The “Winds of Change” affecting the Private Equity Industry

The world is flush with capital and the new game in Private Equity is choosing the right next company in which to invest. To succeed in this changing landscape PE firms need to provide more than just funding to add value to their portfolio companies everything from being on advisory boards to actively helping companies with their sales, marketing, human resources, and technology needs.

As of May 2021, there were almost 700 so-called unicorns private companies with valuations topping $1 billion according to CB Insights. PE assets have ballooned in recent years to approximately $4.6 trillion in AUM, and Deloitte predicts they will reach $9.1 trillion by 2025. Needless to say, there is a large amount of capital ($6.5 Billion each) looking for the next successful Unicorn.

With access to capital progressively easier, it is all about picking the right horse to back while chasing higher internal rates of return (IRRs) rates generally targeted in the 10- 20% range but which can grow to upwards of 50% in some cases. Consequently, it is increasingly important for PE firms to be more active in the execution metrics of their portfolio companies, creating value by adding expertise and services as well as capital.

Being aligned on execution metrics" and having a robust dashboard to track key performance indicators (KPIs) is indispensable for a PE firm to be able to increase valuation in a portfolio company. New entrants like UK-based Untap, which tracks these metrics as well as portfolio management and environmental, social, and governance (ESG) KPIs, are now coming to the market to fill the growing needs for PE firms to be more active with their companies.

This movement is inevitable as PE firms increasingly act as consulting firms, and matchmakers, and get more involved in advising C-level strategies, to address value creation opportunities and initiatives. Here are a few supporting trends:

Digital Transformation

B2B and B2C commerce has transformed to a digital world dependent on software and data over traditional brick and mortar business. This is true across the globe, not just in the US. Driving this transformation is cloud computing businesses like Microsoft, Amazon, Google, Oracle and IBM: Software-as-a-service (SaaS) businesses like Salesforce, Workday and ServiceNow; Software platforms enabling services like Uber, Airbnb, and Amazon; and Fintech companies like PayPal, Klarna, Affirm and Venmo; and both social media and digital media companies.

Mass Personalization

Everything from education and healthcare to nutrition and workout routines is getting personalized. Thanks to AI and predictive/personalized data modeling, what consumers experience from vitamin regimens to shopping is increasingly designed for the individual. Businesses must choose carefully going forward, curating, and creating products, This will necessitate businesses to be mindful of consumer data protection and (cyber)security, but that is for a later blog post.

Workforce Transformation

The Covid-19 pandemic has shown us that most people can operate remotely, taking advantage of online collaboration tools like Teams, Zoom and Salesforce. Workers do not even need to be at home and may choose instead to work and live away from their primary residence, relying on digital businesses for everything from grocery shopping to telehealth to remote schooling.

Engineering, AI, and hyper-automation have become the norm for business performance as legacy infrastructures continue to move to more fluid, virtual and remote workforces managed in less hierarchical manners, according to a report by brand agency Interbrand.

It is no longer enough for PE firms to safeguard investment interests simply by taking a board seat and helping guide with strategy and significant corporate matters. PE firms need to have robust mechanisms in place to monitor and track performance against key value-creating execution metrics. Historically the information exchange was based formally on-board meetings, board packages and financial reporting. Yet it remains both time consuming and cumbersome to gather financials from multiple portfolio companies and collate them into a single dashboard to gauge performance. To meet these needs, solutions like iLevel, eFront, Investran and DealCloud (besides Untap) emerged to help PE firms with portfolio monitoring, accounting, and customer relationship management (CRM).

A growing need for PE firms is for services to track and act on various execution metrics on a more real-time basis. Real-time ESG metric analysis is already gaining traction in Europe and trend experts expect the US to follow suit in the coming months.

To support these trends, new and innovative companies are surfacing daily to help businesses and individuals transform how they work and live. And most, if not all, of these ventures need funding. This underscores the emerging challenge that in a zerointerest environment and mature economy growth rates, raising capital in the neverending search for returns is far easier than finding the next successful unicorn. PE firms are continually reinventing themselves and need to better provide expertise and services not just capital to increase the value of portfolio companies.

Jayesh Punater

Jayesh Punater is a successful Entrepreneur, Investor, Fintech Strategist and Thought Leader. He focuses on bringing innovative technology and business models to the FinTech industry. Mr. Punater is the Founder and CEO of Nucleus, a FinTech studio and venture investment platform. Nucleus invests in, advises, and provides services to start-up and advanced stage scale-up firms. Besides Nucleus, he is an advisor to Mission OG, a finance and technology venture fund. He is the Executive Chairman and CEO of Nucleus Emerging Markets Ventures a fund investing in LATAM fintech companies.

He also is a Board Member of Untap (EXM), a private equity value creation SAAS company, member of the Advisory Board of Thales, a technology-based brokerage firm, a member of the Advisory Board of Bridge FT, a wealth management software platform, Board Member of Life Plugin, which is a personal growth platform for entrepreneurs, a member of the Economic Club of NY, a member of Mavericks 1000 an impact entrepreneurship organization, member of Mind Valley University and a member of C2C which is a peer CEO organization in New York City.

Previously, Mr. Punater founded Gravitas, a leading technology services platform servicing the Asset Management industry. As Founder and CEO, he organically grew the business to a global firm with 300+ employees, with clients managing more than $1.2 Trillion in AUM. Gravitas was sold to a European listed company in 2017. Jayesh is a strategist and focused on growing companies and has had roles in market facing functions always looking to adapt innovative ideas to practical business problems focused on helping firms grow their business or generate alpha or achieve operating efficiencies in the operations of the firm. Mr. Punater is a graduate of Arizona State University with a BSEE and a minor in Economics. He has attended Executive Education courses at Harvard University, Stanford School of Business, Wharton, Columbia University, Northwestern University and has taught an entrepreneurship MBA class at Fordham University as an industry CEO.