The “software economy” is comprised of companies that sell or license software as well as software-enabled business services companies that differentiate themselves on the basis of their software.
Because a software asset is especially complex to valuate and diligence, PE firms and the advisors who serve them have transformed their talent strategy to attract a wide spectrum of operational experts ranging from serial CTOs to young entrepreneurs. A passion for technology combined with partnering experienced executives with curious young talent helps teams remain agile and responsive to rapid change.
A software asset is different from a traditional asset for three important reasons:
- Markets are amorphous and difficult to size.
- Revenue potential and gross margins are high; however, R&D expenditure is also high because the product is must constantly evolve to stay competitive.
- Technical debt, unlike traditional debt, is difficult to quantify and does not appear on a balance sheet, so a PE investor may unwittingly sign up for obligations requiring significant capex.
Five trends shaping the PE/software deal landscape:
- Role of PE: PE is shaping the software landscape by providing access to capital and focusing on building companies.
- Long-term value: PE is increasingly prepared to hold software assets for longer and are therefore optimizing for LTV.
- Growth: high valuations require PE to underwrite for growth, not solely for cash flow.
- Hybrid deals: PE firms that were traditionally majority stakeholders are now considering minority stakes.
- PIPE deals: private investment in public equity (PIPE) deals are leading to cross-fertilization in management and strategy between public and privately held companies.
Jerry Whelan, EY Private Equity Tax Technical Leader, and Ray Beeman, Co-head of the EY Washington Council, join Winna Brown to discuss the top five critical areas to which PE executives must pay attention:
- Tax and regulatory
- Incentives
- Deal activity
- Opportunity landscape (domestic and cross-border)
- Sector big bets
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This podcast was recorded on 20 November, 2020 and assumes there will be a divided government scenario in the US with a Biden Administration and Republican-controlled Senate.
The results of the US election have enormous implications for all industries, and private equity (PE) is no exception. While there is anticipation of a return to a conventional approach to governing, it’s critical for PE to remain agile and anticipate pendulum swings in government policy that will require agility and robust scenario planning.
It’s critical for PE executives to track the following dynamics:
- Whether legislative issues such as stimulus, onshoring supply chains and infrastructure will gain bipartisan momentum
- Whether and how priority initiatives will be funded with proposed tax changes
- Impact of regulatory and enforcement changes on sector and deal flow
- Modeling tax variables, including sunsetting provisions that may increase cash tax
- A gradual shift in tone toward global trade and multilateral agreements and initiatives
Our speakers call on PE to adopt ESG and buy in to a broader long-term value strategy.
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A company’s primary purpose is no longer simply enhancing and protecting value for shareholders through short-term profits, it is also delivering long-term value (LTV) to all stakeholders. Private equity (PE) has taken a keen interest in this expanded definition of value in the face of investor, employee and societal interest in conscious capitalism and ESG. The outdated “do no harm” mantra is rapidly being replaced with a business imperative to “do good.”
In this shift from shareholder to stakeholder capitalism, the biggest challenge is moving beyond public relations talking points and truly integrating ESG into an organization. Organizations that anchor themselves to a meaningful purpose are better positioned to benefit from, demonstrate and measure the value they create and reap both financial and non-financial rewards.
For PE, developing and executing against a compelling purpose-driven, stakeholder-focused strategy incorporates employee experience, customer value proposition, supply chain management, capital allocation decisions and leadership incentives.
ESG skeptics need only look at the facts to be convinced to act:
- One in four investment dollars is now flowing into ESG funds: not only is that number growing exponentially, there is competition for those investment dollars.
- There is a massive transfer of wealth occurring from boomers to millennials, who have very different values and expectations.
- There is frequently a lower cost of capital for companies with better ESG scores.
- During the initial market selloff after the COVID-19 pandemic, funds that had an ESG focus experienced lower volatility and faster recovery than non-ESG funds.
PE firms starting their ESG journey can use the following framework:
- Now – understand the core ESG issues that are important to your firm and your key stakeholders.
- Next – report transparently on ESG issues, metrics, goals, and management tactics.
