A new PE playbook: Economic headwinds spur private equity evolution

The record returns that PE funds achieved in the last decade by capturing value from cheap capital and healthy equity markets are receding. In the present and likely immediate future, higher interest rates and inflation, and softer equities, have changed the fundamentals of PE market return drivers. The traditional exits formula of restructuring and selling assets, and distributing the proceeds, no longer applies, and the PE funds’ value creation playbook is being rethought.

As the market evolves and adapts to this new economic reality, PE firms are getting innovative. As they increasingly employ creative deal structures to enable them to delay selling assets and maintain access to liquidity, they are also looking at new ways to effect large-scale corporate transformation and new markets for future growth. This innovation can benefit the PE firms and their investors, but the risks from potential conflicts of interest have highlighted potential challenges with asset valuations and PE firm governance. Some market commentators have also questioned the potential for risk as PE firms explore debt and retail markets for new avenues of value creation.

This PE market evolution echoes some of the changes evident following the Great Financial Crisis. But it also demonstrates the innovation and flexibility that sets PE firms apart in their pursuit of the best possible returns for their investors. As large PE firms expand into new markets, and niche PE firms become increasingly attractive acquisition targets, many market analysts predict that sectoral consolidation may lead to a leaner, more innovative market in the wake of these challenges.

This report by Clayton Utz, in partnership with The Action Exchange, also explores the innovation that PE firm managers are employing to continue to realise returns during a challenging economic environment.