In Private Equity, 2022 began much as 2021 ended—a flurry of deals with PE teams furiously evaluating investments and plowing through deal processes. However, during the first half of 2022, deal volumes and velocity cooled. High-quality growth opportunities became harder to find, but valuations remained at all-time highs. Additionally, macroeconomic factors increased the level of investment committee caution.
As this dynamic took effect, PE firms pivoted from commercial diligence and value creation plans to collaborating with operations teams on optimization efforts within the portfolio. Based on client work and interaction, here are observations from the first half of 2022 and where the PE community is focusing for the remainder of the year.
Deal teams invest in businesses and management teams they believe in. They are confident leadership can continue running the foundational play that led them to where they are today. The challenge is getting the management team to think big(ger). Deal and operations teams must convince management to invest in the talent and new go-to-market (GTM) models needed to deliver aspirational growth.
2nd Half Prediction: There will be a race for senior commercial leadership talent. PE firms will aggressively pursue leaders with the experience, energy, discipline and fortitude to deliver transformative growth in a tough market.
Jamie Dimon, CEO of JPMorgan Chase, was recently quoted saying, “You know, I said there are storm clouds but I’m going to change it . . . it’s a hurricane.” Cheap money is drying up, inflation is high, labor markets are tight, and supply chain constraints are still in play. Navigating this hurricane will require PE operations teams and portfolio company management to be agile with value creation plans. Commercial leaders must be creative and dynamic. They must be prepared to pivot their teams quickly to respond to storm fronts and capitalize on sunny days.
2nd Half Prediction: PE operations teams will coordinate with management to reevaluate commercial value creation plans. They will refocus priorities on agility—spotting the opportunities in their sights more quickly, moving quickly to deploy the right resources and management support, and doing whatever’s necessary to convert their funnel.
Portfolio companies are under near-term growth pressure. Marketing and sales teams that over-torque towards visionary solutions put stress on delivery. Raw materials and human capital are needed to bring game-changing solutions to the market. Without these resources in place, the business takes on brand, customer experience and bottom-line risk. Looking too far into the future limits the business’ ability to capitalize on near-term growth opportunities.
2nd Half Prediction: PE operations teams will focus portfolio companies on short-term growth objectives. They will optimize commercial teams for near-term execution. They will closely monitor demand generation, funnels and forecasts and work with management teams on short-term initiatives to address gaps and opportunities.
The macroeconomic environment has altered the priorities for many PE firms. As deal volumes and velocity cool, focus is being placed on optimizing portco GTM models versus commercial diligence. Rebalancing GTM costs and resources for the tougher demand profile ahead, along with deploying GTM best practices for continued growth, scale and share, are of precedence for the next 18 months.
For more information on how you can prepare for the rest of 2022, please contact an Alexander Group Private Equity practice leader.