Maximizing Value Creation From Your Investment in Times of Uncertainty 2
In the past 10 years, the average buyout fund has
consistently outperformed the S&P 500-by a significant
margin across multiple time periods and geographies. Not
surprisingly, money has followed success. In 2022, private
equity (PE) firms raised a record $938 billion; today, they
have about $2.5 trillion waiting to be deployed.
But that record of superior performance is in danger.
The PE industry has been greatly affected by global
macroeconomic shifts, including short-term disruptions like
high inflation, rising interest rates, supply chain issues, and
geopolitical tensions. Moreover, long-term changes such
as technology advancements, and climate issues have put
downward pressure on returns for PE investors. PE buyout
multiples declined slightly in 2022, dropping from a record
13.2 times EBITDA to 12.9 times. PE funds began to post
negative returns across the globe for the first time since
2008, for vintages between 2000 and 2019, ending its fiveyear
run as the highest-performing private asset class.
Portfolio company (portco) leaders are facing a difficult
trifecta of higher interest rates, inflation, and slower
economic growth. Together those challenges dampen
customer demand and increase costs, which results in
compressed margins. The pressures come on top of longterm structural
changes in the PE industry: more roll ups
and add-ons, which require more intensive management;
longer holding periods; and more intense competition for
the most attractive targets, all of which serve to increase
the importance of operational excellence as the locus of
value creation.
But a focus on operational excellence is sure to help both
now and for the future. Margin improvement through
operational improvement already accounts for close to
half of PE value creation (see exhibit 1)-~2.5 times more
than in the 1980s-and that trend will strengthen even
more, especially because holding times are lengthening.
Considering all of those factors, PE leaders and portco
executives should be prepared to drive operational
efficiency throughout their businesses through a
coordinated combination of tactical and structural
initiatives that meet the test of today and build the
capabilities needed for the future.
PE funds began to post negative
returns across the globe for the
first time since 2008
Maximizing Value Creation From Your Investment in Times of Uncertainty 2
The AlixPartners Disruption Index survey of 3,000
high-ranking executives worldwide documented the
fact that executives are struggling to balance the
imperatives calling for short-term responses to a
downturn, inflation, and other factors with the need
to find new business models and new paths to value
creation in the face of long-term change.
Faced with so many disruptions, 85% of executives
say they don't know where to start.