PE firms will have to professionalize their business processes to ensure they have the right information at the right time to satisfy the needs of LPs, regulators and other interested parties.
PE houses will come under increasing pressure to demonstrate to their investors that they have adequate resources, processes, procedures and technology in place to strike the balance between managing risk and driving value creation in their investments.
These three factors combined — continued pressure to create value in the portfolio; the need to innovate and define strategy at the fund level; and an imperative to proactively respond to and manage a growing stakeholder group — will require PE firms to look closely at their organizations. PE is no longer a cottage industry.
Firms must adapt to the changing environment. They will have to professionalize their business processes to ensure they have the right information at the right time to satisfy the needs of LPs, regulators and other interested parties.
Complying with new regulations and requirements from LPs
Successfully acquiring businesses, transforming and pursuing value creation have always been central to the PE industry. If firms are to implement and comply with new regulation and the greater informational requirements from LPs, they will need to invest more investments in IT infrastructure and personnel. The back office has now moved center stage.
Solid internal control and reporting systems are no longer optional. The fact that these changes are happening today will add to the challenges faced by many firms. The large exit overhang and resultant aging portfolio, coupled with the need and appetite to make new investments means that resources at PE houses are already stretched.
Some have started hiring, in particular to bolster their operational expertise, but additional resources are likely needed in all parts of the organization if firms are not only to cope with these demands, but also to prosper amid these changes.
Stretching PE resources even more
Larger firms are clearly at an advantage, given the greater amount of internal resources they already have and the fact that they have already gone a long way toward institutionalizing their businesses. Mid-market and smaller firms could find it harder to adapt.
The agile players among these will succeed; among the others, these pressures may well result in some form of consolidation in the very near future. Much of this requires effort, but those that can handle it well may find it is a source of competitive advantage. We are already seeing this in the marketplace. The Carlyle Group and KKR to establish green programs is one such example.
These firms are seeking to improve their portfolio companies' bottom line by implementing initiatives such as energy efficiency measures and improved waste management. This takes cost out of the business and improves profitability, and enables the firms to demonstrate to investors that they are focused on environmental risks.
External change will evoke a variety of internal responses from PE houses. Those unable to cope with the demands placed on them to proactively manage stakeholders may lose out. Firms that embrace these demands through investment, organizational changes and transparent communication will emerge as winners.
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