5 Private Equity Steps to Take in 2022

SuperReturn Recap: Leading Investors Demonstrate Optimistic Resilience

Private capital is growing by $1 trillion every year. What actions can private equity firms (which have boomed amidst COVID-19) take to ensure ongoing success?

To help answer this question, 500+ of the most senior and influential leaders in private equity convened in Boston on October 4 and 5 at the SuperReturn North America conference to predict what a post-pandemic world will look like. Conversations were had on the global macroeconomy, fundraising, portfolio construction, secondaries, digital transformation, and more.

Acertitude was in attendance to capture key takeaways for private equity fund leaders. Five actions for future success became clear:

1. Amid labor shortages, PE firms use ‘Zoomroots’ recruiting to widen talent pools

2021 is the year of the job market shakeup. Attractive compensation packages and shiny perks now aren’t enough to sway people - from front line roles to C-suite roles - to join certain companies. Portfolio company leaders across blue collar industries were hit hard during COVID-19 and now face extreme labor shortages.

The silver lining of an increasingly remote workforce is that it’s now easier to cast wider nets for candidates. Said one panelist, it’s no longer ‘grassroots’ recruiting; it’s ‘zoomroots’ recruiting.

It’s no longer ‘grassroots’ recruiting; it’s ‘zoomroots’ recruiting.

2. ESG emerges as a core value-builder

“ESG” is this year’s hot phrase, with chatter on what the best ESG focus really is (it’s no longer environmental or governance), whether you should have an ESG focus at all (opinion was mixed), and so on swirling, both onstage and in the halls.

It’s now the “S” that’s experiencing a reboot. Although this fragment of ESG is one investors still struggle to build solid actionable data around beyond establishing DEI quotas and the like, leaders stressed doing so must be a priority.

DEI is an immediate next focus.

Private equity needs a rebranding when it comes to a lack of diversity, said one panelist. LPs concurred, upping the pressure on GPs to make progress. One opportunity to make progress is that there are now more available board seats than before. This is the time to focus on filling them with a diverse array of people who can bring contrasting perspectives and opinions to a typically homogenous table and therefore drive organizational transformation.

3. Interest rate volatility presents opportunities

Private equity leaders are eager to see inflation settle higher. (One panelist specifically predicted inflation may exceed 3 percent 18 or so months out.)

Although low-interest rates have remained stable for quite some time, be prepared for interest rates to creep up, they said.

Credit risk has been more distributed than it has in the past which may create more volatility in the future.

This volatility is a valuable future opportunity.

4. Reinforce culture through repeat human connections

Another buzzword of the event was how to build “culture” amidst hybrid or remote teams. Culture is causation for success, and those who get it right are taking a share in this economy, panelists said.

Portfolio company leaders recognized a secret sauce: pattern recognition. The more a team has been together, the quicker it moves.

There was extra emphasis on getting more junior colleagues up to speed on how the “distribution” of culture shapes day-to-day workflows and processes. On this, many said nothing beats getting back together in person.

Culture is causation for success.

5. Keep an eye on the horizon.

Panelists said to be successful, don’t get swept up in the mania of the markets. In time, expect a more middle-market industry focus, they predicted. Inflation will prove to be stickier than many people think, said one panelist. (Consider, for instance, that wages represent two-thirds of a company’s average cost structure.)

Don’t get swept up in the mania of the markets.

Private equity funds have increased to an unprecedented average lifespan of 14 years. When it comes to investing in the secondary market, there’s never been a better time to do so, stressed one panelist. It’s a market on track to make a complete recovery, added another panelist, referencing how earlier this year, both growth equity and venture volume sharply increased.

Over the next ten years, PE will deliver massive outperformance, predicted one panelist. On that note, there was also some talk of absolute returns coming down in time.

A company’s track record and performance should be considered, but one thing not easy to figure out via Zoom is what’s in people’s hearts. As one panelist said, even when you’re closing a virtual deal on Zoom, pay attention to people’s responses and reactions to what you’re saying.

If someone doesn’t have the grit required to raise capital in the first place, they added, find someone who does.