With economists predicting that several countries will head into a short and shallow recession this year, private equity investors will need to adjust their strategies to improve the performance of their portfolios.
By thinking strategically about these 6 pillars of private equity performance improvement, fund managers and investors can mitigate the risks associated with the current market, and position themselves for a higher return on their investments.
6 Pillars of Private Equity Performance Improvement
1. Diversify wisely
Diversifying your portfolio by sector, fund size, vintage year, geography, strategy, and location will help to ensure that you are not overly exposed to any one risk.
However, you need to also play to your strengths. Unlike in venture capital, for example, private equity investors play a more hands-on role in streamlining and changing operations. For fund managers, your best chance at improving your private equity performance is to focus on markets and industries with which you (and/or your investment team) are already familiar.
2. Strategise opportunity selection
Private equity investors should rigorously assess potential investments and run due diligence to ensure that the target company aligns with their investment objectives.
At a time when operational improvements account for around 54% of private equity value, the most competitive PE opportunities are those with a high potential for value creation. To snap up these opportunities you need to be able to quickly identify targets with the ability to drive growth through operational changes.
This involves thoroughly investigating the market, market trends, and competitors; understanding the company’s operations, financial situation, and existing growth strategies; as well as analysing the management’s ability to execute a growth plan.
Given the current macroeconomic situation, it might be tempting to spend capital on snapping up more opportunities while valuations remain modest, but investors should also be cautious about overstretching, and instead reserve a healthy amount of capital to bolster companies as they navigate headwinds.
3. Create Value Post-Deal
Private equity investors should be actively engaged in the post-deal process and strive to create value for the company. As already mentioned, private equity brings more than just capital to a business. It also brings management expertise and additional resources.
Private equity investors should be able to identify the areas where their funds can have the greatest impact, such as by introducing new processes and technologies, hiring and restructuring executives, or developing more efficient distribution channels.
To maximise private equity performance improvement, firms should know exactly what are the strengths and challenges of the company and how they can leverage them to improve the company’s operations.
With our suite of NLP technology, at Symanto we provide actionable insights that help fund managers and investors quickly understand the company’s operational situation.
Using consumer and employee data from target companies and their competitors, our technology can detect potential areas of improvement, and highlight potential problems with operations, management, and strategy. Private equity investors can then use this information to make smarter decisions about their investments and create value post-deal.
4. Get Disruptive with AI
CEOs have come to accept that a private equity deals likely entail disruptive change. Private equity firms must use this to their advantage when formulating and executing a value-creation strategy. Private equity investors should be willing to take risks, challenge existing practices, and put in place initiatives that may seem unconventional but have the potential for great reward.
Digitisation defined Private Equity in the 2010s. In the 2020s, artificial intelligence and automation are fast becoming the major digital disruptors. Private equity investors should take an active role in purposefully leveraging these technologies for their portfolio companies.
AI can be applied to almost any area of a company, from customer service and marketing, to operations and supply chain management. AI can also track customer drivers and pain points, identify new market opportunities, or even facilitate the cross-selling of products across different market segments.
5. On-going monitoring
Private equity funds must actively monitor their investments in order to identify any potential risks or opportunities for improvement. Fund managers should maintain a keen eye on industry trends, changes in the competitive landscape, and customer sentiment. This will help them to quickly identify any potential issues that could affect their portfolio’s performance and take action before they become a problem.
Private equity investors should also conduct periodic post-deal reviews to assess the effectiveness of their performance improvement strategies and make adjustments as needed.
6. Exit intentionally
While private equity investors primarily focus on great purchases and value creation to improve the performance of their portfolios, exit strategies are often overlooked. But a poor exit can turn a great asset into a mediocre one, so it’s important to plan for an exit strategy from the outset.
Successful exits are increasingly difficult to execute as buyers are more specific about what they perceive as valuable, and have wised up to more cynical pre-sale tactics.
Private equity investors should plan for the exit early in their investment cycle and ensure that they are positioning their portfolio companies to attract the right buyers at the right time.
Preparations for sale should begin at least a year and a half before the intended time of sale to assure market readiness. Though it might seem disadvantageous, investors shouldn’t wait until all value-creation strategies have been fully executed and usurped before exiting – they should instead seek to exit when the portfolio company is still attractive, with performance improvements still underway and reaping benefits for potential new owners.
During negotiations with buyers, PE investors should anticipate and be candid about any potential issues and be available to openly answer difficult questions.
Improving the performance of your private equity portfolio requires a combination of careful research and diligent execution. By taking the time to understand each investment, create value post-deal, and successfully exit when the time is right, PE investors will be able to maximise returns and minimise risk.
Get Started With Symanto
By now it’s clear that AI is playing an increasingly important role at almost every stage of Private Equity performance improvement. From quickly assessing the market, finding attractive value creation opportunities, and even disrupting current operating models, AI is already helping Private Equity funds to better evaluate and manage their investments.
Find out how you can leverage AI for maximum performance improvement with Symanto. Our suite of powerful tools empowers PE firms to get ahead of the curve through data-driven insights.
Our AI algorithms can help identify potential areas for improvement in your portfolio companies, as well as uncover hidden value that could help you maximise returns. Get in touch with us today to learn more.