How future scenarios can help private equity firms today

PE has evolved and developed, both geographically and in terms of sophistication. It has expanded from traditional US and European leveraged buyouts to a wide array of alternative strategies and asset classes operating in most countries around the world. Currently, according to Preqin, PE firms and closely related asset classes are estimated to manage more than US$4.4t of investor capital — an amount expected to effectively double over the next five years.

It is reasonable to assume that PE is now at an inflection point — essentially, it has matured. Success brings growth, but it also creates new challenges. As PE moves into the next phase of its evolution, it must find a way to balance the nimbleness, flexibility and responsiveness that brought it to this point with the need to manage increasing complexity in a rapidly changing world. Four megatrends — advances in technology, globalization, shifting demographics, and environmental issues — are combining to upset the existing order and create new working patterns and relationships, and PE firms need to adapt to these changing conditions.

One thing is certain: the next wave of PE will look different. The successful PE firms of tomorrow will be those that can effectively differentiate themselves in a more mature and competitive space. For many, this will mean increasing diversification across asset classes and geographies. For others, it will involve greater specialization (by region, sector, or impact) and the development of best-in-class product offerings. For all, it will require operational excellence.

Crucially, they will also need to find new levers of value creation, with a particular focus on three areas that are becoming increasingly important: digital strategy, purpose and transparency, and talent. The combination of these three levers throughout the deal life cycle can create powerful benefits.

In our latest Keynote Interview in the PEI Future of Private Equity Report (pdf), Andres Saenz, EY Global Private Equity Leader, and Pete Witte, EY Global Private Equity Lead Analyst, discuss how thinking through future scenarios can help private equity firms identify areas that require attention and investment today.