Private equity may struggle to deliver without influence
Australian private equity funds are facing challenging times ahead as competition for investors' capital grows and the need to influence assets increases.
While Bain's annual Global Private Equity Report found that private equity had proven itself to be "remarkably resilient" over the last decade, the firm's head of global private equity, Hugh MacArthur, warned "the shadow of interest-rate increases in some markets and the risk of recession loom as tricky prospects that investors need to include in their deal-making calculus".
The report warned that as the industry tries to find value in investment opportunities with stubbornly high prices and return thresholds, repeatability would play a key role in post-close activism, helping to realize more value from a deal, even once it is complete.
"A common signal of trouble ahead for its underperforming deals was situations in which the key thesis for growth was incompatible with the competencies of existing management teams; yet the firm relied on those teams to develop skills that they had not previously demonstrated," the report said.
"Steering clear of these characteristics can spell the critical difference between a winning deal and a losing deal."
Bain Australia's head of private equity practice, Simon Henderson, said the forecast change to the prevailing favourable fund-raising conditions would place pressure on general partners to demonstrate to limited partners that they have a sharply honed and differentiated strategy for achieving superior performance.
"It used to be that you could take the deal model, trim it by 15 per cent and still wind up with a reasonable return," he said.
"Today, the need to transform the value of the assets is more acute than ever — sometimes you need to get the year five number in year three to realize an attractive payoff."
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