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Navigating the Private Equity Landscape: Insights for CFOs

Key Takeaways From What's Happening In PE Space In 2023

Navigating the Private Equity Landscape is a necessity for CFOs involved with private capital. In the ever-evolving world of private equity, CFOs are at the forefront of adapting to new realities and seizing opportunities. As the markets await economic and interest rate certainty, here are the key takeaways for CFOs involved with private equity.

Adapting To A New Reality In Private Equity

Private equity is recalibrating for profitability and stability. Despite market uncertainties, certain trends persist:

  • Bullish Outlook: 81% of investors plan to maintain or increase their investments in the next 12 months, with 56% looking to boost their private credit allocations.
  • Liquidity Shift: Private equity firms are deleveraging through secondary markets.
  • Value Creation: A renewed focus on value creation, tech-driven support, and capability building is evident.
  • PE Confidence: Investors express greater confidence in private equity’s growth prospects compared to the global economy.

Additional notes include major PE firms offering reduced fees to select LPs and the importance of seizing market opportunities, such as bolt-ons, carve-outs, and private credit, to enhance PE success.

Private Boards Adapting Slowly

Private company boards are lagging behind their public counterparts in addressing critical issues:

  • AI Proficiency: Only 7% of directors believe their management teams are extremely proficient in AI, despite 93% recognizing its impact.
  • ESG Prioritization: While 55% of respondents see long-term value in ESG programs, only 30% have elevated ESG as a priority.
  • Climate Change: Discussions related to climate change have increased for 22% of respondents over the past two years.
  • Human Capital Assessment: Only 28% of respondents have assessed human capital-specific experience and expertise on their boards.

Alternative Managers Invest In Private Debt And Secondaries​

Alternative manager space is catching up to 2022 levels, with control transactions accounting for 45% of deals. Public PE firms are showing improvement in capital deployment, especially in creative ways. Fundraising is on the rise, with private debt funds and secondaries claiming a larger share.

Alternative manager space is catching up to 2022 levels, with control transactions accounting for 45% of deals. Public PE firms are showing improvement in capital deployment, especially in creative ways. Fundraising is on the rise, with private debt funds and secondaries claiming a larger share, driven by desire for liquidity, portfolio rebalancing and diversification

To clarify, “secondaries” refer to a specific segment of the private equity market that deals with the buying and selling of existing private equity investments. These investments are typically in the form of limited partnership interests in private equity funds or direct investments in private companies. Secondaries thus involve the transfer of ownership of existing private equity investments from one investor to another. This can include the sale of limited partner (LP) interests in private equity funds or the sale of direct stakes in private companies held by private equity investors.

Mega Trends Affecting Private Equity And How Their CEOs Perceive These​

Recent PwC’s CEO survey reveals that CEOs are focused on evolution:

  • 40% doubt the viability of their current business models within a decade.
  • Business drivers include changing customer preferences, regulatory shifts, labour shortages, and technology disruption.
  • CEOs identify five megatrends reshaping the business environment: climate change, technological disruption, demographic shifts, a fracturing world, and social instability.
Although not evident from the PwC Survey depicted below, another important trend is that pointed out by Apollo Global Management’s CEOs who believe the era of easy private equity profits is ending, emphasizing the need for more traditional, value-driven investments. This is probably great news for CFOs as the era of quick money and unrealistic value extraction expectations is over.

Strategies For Private Equity CFO Success​

Finance professionals prioritize job stability, financial health, leadership commitment, and product relevance. They also value clarity on career paths, technology usage, and their potential impact. CFOs are looking for self-motivated problem solvers and team players. Given their preferences, but also the wider PE industry developments, here are the suggested strategies for the CFOs to consider:

  • Navigating the role of a private equity CFO requires addressing various challenges:
  • Value Creation Challenges: Identifying and addressing strategic, operational, and cultural hurdles that hinder value creation.
  • Translating Strategies to Performance: Ensuring strategies and operational actions translate into financial performance through data clarity and accountability.
  • Alignment with Investment Thesis: Creating a compelling narrative that aligns the investment strategy with financials.
  • Building Trust: Establishing credibility and trust among all stakeholders, from frontline leaders to the board.
  • Leveraging Data: Prioritizing financial infrastructure to support decision-making and leveraging data for informed choices.
  • Fostering a Data-Driven Culture: Leading cultural transformation toward a data-driven operational environment.
  • Driving Transformation and Growth: Allocating resources effectively, aligning with the CEO, and fostering a culture of experimentation.
  • Maintaining Alignment: Acting as a north star to maintain alignment among stakeholders.
  • Adapting to Changes: Remaining agile in decision-making to respond to evolving business conditions.
  • Fostering Collaboration: Acting as a bridge between CEOs and boards, promoting constructive tension and healthy discussions.

As private equity continues to evolve, CFOs play a pivotal role in driving success, managing challenges, and capitalizing on emerging opportunities. Their ability to adapt, align stakeholders, and foster growth is essential in this dynamic landscape.

Credits

This article has been inspired by Private Equity & CFO Report article that appeared on LinkedIn and the original post can be viewed on LinkedIn

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