- Beyond – leverage what you learned and gained by integrating ESG into your business and articulating how it creates LTV for you and your stakeholders.
Josh Lewsey, EY-Parthenon Strategy & Transactions Partner, and John Levack, Vice Chairman, Hong Kong Venture Capital and Private Equity Association, join Winna Brown to help private equity investors understand how new regulations will impact the current and future private equity ecosystem in APAC.
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The global trade environment has increased geopolitical uncertainty, making forecasting difficult. The Organisation for Economic Co-operation and Development (OECD) is predicting 2020 will see a 4% global contraction in GDP with only one G20 country having a positive GDP: China.
It is possible that a bifurcation between US/Europe and Asia of both markets and products will occur as a result of politics rather than consumer requirements. This combined with the region’s growth potential and faster post-pandemic recovery can potentially result in Asia as a more promising market in which to deploy private capital.
Hong Kong is the biggest cross-border center for private equity (PE) in Asia. While the National Securities Law in Hong Kong has caused significant discussion, the impact on Hong Kong-based PE firms has been nominal: this is because China is already a major investment market for these firms and anyone investing in China is already subject to the Chinese national security law, which is quite similar.
The Hong Kong Government recently passed the following three landmark laws that solidify Hong Kong as an ideal base for private equity operations:
- Unified Fund Exemption Regime: extends the profits tax exemption to all funds, whether or not the fund's central management and control is exercised in Hong Kong.
- New Limited Partnership Fund Law: allows a limited partnership to be set up in Hong Kong so a PE fund vehicle can be based there.
- New concessionary tax rate on carried interest starting in 2020.
Over the next three to five years, PE in Asia-Pacific (APAC) will see:
- Fee pressures and low yields in developed markets will push more capital allocation to APAC.
- Funds that drive sustainable returns through operational value creation and prioritize ESG will emerge as market leaders.
- Bifurcation of funds into financial conglomerates and small specialist funds.
- Minority stakes in local SME companies coming to market as new generations explore exit opportunities.
- An influx of capital from pension (defined contribution) investors will increase dry powder and exacerbate the challenge of deploying it successfully and responsibly.
Josh Lewsey, EY-Parthenon Strategy & Transactions Partner, and John Levack, Vice Chairman, Hong Kong Venture Capital and Private Equity Association, join Winna Brown to help private equity investors understand how to navigate and set expectations in APAC.
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It’s an exciting time for private equity (PE) in Asia-Pacific (APAC). According to Preqin, AUM for buyout funds focused on Asia have more than quadrupled over the last 10 years and firms now have more than USD $260b in AUM. They also have almost US$100b in dry powder available for deals. Taking a larger view, when we include some of the other private capital asset classes such as growth capital, venture, and infrastructure, PE firms focused on Asia have US$1.6t in AUM.
With 4.3 billion people and a blossoming middle class, the positive growth we are seeing in APAC is a contrast to slowdowns in the US and Europe. As a result, PE investors are eager to put capital to work in the region using the LBO strategies and playbooks that have proven successful in the US and Europe. This can be problematic for several reasons:
- Because the region is dominated by small and mid-size enterprises (SME), 70%-80% of PE deals are minority investments.
- PE is often in an influential (not controlling) position, with limited ability to dictate changes in management.
- It’s difficult to find and execute a viable LBO deal due to a cultural perceptions that associate selling a business with a failure of its management.
- APAC is a fragmented market with multiple languages, cultures, legal jurisdictions and working customs.
- The region has not always been open to foreign capital, and while this is changing, legal and regulatory requirements in a fragmented market demand local expertise.
Six ways PE investors can adapt to APAC:
- Choose businesses with capable, collaborative management in addition to competitive advantage and growth potential.
- Realize your ability to use leverage is dramatically reduced.
- Prepare to influence and support rather than dictate by demonstrating how your expertise and operational value creation is accretive to the business.
- Consider walking away from attractive deals in which PE and management are fundamentally misaligned.
- Avoid an ethnocentric, “colonial” approach: instead, lead with empathy and confidence in local talent.
