Global private equity dealmaking volumes dropped 51% in the first six months of 2023 compared to the same period a year earlier. Successful PE firms are utilising talent to navigate the scarcity of deals and gain a competitive edge.
The world is in the grip of a deal-making drought.
Global M&A tumbled 38% to $1.3tn in the first six months of 2023, the lowest deal volume since the start of the Covid-19 pandemic, according to Refinitiv data covered by the FT. Falls in activity have been felt most by the private equity (PE) sector, where global dealmaking reached just $263.3bn in the first six months, down 51% compared with the same period a year earlier.
The uncertain economic outlook has created an ‘expectation gap’ in how buyers and sellers perceive valuations, made worse by the surging cost of debt.
Successful PE firms are navigating the scarcity of deals by altering the way they choose and deploy talented individuals. We think these strategic shifts can be condensed into four key themes, and while many of the economic trends of the current moment will be temporary, we believe our themes will extend into the next economic cycle as the sector becomes increasingly public facing, reliant on emerging technology and globally mobile.
1. Value creators hold the key competitive edge
The scarcity of suitable deals has fuelled competition for the few that do emerge. PE funds that are best able to prove they can create sustainable, long-term value hold an important advantage.
Value creation has always sat at the core of private equity strategy, but this is the first time we’ve witnessed such large and sustained levels of investment from our clients into value creation teams at a time when dealmaking teams are shrinking.
This has been some time in the making. Competition for senior individuals able to drive operational performance and commercial growth – or to better use technology to reposition brands, products or services – has surged since the onset of the pandemic. More than nine in ten PE general partners surveyed by McKinsey in 2022 said portfolio company leadership contributed an average of 53% toward investment returns. One PE portfolio company told the company that 37 roles among thousands of employees in the organization drove 80% of its EBITDA.
Spotting and leveraging that kind of value has only grown in importance as companies try to extract more from fewer deals, but rarely have we seen investing in value creation teams – plus the support teams and infrastructure that goes with them – play such an outsized role in securing those deals in the first place.
2. Branding becomes key as PE steps out of the shadows
‘A Wall Street Titan Scores One of the Best Real Estate Trades Ever’, read a Bloomberg headline last month. The piece referred to Blackstone’s early foray into European industrial property that culminated in a 15 million square meter portfolio worth €21 billion euros.
Private equity was once viewed as an industry working from the shadows, but the rising need among firms to prove they have a successful track record has prompted many to turn outwards. Blackstone’s global co-head of real estate gave an interview to Bloomberg for the piece linked above and few companies could hope for a better headline.
It’s not just PR, either. Branding in its entirety has become a skill that PE leadership value highly. A study of 27 global PE firms by BackBay Communications found that eight in ten respondents viewed having a strong brand as ‘very important’. Generating awareness among CEOs and management teams for deal sourcing purposes was identified as the most common reason for needing a strong brand.
Almost seven in ten firms are now planning to increase their investments in marketing and communications with e-mail communications, thought leadership content, conference speaking, case studies, social media and media relations all set to be primary areas of focus.
3. Niche and frontier targets draw interest as traditional markets wobble
Traditional investing geographies such as Europe and the US are offering modest returns, so we’re seeing an increase in firms seeking individuals that know how to put capital into emerging markets and sectors.
Digital infrastructure is particularly popular. Private-equity firms bought data centres in near-record numbers last year in an attempt to capitalise on surging demand for data storage and cloud computing, for example. Africa will be the source of huge investment in the next three to five years and approximately US$5-6 billion will be invested in carrier neutral data centres across the continent during the period, according to Balancing Act. Similarly, increasing numbers of funds are initiating Deep Tech and artificial intelligence investing strategies – industries that were once solely the domain of early stage and seed investing.
As PE has moved away from traditional ‘bricks and mortar’ investing in highly technical sectors, we’ve witnessed a decrease in demand for traditional hires with large consultancy or M&A backgrounds. Instead, PE firms want subject matter experts that have spent time in innovation hubs, academia, or the sorts of specialist industry research positions that garner a deeper understanding of these highly technical markets. Firms might be seeking vital local knowledge from a geographic perspective, or deep technical industry knowledge that can underpin confidence to tackle fast-moving technologies and sectors.
4. The technology transition for the new economy
Technology offers huge opportunities to drive growth as PE firms try to squeeze more out of fewer deals. Technology leaders that are able to lead on digitization plans are a source of huge interest, particularly those able to grow a portfolio company’s online presence, or to drive efficiencies via technology.
This applies internally, too. The overwhelming majority of respondents to PWC’s latest private equity trend report said digitisation is a central lever for value creation. Almost all respondents said that they want to invest further in digitisation in the coming year.
Eight in ten plan to put money into data analysis this year, often for due diligence and valuation of companies, but increasingly also for identifying potential target companies. Already, 61%of respondents report that they already rely on data analytics to find attractive acquisition targets; by 2023, a good three-quarters of respondents plan to do so.
If you are an investor looking for senior talent to drive value creation, advise on acquisitions or for portfolio leadership expertise please contact Nick Hart, who heads up our Interim & Consulting business here or Edward King, who leads our International Private Equity practice, here.
