The Strategical Changes in Private Equity

 As technology and interest rates are changing through the corporate world, private equity starts to contain more advantages than public market investing when it comes to large-scale companies. The predicted time ahead of us that will have slower economic growth, and higher inflation. Because of this higher interest rates which will serve as trouble for operators and investors. Even with a higher cost of capital, private equity should be able to create attractive values for investors, but to do this they will have to change their strategical strategy. In the past, private equity uses control-oriented ownership, which allows partners to have more of say in the plans of companies. By doing this they have generated 15% of internal rates of returns over the past 20 years. 

The different ways to buyout investment vary, but the drivers of return can be distinguished into four categories. These are revenue growth, margin expansion, changes in valuation, and financial structuring and leveraging. As time goes on private equity is still predicted to succeed, however, margin expansion and revenue growth are now more than ever supposed to be the main successes while financial structuring and leveraging are becoming less important. 

Focusing on boosting revenue, private equity strategies are to prioritize organic growth, for it is believed to increase value creations. To achieve this growth, it is needed to fix broken business models, and super charge healthy but slower growing business models. 

For margin expansion the key shift is going from growth to efficiency because capital cost has risen it is needed to rely on optimizing processes, enhancing supply chains and explaining the reality of new technological impacts to companies face to face, highlighting opportunistical advantages for the future. 

With private equity flipping the value creation playbook it will continue the trend of private equity having an advantage over the public market.

Sources: How private equity strategies are changing amid higher-for-longer rates (goldmansachs.com)