We recently attended the Actum Group Value Creation Forum, where the theme was ‘Value Creation in a Recession: Risks & Rewards’ – and it was interesting to hear the views of experts in the field, and the approaches being taken by GPs to ‘bullet-proof’ their investment strategy and protect the portfolio.

This article explores how Private Equity (PE) investors can create value in the current environment and portfolio by investing in emerging and fundamental technologies, focusing on talent, managing risk, embedding culture, and adopting sustainable investment strategies.

The sector and its Portcos are currently facing irreversible challenges: In the long-term, climate change, the increased attention on ESG activities, and the potential negative impacts of not focusing on it enough (i.e., higher lending costs, or being excluded from markets/bids), and in the short-to-mid-term an economic downturn, low growth, high inflation, and prevailing uncertainty.

These challenges are further compounded by geopolitical issues, which are also driving some of these aspects. Moreover, the cost of capital has gone up, and with rising interest rates, Leveraged Buyouts are no longer seen as levers to create value. In this environment, the PE industry can no longer rely on cheap credit, and revenue and margin growth is critical in driving value.

However, what if you approached the ongoing disruptions with an open mind – could the geopolitical situation be used as a driver for investment thesis?

Geopolitical Challenges & Opportunities

The winners will be those who will identify the right players in the market, take risks, and understand where the true value lies - by digesting the geopolitical situation, understanding what this means for the marketplace, and unearthing the investment opportunity – and a significant indicator of value is volatility. PE firms must recalibrate their investments based on geopolitical situations and consider how government decisions affect the perception of stability.

Governments are increasingly backing tech innovators, as they aim to achieve technological supremacy. We are already seeing large-scale progression in the technology space due to this focus, for instance, both Xi Jinping and Joe Biden have emphasised the importance of technology in their policies. As a result, governments are expected to provide greater support to tech innovators, creating opportunities for PE investors.

One potential area of focus for PE firms could be technology companies that focus on security and certainty – fundamental technology. This includes firms working on Artificial Intelligence (AI), Machine Learning (ML), Big Data, Quantum computing, Energy storage, Chips, and Fusion Tech. These technologies have the potential to transform entire industries, and PE firms that invest in these technologies early on could reap significant rewards.

Talent Challenges in Leadership & Tech

Another significant, and related consideration for investors is talent. Innovation talent is a key part of value creation plans, and there are ruptures across ‘top talent’ in tech - demand for such talent is huge, while supply is scarce. This is also applicable to operational talent challenges, including attrition and heavy workloads. Automation is an effective way to address some of these challenges, however, investors need to move beyond simple automation to transformational automation within their Portcos.

Data Analytics can add value to tactical improvement levers such as inventory management and working capital management to make companies more resilient in the downturn.

There is a growing concern with the capacity of their Portco management teams being able to handle the plethora of challenges faced – from the day-to-day to more transformational implementation. According to our latest Private Equity Leadership Survey, 46% of PEs either didn’t think or were unsure that they had the right leadership in place at their Portco. Here, external support is part of the answer, but prioritisation is too.

Value can also be created by building an ecosystem of inspiration. By developing a clearer sense of purpose within a business - the workforce will be inspired to work for the company and be upskilled to develop their capabilities in line with market trends.

Transformation is not always 'big bang’ technology transformation – it can be incremental. By embedding data capabilities within Porto leadership, it can support driving culture shifts, especially when translating the language barrier between tech professionals and the boardroom. The right data leads to the right decisions.

Additionally, the Operating Partner model is evolving to focus on value creation at the early stages of the deal lifecycle. Many PE firms are also hiring specialists to drive value creation, with data and digital transformation being highlighted as two key areas.

Sustainability & Energy Security

Another important topic highlighted was sustainability. As companies face increasing pressure to reduce their environmental impact, sustainability has become a mainstream topic for PE firms. However, to address the challenges, an international framework is needed.

With changes to the geopolitical landscape and inflation likely to stay high, a re-ordering of energy supply is required, requiring a coordinated energy security strategy. The critical minerals strategy is also crucial for securing access. With higher defence spending and ESG gaining prominence, a balance needs to be struck between sustainability and energy security. The decline in established global governance and frameworks is another challenge, with new networks and alliances emerging.

With the ongoing macro trends impacting the global economy, it seems inevitable that investment horizons will lengthen – especially with the focus to include long-term ESG considerations in company strategy. Some ventures will fail, some may win – but it will take time for the value to become apparent.

In conclusion, the sector is facing a range of challenges, from economic downturns to geopolitical issues. However, value can be created by investing in emerging and fundamental technologies, focusing on talent, managing risk, and adopting sustainable investment strategies. Despite a challenging outlook, innovation is at an all-time high, and the industry has the potential to not only transform entire industries, but importantly drive significant returns.

To discover how AlixPartners drives value for Private Equity, get in touch.

Read the round-up from the Actum Group Value Creation Forum - Value Creation in a Recession: Risks & Rewards.