Private Equity Adapting Strategies in a Changing Economic Landscape

Rising asset values and difficult financial conditions are causing the private equity (PE) world to navigate turbulent waters. A recent survey by BDO USA sheds light on the shifting priorities of PE fund managers and offers insights into how the sector is reacting to current economic dynamics.

The survey, which included responses from 405 US PE fund managers, 200 Chief Financial Officers (CFOs) of portfolio companies (portcos), and 50 portco board members, was conducted in March. According to its findings, PE players are increasingly concentrating on organic value creation as a strategy.

Become a Subscriber

Please purchase a subscription to continue reading this article.

Subscribe Now

First and foremost, over 79% of fund managers and operational partners surveyed anticipate a continued rise in asset prices over the next six months. This expectation is coupled with a decreased emphasis on new deals, which are considered 14% lower in priority due to concerns related to rising interest rates, inflation, and valuations. Instead, equity relief strategies take the lead, with 17% of respondents ranking them as the top capital deployment strategy for 2023.

According to Matt Segal, national partner in PE assurance at BDO USA, fund managers have prioritized portfolio companies that are struggling with rising debt and operating costs as a result of the economy's uncertainty as a result of over a year of rising interest rates and capital costs. These managers recognize the importance of ensuring a clear path to value creation independent of equity market fluctuations.

Interestingly, the survey also reveals that many portco CFOs are relatively new to their roles, with 60% having started within the last decade. For these finance leaders, the current environment of high inflation and interest rates represents a novel challenge.

Personnel constraints are another issue facing portcos, with 47% of CFOs reporting understaffing in crucial areas, particularly those requiring advanced financial expertise to drive value development initiatives. Value-creation strategies vary slightly between fund managers and CFOs. While 46% of respondents overall prioritize top-line growth for the coming year, fund managers favor revenue growth (40%), while CFOs lean towards managing operating expenses and capital (44%).

Furthermore, Jim Clayton, PE national advisory leader at BDO USA, emphasizes the critical importance of doubling down on value creation efforts in the months ahead, particularly for growth-oriented funds and portfolio companies. Success margins in today's landscape are slim, and strategic decisions made now could determine whether a deal ultimately delivers returns for limited partners or leads a portfolio business towards default.

The survey also highlights shifts in exit strategies. In 2023, 41% of fund managers indicated that financial sponsors were the preferred exit path, down 14 points from the previous year. In contrast, carveouts gained popularity, rising by 16 points to 38%. Meanwhile, selling to a strategic buyer declined by 19 points to 33% in 2023.