The private equity (PE) sector continues to do well despite challenges. Assets under management have reached $2.5 trillion. Key overseas markets like Europe and Asia are robust.
At the same time, more money and more players are competing for a finite number of high-performing deals, driving up valuation multiples. Larger firms are moving downstream for transactions, and more managers are seeking add-on acquisition strategies. As increasingly sophisticated investors demand exemplary performance, the PE industry has felt the need to do more, and more quickly. All funds, whatever their size, can gain rewards by identifying opportunities for value creation and tackling head-on the increasingly competitive nature of the business.
A plus has been the Trump administration’s plans for the economy, which include reduced regulation and a potential softening — in the alternative investment sector in particular — of current rules that require firms managing private funds of $150 million or more to register with the SEC. Adoption of corporate tax reform would free up cash for deals, and infrastructure improvement would give a boost to the sector and the overall economy. True, interest rates could tick up, yet the industry is still likely to operate in a low-interest-rate environment where investors seek the higher returns that PE can produce.
On the other side of the ledger, the administration may seek to eliminate carried interest, which could be a setback. And although regulation may be relaxed in the U.S., the overall trend globally, especially since the financial crisis, has been toward more regulation. Of course, among industries there will be winners and losers. The exploration and production sector may benefit from government policies, while alternative energy investments could become less attractive.
Operationally, PE faces several challenges. Competition for talent has grown. Some firms have lagged in automating business processes, while others are behind in introducing data analytics and digital platforms.
Today’s PE leaders must look for bottom-line and sustainable growth at both the fund and their portfolio companies. To thrive, they must understand the regulatory environment and balance the risks and opportunities presented by advances in the digital economy and technology.