- Present operational value creation and ESG as positive value accretion methods that improve the quality of a business.
Jeff Woods, EY-Parthenon US Co-Head of Healthcare, joins Winna Brown to explain why PE should remain optimistic about investing in the healthcare sector despite the short-term detriment of COVID-19.
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The assumption that the healthcare sector is “recession proof” has been debunked as the pandemic usurped traditional assumptions among both patients and investors. Now, there is heightened awareness of how patients access (or don’t access) the healthcare system after utilization plunged nearly 20%. According to EY-Parthenon research, 10% of Americans have decided not to access the healthcare system for the rest of 2020 or until a viable vaccine is available.
Despite the short-term impact of the pandemic, PE investors have been encouraged by recent return to volumes and are more optimistic now than they were in the spring.
The US payer mix is unique in a global landscape of government-sponsored healthcare systems. While there has not been a strong shift in favor of universal healthcare in the US, there has been a secular shift in healthcare expenditure from commercial to government that has accelerated due to rising unemployment caused by the pandemic. While the US healthcare market is ripe for efficiency gains, private equity (PE) can drive innovation in any healthcare market, regardless of the payer mix.
Shifting patient behaviors and preferences are accelerating experience-led transformation and inspiring an increasingly patient-centric approach, creating opportunities for PE to drive innovation and improve patient experiences.
The healthcare/technology deal environment continues to be very active. The pandemic has impacted the deal lifecycle in several ways, including valuations and timeline to exit. In addition, PE has looked to deploy digital across the portfolio to address access, engagement, navigation, care transitions, cost management and staffing.
Summary of the PE/healthcare landscape over the next three to five years:
- Deal landscape remains very strong and is expected to recover to pre-COVID levels
- 2020 deal volume will be down 15-20% from 2019 but the worst is over
- Providers will be the largest deal category and healthcare/technology deals will be the second largest
- Private capital remains the fastest way to innovate
- The healthcare sector will no longer be thought of as “recession proof”
Jon Shames, Senior Partner and Leader of the EY Geostrategic Business Group, joins Winna Brown to explore why PE must embed geostrategy in both deal lifecycle and organizational culture to recognize unique opportunities and drive investment decisions.
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The geopolitical landscape is shaped by four disruptive forces: globalization, technology, demographics and the environment. Private equity firms need geostrategy to manage a shifting political environment with the objective of finding opportunity amid geopolitical risk. It is necessary to develop a culture in which these considerations are explored, resourced and incorporated into all steps of deal flow, ESG and LP relationships.
A geostrategy is a powerful way for private equity firms to differentiate themselves and win in the market. Some PE funds have a more sophisticated and proactive approach to geostrategy while others are more reactive and ad-hoc: whatever the chosen approach, there is ample room for PE to further embed geostrategy into investment committee decisions.
Geopolitics shouldn’t just be about risk and worrying about the downside: it should be about driving the investment strategy from a proactive, informed perspective that yields unique opportunities that may not have otherwise been considered. It’s also about making sure a deal makes sense given the complexity of risk in the current geopolitical and broader ESG environment.
A successful geostrategic framework should follow:
- Scan: establish and maintain the ability to identify, monitor and assess political risk.
- Focus: evaluate the impact on key performance indicators, mapping the political environment to the company footprint.
- Act: develop a portfolio of robust geopolitical risk management instruments and build a growth-oriented geostrategy.
Five key geostrategic practices PE executives can adopt:
- Political risk is here to stay and is increasingly more complex.
- Firms need to refine their philosophical and organizational perspective.
- PE firms must embed geostrategy into every stage of the deal lifecycle from origination to exit.
- Consider developing a geostrategic center of excellence (COE) that empowers executives to move beyond risk identification to opportunity assessment.
- Geostrategy is more than a “check the box” compliance exercise: it should be integral to a firm’s investment decision process, incorporated into ESG and culturally valued.
Sean Epstein, Senior Vice President and Global Head of SAP Private Equity & Mergers and Acquisition Programs, and Marc Noë, a Managing Director in the EY Digital practice, join Winna Brown to discuss how customer experience is driving digital transformation in private equity.
