4. Increasing corporate-PE collaboration
PE firms are also finding new ways to work with non-PE, or even nonfinancial services firms, with funds increasingly building institutional relationships with conglomerate businesses in order to participate in carve-out transactions.
For example, by partnering with corporates, PE firms can leverage the synergy benefits of their partners to gain access to higher-valued assets, from which they may otherwise be priced out.
Increasing competition for opportunities is also leading some funds to move downmarket into the growth capital space — typically the preserve of venture capital (VC) investors. Similarly, there has also been a rise in pre-IPO funding, which gives PE firms access to growth opportunities that aren’t complicated by high barriers to entry, like rising corporate valuations.
5. Co-investing with limited partners
PE firms are also increasingly teaming up with limited partners independently of managed portfolios — to pool resources, invest in bigger deals and access greater levels of debt financing.
For the limited partners, this means cheaper access to larger investments, as they don’t have to pay the management fees to an intermediary private equity firm. It also gives them the opportunity to earn higher returns and greater freedom in deal selection.
For private equity firms, co-investing with an LP may cost them slightly in lost fees and a reduced degree of control, but it allows them access to deals that would otherwise be beyond their available capital, while strengthening the LP and general partner relationship.
However, legislation in the US regarding investment could impact this trend. The Committee on Foreign Investment in the US (CFIUS) is an interagency committee of the US government that reviews financial transactions to determine if they will result in a foreign individual or organization controlling a US business. CFIUS’s current review of US-China investment ties, particularly in high-tech industries, could set new limitations on global PE-LP co-investments moving forward.
6. Building your own business
A number of parties are now creating platforms as startup businesses. Increasingly, PE firms are using their cash reserves, sector knowledge and human capital to build their own startup businesses with their own bespoke management teams, to take advantage of perceived market opportunities.
For example, PE firm Oaktree Capital Management used its sector knowledge and resources to build a substantial portfolio of student accommodations. And The Carlyle Group has backed a new company building the next generation of high performance chip technology designed to support the movement of business to the cloud. In these scenarios, PE firms don’t just manage and add value to existing organizations, they directly create their own strategic players in the marketplace.
PE firms that were once focused on generating value from a limited range of activities now have a much wider variety of strategic options. From assuming minority interest, to starting their own companies, today’s PE firms are far from just asset management entities.
For PE funds, this is an exciting time. For non-PE funds, new competition can mean new challenges in the M&A marketplace — but perhaps also new opportunities for value creation. One way or another, 2018 is the year of the PE acquirer, and parties on both sides of the equation should take steps to prepare for the realities of a transformed marketplace.