PRIVATE EQUITY CHANGING BUSINESS MODEL
Higher interest rates and a still sluggish new listings markets have made it harder to sell holdings and return cash to investors. Higher interest rates have fundamentally changed the game for private equity firms, forcing a rethink of how they do business. Between 2010 and 2021, borrowing accounted for half of all of PE’s performance, according to consultants StepStone. But that strategy falters when interest rates are higher. Loading a portfolio company with debt hits its bottom line immediately and damages the PE sponsor’s ability to sell or float it later on. The impact is already starting to show: 2023 buyouts were done with meaningfully less debt relative to company earnings than prior years, according to statistics from McKinsey. With less leverage, private equity firms must find other ways to deliver strong returns, even as investors demand better results because the comparable risk-free rate is so much higher. Going forward PE’s have to do things differently. The obvious path to lasting profits is through operational changes that increase revenue, cut costs or both. PE firms have always claimed to do this, but leverage has made some of them less diligent than they could be. The tried and true methods involve better management. Some PE firms focus on new appointments on a newly purchased portfolio company’s board and management team. Others maintain a staff of full-time in-house consultants who provide services to multiple companies. A third way is to recruit a roster of veteran executives to advise company leaders.
Business Technology Leaders private equity value accelerator experts offer advice on everything from operational efficiency consultants to upgrading IT platforms and redesigning management processes.
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