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“Digital” drives enhanced experiences for customers. And while many people talk about digital in terms of technologies, the most important (and difficult) aspect of digital is adopting new ways of working in areas such as product orientation, design thinking and customer experience.
Finding the right technology fit across the PE portfolio can be daunting, but the pandemic is inspiring PE firms to question the more fundamental processes of buying, making and selling:
- How can digital help us identify synergies in procurement across the portfolio so we can leverage our aggregate buying power to drive cost reductions?
- How can digital help us reimagine our sourcing and manufacturing so we can continue making products with fewer workers?
- How can digital better connect us with the experiences, desires and needs of our customers in a post-pandemic shopping environment?
- What are my peers doing that is driving superior performance and which digital technologies, investments and best practices will help me get there?
Experience-led transformation impacts PE-backed companies from three key perspectives:
- Customer: customer experience and feedback changes business fundamentals and KPIs by informing how a company innovates, develops, markets and sells its products.
- Employee: employee experience and feedback surfaces valuable business learnings about what is working and not working “on the ground."
- Firm: scalable customer and employee feedback loops and the resulting KPIs serve as an ongoing barometer throughout the business lifecycle that is especially illuminative and relevant during due diligence.
Top tips for PE-backed companies that want to enhance their customer experience include:
- Rather than ask, “what do we need to do to digitalize our business?” ask, “what do we need to do to make us easier to do business with?”
- Launch and learn, speed is of the essence. You may fail but you will learn from the experience.
- CIOs need a seat at the table alongside all the other business leaders.
- It’s hard to attract and retain top talent, so don’t “sleep” on your talent.
Andres Saenz, EY Global Private Equity Leader, shares his observations regarding the evolution of private equity and the role it will play in a post-COVID world.
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The initial impact of COVID-19 on the private equity complex echoed what was seen in businesses across all sectors, with workplace safety, remote ways of working, investor and employee communication, liquidity and supply chain being top of mind to triage. In addition, deal markets (with the exception of credit funds) practically shut down overnight.
PE firms are well-positioned for an economic downturn and have been preparing for this type of event in recent years. With over US$750b in dry powder in what is now a favorable buyer’s market, PE is looking to be as active as possible, as soon as possible.
A few impediments to deals have included the inability to travel, a lack of available financing, and valuation disconnect between buyers and sellers in pricing assets. Despite these challenges, firms have become creative around investments in public equities as well as credit opportunities. Barring a resurgence of COVID-19, we anticipate buyers and sellers to converge sooner on valuations and in addition to pursuing opportunities in corporate carve-outs.
PE-backed companies have a real advantage in this volatile environment: not only do funds have greater access to capital, they also have a mix of operating resources, expertise and advisor relationships ready to deploy across the portfolio.
As PE navigates through COVID-19 and prepares for a momentous shift, a few trends will accelerate, including:
- Investing up and down the capital stack
- Defining digital transformation and enablement
- Refining their value proposition to attract incoming talent
- Hiring talent with the right skill sets
- Elevation of D&I and a broader focus on social responsibility
- Widening the aperture and representation of stakeholders
- Pivoting strategy towards long-term value
Tim Dutterer, EY-Parthenon Head of Private Equity, and Greg Schooley, EY US Value Creation Leader, discuss how COVID-19 is transforming operating models across the PE portfolio and beyond.
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After the economy recovered from the Great Financial Crisis of 2008, economic activity and growth were steady and predictable. As a result, private equity-owned companies optimized their operating models for efficiency, anticipating the next economic cycle would a more modest recession. No one, publicly traded corporates or PE-owned companies, was prepared for the sudden and complete secession of economic activity caused by COVID.
However, PE investors reacted very quickly, understanding the severity of the crisis and mobilizing to increase liquidity across the portfolio. While a few sectors were spared from the sudden economic collapse, a wide spectrum of both impacts and actions can be observed across the vast majority of the US economy.
