Value creation: Beyond financial engineering

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Value creationIntroduction At their very core, private equity firms have one job — to generate strong returns for their limited partners (LPs). To do this they must increase the value of their investments. While the premise may sound simple, the task at hand is not. Over the years, some private equity firms have failed to create true value at the portfolio level, which has caused LPs to retract. The result is many private equity firms will not be able to raise new funds.

Consider this: At the end of 2014, there were over 2,000 funds in the market seeking $730 billion in capital. During the same year, only 48% of buyout firms in the market successfully closed funds, according to data from Preqin. Additionally, at the end of 2015, the overhang of undrawn commitments had increased to an all-time high of $1.3 trillion. With this much capital already committed and LPs being very selective, some funds will simply not get raised.

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