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Private Equity Firms Are Booming, but It’s No Time to Be Complacent

The Private Equity Industry Continues to Post Strong Returns and Attract Investors, but a New Article by The Boston Consulting Group Argues That PE Firms Will Need to Take Decisive Actions to Capitalize on This Golden Age

BOSTON—Private equity (PE) firms are benefiting from nearly ideal market conditions right now, yet the tide is changing, and they should take this opportunity to think about their competitive edge and differentiation. That is the main finding of a new article by The Boston Consulting Group (BCG). The article, titled Capitalizing on the New Golden Age in Private Equity, is being released today.

Worldwide, PE firms had a record $2.49 trillion in assets at the end of 2016, including nearly $1 trillion in uninvested capital. As returns for the overall industry continue to beat other asset classes, particularly hedge funds, capital continues to pour into PE firms, and new competitors are entering the field. Not only are firms struggling to differentiate themselves in this new environment, but new money is bidding up deal multiples and putting future returns into question. At the same time, some investors continue to challenge the firms’ traditional fee structure: 2% of assets under management and 20% of gains. And as the economic clout of the PE industry grows, firms will find themselves under increased scrutiny by the media and, potentially, governments.

“The current conditions are favorable in so many ways, but there are also challenges looming ahead,” says Tawfik Hammoud, a senior partner at BCG and the lead author of the article. “We think top managers will use this as an opportunity—or even an imperative—to sharpen their thinking, improve their discipline, and be bold in several dimensions of their businesses.”

Three Imperatives 

Specifically, PE firms should take three actions:

  • Turn their operational playbooks inward. Many firms hold their portfolio companies to a much higher operational standard than they hold themselves. In an increasingly crowded market, this approach no longer works. Instead, firms need to improve their own internal operations and processes, primarily through digital technology. “Some firms are busy creating new roles, such as chief digital officers, and are far more proactive about gauging the impact of digital on their portfolio companies,” says Michael Brigl, a BCG partner and coauthor of the report.
  • Develop a true talent strategy. Firms need to bring in the right people, with a wider range of experience and expertise, particularly in digital. This is especially important given the way that some small firms have posted meteoric growth over the past few years. Succession planning and diversity are increasingly on the minds of investors and need to be at the top of general partners’ agendas.
  • Upgrade their approach to value creation. Rather than taking action in just one or two areas of their portfolio companies, firms need to leave no stone unturned. This includes adopting new strategies that emphasize digital, improving pricing, creating a lean activist project management office, and accelerating merger integration.

The current golden age will not last forever. Smart PE firms are taking the necessary steps today to prepare for the challenges ahead.

BCG partners Christy Carter and Laila Worrell will be presenting this article at a keynote address during the upcoming tenth annual Women’s Private Equity Summit on March 8–10 at The Ritz-Carlton in Half Moon Bay, California. The event will bring together more than 500 senior-level women in PE and venture capital for in-depth discussions about the industry. As one of the conference’s platinum sponsors, BCG is deeply committed to increasing women’s leadership roles in the PE and alternative-investment world.

A copy of the article can be downloaded here.

To arrange an interview with one of the authors, please contact David Fondiller at +1 212 446 3257 or fondiller.david@bcg.com

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