Private Equity Has Become More Competitive. Here’s How Managers Can Stand Out.

Private equity firms that have expertise in value creation will stand out from those that don’t, according to Accenture.

Illustration by II

Illustration by II

With the surge in private equity firms and a dwindling pool of potential target companies, the competition for good deals has become fiercer among private equity dealmakers.

The number of private equity firms rose from 4,300 in 2010 to almost 12,000 in 2022, a nearly threefold increase in only 12 years, according to the latest report from Accenture. About 50 percent of private equity professionals think PE investments have become more competitive in recent years as dry powder levels stay near their all-time highs and deals become more complex.

“The growth of investible assets has not increased at the rate of capital that’s in the market chasing those assets,” the Accenture report said. “This means there’s more competition to buy great targets, and it’s hard to make returns on those targets.”

The report was based on a survey of 170 private equity professionals, with 55 percent based in North America, 34 percent in Europe, and the remaining 11 percent in the Asia-Pacific region. Roughly half of these professionals work for firms managing assets in the $5 billion to $25 billion range.

Jay Scanlan, global private equity lead at Accenture, said that “persistent inflation, tougher credit markets, and unbalanced labor markets” have created a more complex climate for private equity investing. “On top of that, PE buyers are undertaking more complex transaction types, such as carve-outs and platforms with major inorganic growth, to distinguish themselves from competitors,” he told Institutional Investor.

The longer hold times for private assets also adds to the pressure on dealmakers. According to the report, the average hold duration for companies exited in 2022 was 6.6 years, up 14 percent from 2012. Because private equity firms are holding their assets longer, the report explained, they need to generate higher returns from each portfolio company to meet investor expectations.

To do so, dealmakers need to adopt new mechanisms — which usually include a wide range of value creation methods, such as working with operating partners and leveraging economies of scale — to drive value for their portfolio companies. According to the survey, private equity professionals believe that they should spend 75 percent of their effort on operational value creation. Only 25 percent of their effort should focus on financial engineering, which often involves taking on debt and adopting traditional cost-cutting measures, according to the report.

But steering away from the old norm isn’t easy. According to Accenture, 34 percent of PE professionals listed the lack of value creation planning as one of the most difficult issues to overcome in creating value for their portfolio companies, followed by broken operating models (32 percent) and the inability to scale operations (31 percent). They also mentioned the high cost of capital and the lack of cultural readiness as major obstacles in the value creation process, according to the report.

“The challenges listed are significant, and PE firms are unlikely to achieve the desired returns if they remain unsolved,” the report said. But it added that the problems can be solved with the right approaches. About 60 percent of PE professionals said that they expect to use data and artificial intelligence tools to enhance operations, and 58 percent said they plan to leverage talent and culture.

“We conducted an analysis of 800-plus companies that went private-to-public in the last six years to understand what characteristics can lead to increased performance and value at exit,” Scanlan said. The successful PE leaders not only understood the traditional set of financial levers, but also adopted new approaches to drive value creation, including investing in technology and prioritizing talent.

“Investing in future growth, leveraging ecosystems, and doubling down on technology and talent have all shown [themselves] to be signposts on the path to the next value frontier,” the report concluded.