Despite a more challenging macro environment, private equity (PE) is set to reach new heights in the next decade as companies stay private longer and institutional investors increase allocations to alternative assets like PE in search of higher returns. Are you prepared for this secular trend?
- Private capital markets faced headwinds in 2022, but a boom is predicted due to more companies staying private longer, institutional investors increasing allocations to private equity, and a demographic shift as entrepreneurial Baby Boomers consider succession plans for their businesses.
- Private equity firms try to increase its value through various strategies such as implementing an inorganic growth plan, improving processes and systems that will enable scaling and operating leverage, and improve operational efficiency and productivity.
- To capitalize on these strategic choices, PE firms need to invest in a strong CFO office, personnel hires, processes and systems, and consider partnering with a transaction advisor to build a platform for successful roll-up strategies.
- E78 Partners offers finance and technology solutions for PE firms pursuing roll-up strategies.
The State of Private Equity
Private capital markets faced unexpected headwinds from inflation, geopolitical tensions, and rising interest rates in 2022. Despite this, experts predict that a private capital market boom is underway. Preqin, the leading trusted industry data provider, forecasts that global private capital assets under management (AUM) will reach a staggering $18.3 trillion by 2027; Goldman Sachs estimates it will be as high as $30tn by the same year.
What’s driving this growth? We know more companies are choosing to remain private for longer. Apple went public by its 5th birthday, but companies with similar profiles today stay private for an average of 12 years, and in some cases, up to 20 years.
This trend was made possible by the staggering amounts of capital available in private markets during an era of lower interest rates and surging valuations. This may not reflect today’s economic realities, but most analysts agree PE’s best days still lie ahead.
That’s thanks, in large part, to the fact that more and more institutional investors, like pension funds, college endowments, and the major insurance companies, are reallocating funds to alternative assets. The reason is not surprising. Alternative markets, like PE, have outperformed traditional stocks and bonds in recent years. Buyout funds had an average annual net return of 12.5 percent over the past decade, compared to 8.5 percent for the S&P 500 Index. Bain & Company projects that institutional capital allocated to alternative investments will grow 8 percent annually over the next decade
The high conviction in this asset class among institutional investors is not only driven by historically high returns. There’s also an advantageous demographic shift underway.
The 2020s will be the decade that sees many Baby Boomers head into retirement.
Boomers are not only America’s wealthiest demographic, but also its most entrepreneurial. As businesses owned by the Boomers enter succession planning, high-quality companies positioned for growth and ready for investment will flood the market. Estimates suggest that one in two buyers of these Boomer-owned businesses will be financial sponsors like PE.
Unsurprisingly, most funds are positioned to take advantage of the fact supplies of available capital and businesses for sale will be at all-time highs. More and more GPs are being formed each day. But are they fully prepared to capitalize on the coming secular trend?
Investing in Founder-Owned Businesses
Investing in a founder-owned business requires significant investments in the Chief Financial Officer’s (CFO) office. These businesses are strong and offer exceptional products and services and can serve as a base for acquiring other companies through a roll-up strategy. But, without a strong finance function, your fund will not be able to get timely, accurate data and insights it needs to assess and measure performance over time. So, to scale efficiently, you need to devote heavy amounts of capital upfront for personnel hires, redesigning the back office, and implementing processes and systems.
Before embarking, consider partnering with a transaction advisor to build a shared services platform. Beyond routine due diligence for investment purposes, a transaction advisor can help you carefully evaluate each target company to ensure they’re compatible with the platform and can seamlessly integrate with its systems and processes.
E78 Partners: Your Trusted Partner for PE Roll-Up Strategies.
E78 Partners offers front-office and back-office solutions for PE firms pursuing roll-up strategies. We typically partner with firms that are the first round of institutional capital investing in a founder-owned company. E78 Partners was founded by former PE professionals who have completed the transaction lifecycle time and time again. We understand the intricacies and pitfalls inherent in the process. We can help you navigate these treacherous waters with confidence, providing both advisory and execution support, and ensuring success at closing and beyond.
- Criteria & Planning: Our teams deploy systems to organize work and time, ensuring tasks are planned appropriately and realistically. Track progress and work effectively and efficiently under tight deadlines with sponsors and management teams from diligence through closing.
