As the sector evolves at a rapid pace, private equity firms and principal investors are being forced to continuously adapt their strategies and improve their operations. Executives have to think hard about what kinds of firms they want to own, how those companies fit with their other holdings, and which opportunities are the most attractive—while diligently evaluating their operating model and addressing their organization, talent, IT, and other functional needs.
Once very passive holders of government wealth, sovereign wealth funds have transformed operations in three critical ways since amassing greater assets. BCG’s Markus Massi explains that these funds now attract better talent, have added new asset classes and expanded into new investment strategies, and have evolved to become more active managers of their assets.
Critical issues to consider include:
Risk-Return Trade-offs. Some firms are targeting relatively low-growth and easy-to-forecast sectors, while others prefer sectors with higher growth and greater volatility. With the current scarcity of assets, should your firm consider different risk-return profiles in order to expand your range of opportunities?
Diversification. More firms are moving from traditional leveraged buyouts into new investment vehicles such as debt or real estate. What is your appetite for investing in different asset classes?
Geographic Scope. There is a lot of growth in emerging markets in Asia and, increasingly, in Africa, but experience shows that adapting the private equity business model to these regions isn’t easy. Should you adapt or ignore the opportunity?
Co-investment. Sovereign wealth funds, pension funds, and other limited partners increasingly partner with private equity firms and play a more active role through co-investment. How should fund strategies adapt?
Majority versus Minority Investment. The growing competition for assets is driving some firms to accept minority investments, such as in the case of family owners. When does minority investment make sense?
Business Model Innovation. High asset values mean firms have to work harder than ever to create value at their portfolio companies, sometimes with profound implications for the entire private equity firm business model. Is your current business model a good fit with the imperative to create value? Do you have the capabilities to deliver? If not, what should you do?
BCG’s experience working with leading private equity firms and principal investors around the world, combined with our industry and functional expertise, can help global investors chart a course in today’s complex and fast-changing environment.