Over the years, private equity has played a significant role in businesses across all sectors. This includes technology, healthcare, and even education.
There are no shortages of industries that have benefited from private equity. Otherwise, they would, in most cases, be nowhere near their respective growth trajectories.
However, the private equity business model has changed in recent years. Even though it has adapted, there still exists an opportunity to identify the optimal approach that improves its performance across most businesses.
Here are some of the private equity trends to keep an eye out for!
1. Increased Interest in ESG
In recent years there has been a marked increase in interest among private equity firms for investments with an ESG focus. This surge has been driven by greater recognition of the importance of Environmental Social and Governance as a way of creating long-term value not only for companies.
It also includes the environment and the communities they operate in. As the private equity sector becomes ever more ESG-aware, companies will need to be aware of how their operations and investments impact their ESG credentials.
ESG data analysis, rating, and certification are becoming increasingly central to the due diligence procedures for private equity investments. Potential investment targets must have a comprehensive understanding of their impacts across these factors:
- environmental
- social
- governance
They must demonstrate a commitment to maximizing value in these areas. To remain competitive, they must also develop policies and systems to ensure they are meeting and exceeding the expectations of their potential private equity partners. With ESG investing, investors strive to not only gain financial returns. They also strive to make a positive social and environmental impact.
2. Focus on Technology
Private equity firms are always on the lookout for the next big trend. There is a rise of:
- AI
- machine learning
- other technologies
There is then a focus on technology that is continuing to increase. One trend to watch out for is venture capital (VC) funding going towards the above technologies. Investors are interested in both the commercial and research potential of these technologies.
Private Equity AI
By leveraging AI technology, private equity firms can automate and streamline the process of:
- researching
- analyzing
- investing
AI can provide invaluable insight into a company’s:
- financials
- potential risks and opportunities
- potential customers
AI can also help identify potential investments that traditional research may have missed and provide deeper insights into how the company is positioned in its respective industry. AI also allows private equity firms to monitor the performance of their portfolio companies – in real-time.
Private Equity Machine Learning
By using machine learning to process large datasets, private equity firms can:
- gain insights into potential investments
- gain a better understanding of the market
- streamline decision-making processes
Private equity machine learning also offers the potential to reduce operational costs. At the same time, opens the doors to increasing the efficiency of financial analysis. As the technology continues to improve, early adopters will be especially well-positioned to benefit from the data-driven decision-making that machine learning brings. This can result in:
- increased productivity
- better returns on investments
- greater ability to spot opportunities
For portfolio managers and institutional investors, machine learning is becoming a key investment decision strategy and will continue to be an important trend to watch closely.
Overall, technology is playing a bigger role in private equity, and the landscape continues to evolve. Thus, this gives more opportunities for investors to focus on technology-related investments will present itself.
Private equity firms should act fast to take advantage of these trends. This is because the industry is quickly shifting from traditional to more cutting-edge technologies to remain competitive.
3. Rise of Co-Investment
The rise of co-investments represents a clear shift in private equity trends. This goes away from solely relying on fund commitments to now focusing more on selective investments. These can be more flexibly tailored to a portfolio’s specific needs.
These can also target the company’s stage of development without having to deal with a large bundle of other individual opportunities. These of which usually accompany commitments to funds.
By co-investing, investors typically enjoy:
- improved ownership control
- preferential economics
- clearer exit strategies
However, investors must be aware of their risk profile when structuring co-investment deals. This is because they may have to give up traditional fund vehicle protections while holding significant positions. Investors should also consider carefully their strategy for:
- actively managing limited partner relationships
- monitoring the investments
- securing the right future lead positions
For successful co-investment, investors must ensure that the underlying asset being purchased is accurately valued and that it does not carry any hidden risks.
4. Emphasis on Diversity and Inclusion
The trends in private equity are rapidly changing, with an emphasis on diversity and inclusion. Both of which are becoming increasingly important. Private Equity firms are beginning to realize that to drive their best returns, they need to create environments where all members of their team feel:
- engaged
- respected
- valued
Seeing more women, ethnic minorities, and LGBT individuals in leadership roles is crucial in helping to drive and innovate creativity and profitability. Going forward, private equity firms will need to continue to be deliberate in their hiring practices.
This is by working to create a culture of equal opportunity. Furthermore, PE firms need to ensure they are providing development opportunities and access to capital to the underrepresented within the industry. This is the only way real progress can be made in the long term.
Consider These 4 Private Equity Trends to Watch Out For
The private equity market is ever-changing. Keeping up with the latest private equity trends can help your private equity firm stay ahead of the competition. Be on the lookout for trends such as what we have discussed in this article.
Taking advantage of these trends can help your firm maximize its potential. Act now and reach out to a knowledgeable private equity professional. They will help your firm tackle these trends successfully.
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