It’s an industry that often grabs the headlines, but unless you are directly involved in private equity it’s hard to monitor the changes that are impacting it.
In other words, you might read all about the latest acquisition worth tens of millions of dollars – but that’s as far as general knowledge tends to go. When it comes to more subtle changes, most of us are left scratching our heads.
All of the above is the reason behind this guide. In comparison to some investment channels, private equity is continuing to soar and a lot of this is due to the way it is constantly adapting. We are now going to take a look at some of the biggest changes that have impacted the industry and how investors are now approaching it.
Under-performing companies are being targeted more and more
In comparison to previous years, there’s no doubt that the majority of private equity companies are targeting those firms that are struggling. You only have to cast your eye over the dealings by one of the larger firms, Sun Capital, to see this is the case. Marc Leder has gone on record to say that one of the principle things he looks at is to see if a potential company is performing worse than it should – and only then will he consider a deal.
Once upon a time this wasn’t the case, but whether it’s due to the enhanced knowledge that a lot of the major private equity investors have, or other reasons which we will touch on below, there’s no doubt there has been a shift in strategy.
Valuations are increasing
The previous point leads perfectly onto this. In the eyes of a private equity investor, there’s no doubt that valuations are always going to appear “high”. After all, this is the nature of the game.
However, there’s no doubt that valuations have increased significantly over the last few years and this is affecting how the entire industry operates. Under-performing companies aren’t just targeted for all of the reasons we documented previously, but also because those businesses which are performing well are just priced out of the game. They just don’t represent very good investment opportunities.
Management teams are no longer “stripped out”
A common approach for private equity investors used to be to come in and make wholesale changes. Admittedly, in some regards at least, this still happens. However, in relation to the management team there is a much less drastic approach that is often adopted.
Sure, PE firms will still bring in their own professionals – particularly if they already have experience in a specific market. This isn’t necessarily to replace an existing team though – even if that team hasn’t been getting results (see the section on underperforming companies). There’s much more appreciation for “local knowledge”, so to speak, with existing management teams possessing the knowhow which can help the new investors navigate past problems and devise the appropriate solutions.