We believe that the COVID-induced economic collapse will greatly accelerate several ongoing trends:
- Global supply chains will fragment as companies look for more resiliency
- Continued reconsideration of extent of reliance on China compared to lower-cost and lower-profile countries
- Automation will be more widely deployed in a range of activities and sub-functions
- Back-office functions will be increasingly outsourced
- The value of office real estate will diminish due to large-scale adoption of remote ways of working
- Assessing the impact “black swan” events will become the norm in scenario planning
Jeff Schlosser, EY US Supply Chain Transaction Leader and Jay Camillo, EY Americas Operating Model Effectiveness Leader, explain why a post-pandemic supply chain will prioritize resilience over efficiency.
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- COVID-19 has forced companies across all industries and geographies to pivot towards a “new normal” related to their supply chains.
- Supply and demand plans became irrelevant practically overnight as companies reprioritized to serve critical needs
- Lean, linear supply chains are losing favor to parallel structures that allow executives to pivot production in response to demand shocks
- Traditional levers of consolidation and rationalization will lose popularity and efficiencies will have to be found elsewhere amid rising costs and condensed margins
- Companies are modelling future scenarios to plan for catastrophic events
- Regulation is widely anticipated to be a global response to the pandemic, as companies will be increasingly scrutinized (and rewarded) for supply chain resiliency
In order to forge a sensible path to this new world, tax teams will need to work closely with business and operations teams and ensure tax efficient measures are considered including evaluating the challenges and opportunities inherent in this pivot from lean to agile.
- Near term: for liquidity and tax liability management, internal reviews of legal contracts and government agreements to find opportunities for flexibility and efficiency
- Medium term: as companies pivot, external evaluation of new incentives as tax authorities seek to help companies cope
- Long term: as companies move to resiliency, shifts of manufacturing require close evaluation of exit liabilities, IP development and use will require careful review, and indirect tax consequences in the excise, customs and VAT area will require management
Nick Boaro and Sven Braun of the EY Transaction Advisory Services and Working Capital Group explain why freeing cash from working capital can allow PE to prolong sustainability, realize value sooner and invest earlier.
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Four reasons why a PE-backed company would want to optimize cash flow now include:
- Up to 7% of sales can be unlocked and released quickly.
- Unlocking cash is the cheapest source of liquidity.
- Companies with optionality are in a stronger position to reinvest for growth.
- A successful outcome in one portfolio company can inspire other portfolio companies to take the same journey.
Working capital is the cash a company has tied up in assets less the cash it holds as a liability; a financial metric that represents the amount of day-to-day operating liquidity available to a business. Freeing cash from working capital is the cheapest source of additional liquidity often unlocked to pay down debt, fund day-to-day operation or fund strategic initiatives.
Today, private equity funds and their portfolio companies are able to unlock on average 5%-7% of revenue in cash flow improvement within 3-6 months of completing 8-12 week operational improvement programs. A company that optimizes working capital increases liquidity, improves predictability of cash flow and increases visibility in all areas of cash.
Because of COVID-19, many PE funds are laser focused on forecasting and releasing cash to prolong sustainability, realize value sooner and invest earlier. PE funds are asking for liquidity forecasts from across the portfolio to measure exposure, identify opportunities and quickly accelerate cash flow for as many companies as possible. Where corporations have complex hierarchical structures that force them to move slower with more measured outcomes, PE is able to act more quickly.
Having a “cash culture” is important for any company, especially now. After all, cash is the cheapest source of liquidity a business can generate, and it provides critical funding in either a downturn or growth period. Healthy cash flow is a positive indicator of a company’s preparation for an economic downturn; however, it isn’t too late for companies to improve cash flow, so they have greater optionality when opportunities arise.
Jennifer Shearer and Alexander Ludwig Reiter of the EY International Tax & Transaction Services group help PE funds and portfolio companies understand and manage the tax implications of recent coronavirus stimulus packages.