- Integration Management: We will deploy our playbook, proven processes templates and tools led by successful M&A experts along with our synergy tracking framework to prioritize KPIs, all supported with the functional expertise to drive a successful deal.
- Post-Close Operations: The first 100 days are critical to both private equity and portfolio firms to maximizing value. We deliver enhanced reporting and improved IT systems and implement best practices. We are highly involved with all parties to deliver an effective operational playbook. Our team will address optimizing accounting operations, design reporting packages and rolling forecasts for stakeholders, build and enhance treasury & cash management controls and optimize governance.
- Pre-sell Readiness: Our sell-side transaction execution services ensure you maximize value and likelihood to close by presenting your financials in the best way, then navigating the complicated process of multiple parties and preparing you for rigorous financial and contract diligence.
Transition of Leadership
- Leadership and governance: We provide C-level interim and project leadership with the experience and perspective your firm needs. Our proven, on-demand leaders have worked as CFOs, CEOs, COOs and CIOs across a range of industries.
- Leadership transition & executive search: We provide management transition services to ensure your firm has the leadership it needs at all times. Our interim executives rapidly integrate within your management team with the strategic insight and expertise to address key initiatives as well as on-going operational responsibilities while we concurrently perform an executive search for a professional who meets your strategic needs.
- Performance management: We assess your business to discover opportunities to enhance operational efficiencies, improve profitability and promote scalability. We ensure you have the right people, processes and technology in place to continue to grow into the future.
- Roadmap to future success: We develop a high-level plan considering financial function effectiveness, M&A and organic growth, execution of strategic initiatives and building value pre-exit. The result is an actionable approach to meeting strategic, financial and operational goals.
Finance and Accounting
- FP&A Best Practices Implementation: We design efficient processes and drive continuous improvement in planning cycles to empower FP&A team members to spend less time producing reports and more time generating analysis and insight.
- Business Intelligence & Big Data Analytics: Our team provides you with clarity and insights in an efficient manner, giving you visibility into your organization including real-time forecasting, planning, budgeting and KPI analysis. We deliver data to ensure you are more informed and confident making business decisions.
- Management & Stakeholder Reporting: Our team delivers full financial projections and business analysis, management KPIs reporting and dashboards, business model / cash performance analysis and consolidation reporting, along with data modeling and data systems design.
- Planning, Budgeting & Forecasting Optimization: We help you unlock actionable insights to make data-driven strategic decisions. You’ll be able to lead your organization with real-time data analysis; plan, budget and forecast smarter; reduce management reporting from days or weeks to minutes; and optimize your performance management system to drive better results.
- Fractional or Interim CIO: We offer fractional or interim CIO services to organizations looking to replace or add CIO level support that provides strategic IT direction, becomes a trusted IT partner with other internal stakeholders, and manages all aspects of the IT group.
- IT Due Diligence: We provide insights into the technology risks and impacts associated with M&A activities. This includes, but is not limited to, risk analysis, technology investment forecasting, capability and maturity assessments, and analysis and reporting.
- Software & Vendor Selection: Our team of experts work with you to understand your organization’s needs when it comes to identifying new technology to meet business requirements. Our vendor agnostic approach offers recommendations to software or technology solutions and implementation approaches that will work best for your company.
- Project, Program & Portfolio Management: Proper management of a project, program, or portfolio is crucial to deliver a successful outcome. We have years of experience managing and delivering various initiatives. We help manage the implementation process, change management, communications, project risk, and other issues that may arise.
The office of the CFO is critical to scale PE-backed companies. E78 Partners provides services and solutions that you need to grow. The secular trend indicates that these services will be in demand, in such a strong way that more and more institutional investors are investing in professional services firms to support their competitors.
As more middle-market focused PE firms are executing roll-ups across a multitude of industries, E78 Partners enables them to focus on value creation through high velocity M&A, while E78 focuses on platform development and essential business service operations. With the secular trend showing no signs of slowing down, it is clear that services catering to the office of the CFO will continue to be in high demand.
Have more questions? Talk to an expert.