Eric Tan’s Post

New Horizons in Private Equity Landscape In recent years, the private equity (PE) landscape has undergone significant transformations. With economic shifts and rising interest rates shaping the market, the strategies that once drove substantial returns for PE firms are no longer as effective. Here’s a simplified look at what’s changing and what it means for the industry: - From Financial Engineering to Operational Excellence: The focus in PE is shifting from leveraging financial tactics to driving value through operational improvements. As borrowing becomes more costly and less effective due to higher interest rates, the emphasis is on enhancing the day-to-day operations of portfolio companies. - The Rise of Operational Efficiency: In today's economic climate, operational efficiency isn't just a strategy—it's a necessity. PE firms are investing more in making companies they own more productive and profitable through better management practices, technological upgrades, and smarter organizational structures. - Longer Holding Periods: The quick flip of investments is becoming less common. Instead, PE firms are preparing for longer investment horizons, allowing them to implement comprehensive improvements and realize the full potential of operational enhancements. - Internal Transformations Within PE Firms: There's a significant internal shift within firms as well. Greater emphasis is being placed on teams that specialize in boosting company operations, moving away from those focused predominantly on financial structuring. The evolving PE model reflects a deeper, more sustainable approach to value creation—one that leverages operational prowess to navigate through economic uncertainties. This shift not only aims to enhance the stability and growth of investments but also ensures that PE can continue to offer robust returns in a changing financial landscape. Read the full article - https://lnkd.in/da7aKgeq #PrivateEquity #InvestmentStrategies #OperationalExcellence #EconomicShifts #BusinessTransformation

PE to go 'back to the future' in the new rate environment. As the financial landscape evolves, private equity firms can no longer solely depend on low-cost borrowing to generate returns. The future success of the industry will depend on a return to the fundamentals of identifying promising investment opportunities and implementing sound operational strategies. #privateequity #financialmarkets #operationalexcellence #delorean https://lnkd.in/eFDFPaFX

An interesting article on the challenges private equity (PE) firms face in creating value in the current economic environment. Traditionally, PE firms have relied on financial leverage, tax and debt structures, and increasing asset valuations to generate high returns for investors. However, since 2020, the cost of debt has increased, and access to debt markets has become more difficult due to higher interest rates and stricter lending standards. As a result, PE firms have seen a decline in entry multiples.. To overcome these challenges, PE firms are focusing on operational value creation strategies, such as increasing revenue growth and margin expansion, to offset the compression of multiples and deliver desired returns to investors akin to their strategic players. The article highlights that certain PE funds with a core commitment to portfolio value creation, such as those focused on healthcare and software industries, have already seen average leveraged loans with interest coverage ratios below 2x. This highlights the importance of operational efficiency to increase EBITDA and avoid potential financial difficulties.

Why Some Savvy Investors Are Willing to Pay More for Less. • Some people often wonder why subsequent investors are willing to contribute more capital into a private equity fund with multiple closes, even if it means receiving a smaller % interest. It is because they appreciate the groundwork laid by early investors and the benefits of a de-risked investment. • Subsequent investors recognize the value of investments that have undergone some degree of de-risking. Experienced investors are often willing to pay a premium to join a less risky investment opportunity. This willingness to pay more stems from the understanding that early investors took on significant risks, including closing risks, financing risks, business risks, regulatory risks, and associated costs. • Early investors essentially bet on the fund manager's ability to execute the underlying business plan, shouldering greater risks and costs. As a result, it is only fair for the investors to be rewarded. To ensure fairness, subsequent investors compensate early investors for the risks and opportunity costs they have incurred to prevent early investors from receiving unfair returns compared to subsequent investors. • To balance risks and returns among all investors, a mechanism called equalization is employed. This mechanism adjusts the contributions and returns of investors to account for timing differences, ensuring comparable risks and returns regardless of when the investors joined the fund through equalization payments. • These payments are made to compensate early investors for the period during which their capital was at risk before new investors joined. The payments align the economic interests of all investors by adjusting their contributions and returns. Compensation includes accounting for opportunity costs (time value of money), preferred returns if any, and capital contributions (contribution true-up). • After each subsequent closing, investors' accounts are adjusted to reflect the equalization payments. This ensures that each investor's ownership % aligns with the total committed capital and determines the remaining commitments. Typically, these adjustments are not made as actual cash transactions but as adjustments that reduce early investors' outstanding commitments and increase subsequent investors' required commitments. Some informed investors value the de-risk investments and are willing to pay more for less in a subsequent close instead of investing in a follow-on fund initial close. They appreciate the fair compensation mechanisms that balance risks and returns. ___________________________________ Through Ascendi Capital, I partner with accredited investors (retail & institutional) who are looking to preserve, protect, and grow their wealth through real assets investments. Get in touch to learn more. #PrivateEquity #Investments #RealAssets #Carwash #Roll-up #Equalization

********** A Simple Translation ********** Allow me to deconstruct this document into more simple terms. If the PE firms cant raise the funds to play pass the parcel just one more time and all make a killing at your expense. The companies they own will start to fail or the PE firm has to spin a whole new line of BS and announce themselves as "Long term institutional investors!!!" which means they took a multi year finance rescue package and those companies, will do nothing but pay off debt for that multi year term. R&D, innovation will become nasty words, so will pay rises.

Private equity deal volumes declined in 2023 for the second year in a row, but signs suggest a rebound in 2024! Check out our latest blog to read more.

Equity Investments for High-Net-Worth Individuals Read more : https://lnkd.in/gwp3t3Xj Follow us for more updates on Markets and Investments. #Equity #InvestmentStrategies #HNI #FinancialPlanning #InvestmentAdvisory #WealthManagement #JamaWealth

"The report forecasts a rise in private market investment opportunities across private equity, private credit and private infrastructure resulting from the benefits companies perceive in remaining private for longer, and the growing investment requirements and need for private capital to support infrastructure projects critical to modernizing economies. In addition, recent volatility in the public markets has investors looking beyond traditional investment options for products that can provide enhanced alpha potential and increased diversification. The report forecasts that these factors will continue to drive investor appetite for private market investment" #PrivateWealth #WealthManagement #RealAssets #PrivateMarkets #AlternativeInvestments #Alts #UHNW #HNW #FamilyOffices #IBD #RIA #PrivateInvestments #PrivateCredit #PrivateEquity #RealEstate Mackenzie Investments Northleaf Capital Partners

In this current rate environment, value creation through operational enhancements to drive EBITDA and profitability growth will be crucial for private equity (PE) to generate alpha #2024outlook #investing #privateequity #alternatives #privatemarkets #opportunity #economy #markets #ebitda #GP #LP #exit

Despite the challenges faced in 2023, private equity is poised for a promising resurgence in 2024. Discover the key factors driving this optimistic outlook in our latest article. #PrivateEquity #InvestmentOutlook #2024Trends