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COVID-19 stimulus legislation in the US and Europe is designed to ease the strain on businesses with particular focus on small and medium sized companies, keep people employed, increase liquidity and provide access to much-needed capital. Loan programs, cash tax defer programs, tax incentives and compensation for reduced working hours are all being deployed. Key focus areas for private equity are as follows:
Immediate: focus on liquidity and establishing task forces to triage needs across the portfolio.
Short-term: use a coordinated approach to evaluate need and eligibility for assistance. There is a lot of detail and nuance to consider when evaluating these programs, as loans have restrictions and some PE complexes may not qualify depending on how they are structured. Differences in policy adoption across US states and between European countries also adds complexities.
Medium term: take time to understand the fund and portfolio structure in order to determine which measures can be taken without inflicting damage. Debt buybacks present an attractive opportunity but come with important tax considerations.
Longer term: broken supply chains at the portfolio level will need to be fixed. Global sourcing structures will be re-evaluated. The “just-in-time” inventory management strategy will also be re-examined as company seek to protect themselves against future global disruptions. Digitization will drive improvements in sourcing practices and multi-channel distribution. Lastly, a focus on improving “corporate hygiene” by investing in cybersecurity and technology that enables remote ways of working will remain top-of-mind.
Karim Anani, Financial Accounting and Advisory Partner, and Lukas Hoebarth, Strategy & Operations Partner explain how to manage a remote close in today’s volatile financial and regulatory environment.
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While there has been a growing trend towards remote (or virtual) close for several years, the need for this capability has not only been accelerated but thrust into an volatile environment. Unforeseen complexity due to macroeconomic uncertainty, regulatory change, remote ways of working, incomplete information, workforce uncertainty and cybersecurity risks threaten vital systems of control that must now pivot to cover the risk mitigation they were designed to provide.
Private Equity CFOs and finance teams are instrumental in connecting the dots throughout the organization and will play a pivotal role as the business partner to the CEO. Analysis of short-term liquidity forecasts, tax implications and business plans will impact investment decisions and expose resource constraints across the private equity portfolio in the weeks and months to come.
In order for CFOs to cultivate successful remote close outcomes, they must focus on:
- Communication: holding regular meetings and establish expectations for communication
- Collaboration: establish and maintain healthy ways of remote working
- Preparation: organize a PMO to map the close calendar, identify exposure and predict/solve for different scenarios
- Motivation: keeping spirits high and nurture positivity
Five complexities will drive additional focus on the upcoming reporting cycle:
- Delays in the close process due to remote ways of working, personal distraction and impact of available (or unavailable) technology
- Different/additional analysis will be required to “close the books”
- Incomplete information from upstream operational activities and suppliers
- Sensitivity of data in a remote working environment brings cybersecurity and potential vulnerabilities into question
- The ability to ensure the controls environment is sufficient to ensure accuracy for stakeholder signoff
Mike Lo Parrino, EY Americas FSO Private Equity Leader, explores the evolving role of the private equity CFO.
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In the seven years since EY has conducted the Global Private Equity (PE) survey, private equity CFOs have assumed increasing responsibility for the overall operations of their firms.
They have expanded their oversight beyond the traditional finance functions to include IT system implementation, investor relations and cybersecurity, even as the industry has experienced record growth. Now they are expected to take on an even more strategic role, assisting with the decision-making and deployment of new investment products, location strategy and a changing investor profile, while also keeping a mindful eye on increasing margin pressures.
At the same time, private equity CFOs are also leading the effort to find ways to deploy innovative new technologies, particularly those that leverage next-generation data and robotics. As part of their more strategic mindset, they are also helping to elevate their firms’ overall talent profile and interact more frequently with portfolio companies.
The PE CFO’s role has evolved over the past seven years in five key ways:
- The CFO spends more time than ever on asset growth, innovation and talent.
- CFOs must strike a balance of tactical and technical skills to be effective, strategic leaders for their entire organization
- Attracting and retaining diverse talent combined with an inclusive culture are top talent management priorities
- CFOs consider advanced technology solutions to complement new, strategic responsibilities
- The next generation CFO will leverage data for the benefit of both the private equity firm and portfolio.
To read the full survey, visit ey.com/privateequity.
