Why PE must aspire to long-term value

EY NextWave is a global strategy and ambition to deliver long-term value to EY clients, EY people and society at large. The NextWave Private Equity vision represents the EY organization’s perspective on the most powerful trends and forces shaping the private equity industry’s future. It explores how drivers such as value creation, purpose and transparency, digital and talent are driving magnanimous change across the global PE landscape.

While PE is a relatively young industry, it has grown quickly, matured immensely and is now at an inflection point. Preqin is anticipating an impressive 15% CAGR in AUM over the next five years, a trajectory that requires PE to remain competitive while simultaneously experiencing tremendous growth.

The long-term value (LTV) narrative in PE is shifting from “we contribute to society because we are successful and then give back” to “we are successful because we create shared value with society.” While LTV remains an aspirational goal, leading firms have already started moving in this direction because they view it as both inevitable and non-optional. 

Four key drivers of the shift to LTV include:

• Demand from investors and resulting competition for capital
• Regulatory scrutiny threatening PE’s license to operate
• Competition for deals involving discerning entrepreneurs
• Talent landscape that seeks alignment of values

There are five stages of an LTV journey for PE firms:

• Compliance: establish compliance with initiatives, regulations and LP agreements
• Risk management: ESG is used as a tool to manage non-financial risks during the investment life cycle
• Opportunity-seeking: use ESG and LTV to identify opportunities for value creation during the entire investment life cycle
• Impact-focused: selected portfolio companies create value to increase the bottom line. Active ownership seeks to adapt or transform the portfolio and deliver superior returns
• Long-term value: find comparable and meaningful ways to measure and articulate strategic value creation for stakeholders

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