Private Equity Evolution

The private equity market has seen solid growth and good returns for the past two decades. While some believe there is still room to grow, critics are concerned. According to Pitchbook, in 2017 average deal multiples were 12.5 times multiples. This is the highest it’s ever been, and the previous high levels were just prior to the financial crisis. Regardless of which side you’re on, between technology and the number of well known firm founders retiring means the private equity market is evolving.

Let’s look at the technology change taking place across industries. In general, large companies are more exposed to the risk of technology change. They have legacy tech debt and are slow to adopt change…like trying to turn a barge. Historically, private equity often invests in these types of organizations which are large, successful, and traditional in their business model.

The rate of technology change is accelerating the disruption. In looking at the Fortune 500 from 1955 to 2017, just 12% of companies still remain. For more recent companies, look to Blockbuster, Navteq, Nokia, Iridium to name a few. A Yale University professor notes that the life of an S&P 500 company is just 15 years, compared to 67 years in the 1920’s.

Private equity firms need to become more proactive in reviewing their investments and understand how technology can impact the business models of different industries. With their focus on financial performance, the firms must figure out how they can create higher, predictable, and scalable growth and shareholder value.

Digital technology should not be considered a threat, but rather an opportunity. Companies taking a proactive approach are those that will garner investment. As the millennial generation comes of age, these digital natives have expectations that will need to be met. Their buyer’s journey is an omni-channel experience. Companies that can connect with them and monetize the experience will gain significant market share.

The other change taking place in the private equity sector is succession planning. As we’ve seen generally, there is a lack of trained qualified candidates to replace the boomer generation that is retiring in record numbers. This is not only because generation X is much smaller and millennials don’t have the experience to step into these roles, it’s also because succession planning wasn’t a priority for most organizations until it was too late.

In the private equity arena, the stakes are high. With more than a trillion dollars of assets, and many of the people leaving being original founders with big personalities, the need to identify the best possible replacement is crucial for the firms next two decades. While the next group of partners want to make their mark, it’s important to make sure you have a solid cultural fit.

Creating a well thought out succession process with transparent communication to limited partners, investors, shareholders, and employees, First Republic says to start early and seek outside expertise. “There is no one-size-fits-all formula for executing a graceful exit, but partners and their firms can lay a foundation for a smooth transition by planning well in advance, integrating succession planning into their strategic decisions, recognizing when to bring in outside expertise and communicating with their stakeholders every step of the way.”

If you’re considering a change in leadership or simply looking for a new private equity executive for your firm, Sheer Velocity specializes in private equity search. Our executive recruiters have a depth and breadth of experience working with private equity firms and understand your challenges. To learn more, drop us a line.