Andrew Wollaston, Global Private Equity Transactions Leader, and Peter Witte, Global Private Equity Lead Analyst, discuss how PE firms are planning for a potential market correction and the opportunities it might afford.
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While PE-backed companies performed generally well during the GFC, over the last decade, the PE model has evolved in a number of ways that make it even better prepared for future downturns:
- The industry has more capital at its disposal
- PE has diversified in ways that increase its resilience.
- PE firms have expanded their operating capabilities.
- LPs are more sophisticated and have access to better portfolio management tools.
- Perhaps most significantly, PE firms are prepared to deploy more aggressively than during the 2008 recession
Jackie Kelley, EY Americas IPO Leader discusses IPO readiness for private equity-owned companies.
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An IPO is often a desired exit for private equity-backed companies. Soaring valuations in sectors, such as technology and biotech have led business leaders to choose an IPO to secure both investment and trust from the public market. Companies that choose an IPO must prepare not only for the event itself but also to meet public market shareholder expectations around growth, transparency, accountability and performance.
An assessment of IPO readiness is a critical step in ensuring a company is prepared not only to enter the public markets, but to be successful in both the short and long term.
Key takeaways * Start discussions about IPO readiness 18-24 months in advance. * Team with experienced advisors who have seen the pitfalls and know how to avoid them. * Invest to mature back-end infrastructure, build/scale critical processes and acquire the talent needed to run a predictable business that will continue to scale and can meet the regulatory compliance requirements of the public market. * Focus on creating a strong foundation for both the IPO and for the company’s rapid growth post-IPO. * Private Equity investors should not expect to fully exit at the time of IPO as existing shareholders are expected to remain invested for a few years.
Charles Honnywill, EY UK&I Divestiture Advisory Services Leader, discusses specific actions PE fund managers can take to prepare for a successful, well-timed exit.
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It can be difficult for PE fund managers to have a comprehensive outside-in perspective when considering the sale of a portfolio company due to what Charles calls a “baggage of ownership”: the inability of a fund manager to adopt the mindset of a likely buyer due to their proximity to an investment. As a result, PE funds historically have not always planned as methodically around the exit of a business as they do upon its investment.
In this episode, Charles explains this challenge, articulates the benefits of an IPO vs. outright sale and recommends specific actions PE fund managers can take to prepare for a successful, well-timed exit.
Key takeaways: * While IPO remains the most popular exit route, other options include an outright sale to a strategic buyer or PE fund * PE funds are starting to think more methodically around exit, but there is a trend toward greater preparedness * The top five exit considerations for a PE-backed company include: 1. Create a plan 18 months prior to expected sale 2. Consider the equity story of potential buyers 3. Make necessary changes to your management team 4. Consider the timetables of the market and likely buyers 5. Consider your sale from a financial, operational, commercial, tax/legal and regulatory perspective
Glenn Engler, EY-Parthenon Global Digital Leader and EY Americas Strategy and Transactions Digital Strategy Leader discusses how and where digital competence can be incorporated into the diligence process and manifested in a PE firm or portfolio company’s business strategy.
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The word “digital” can be interpreted in a multitude of ways, but it’s important for PE firms and CEOs to start with a broad view regardless of industry or competency in the context of a deal. Because digital impacts every aspect of a business, digital strategy should be owned by the CEO, not siloed into individual functional areas such as marketing or technology.
PE firms, whether considering investment decisions, operational improvements or driving growth, must inject digital competence throughout the diligence process and business strategy to fully understand the value in both the target landscape and company DNA.
Key takeaways * Digital touches every aspect of a PE firm or portfolio company, so the CEO should own a digital strategy inspired by the needs of the business and customer. * Digital competence is critical in understanding a target’s value and must be woven throughout the diligence process. * PE firms must look holistically and more upstream where PE, VC and corporate dollars flow to understand where value is created in the target landscape. * PE firms can explore digital in driving operational expertise and growth in portfolio companies with intelligent automation, digitizing supply chains, cloud, omnichannel/ecommerce, "frictionless" customer experience and new revenue models.