EQT: PE needs to disrupt itself

Being creative and embracing new tools such as Artificial intelligence will be vital for investors in an increasingly competitive private equity industry, writes EQT’s head of equity Christian Sinding.

The European private equity market has been firing on all cylinders in 2017, with tough competition for investor capital and attractive deals. Pricing is high, investor appetite is strong, and the pace of activity is frantic. The question is will this last? We think yes.

It may be daunting to think that such highly competitive conditions will continue in 2018. However, the reality is as long as a general partner can deliver superior growth, then private equity will remain one of the best places to be for investors. So as we celebrate the beginning of a new year, the industry would do well to make a resolution – be as creative as possible in supporting and sustainably growing companies for the long term.

The reason is simple – independent of the price you pay for a company, if it is a high-quality business and you have the creativity and skills to transform it, you will generate value over the long term.

Creativity is especially important with the days of outsized returns in the absence of operational improvements being long gone. Going forward, growth focus must also be complemented with real ingenuity and the guts to do things differently, thereby ‘future-proofing’ businesses.

Future-proofing can, for example, mean incorporating ESG throughout the investment process helping drive efficiency through more motivated employees and a more prudent consumption of resources. Another part is new technologies. GPs have become increasingly aware of the importance that new technology has in driving change and growth in portfolio companies, acknowledging that every industry is subject to the forces of disruption. Looking ahead, the focus will not be on digitisation as a separate force applied to certain areas of a company, but on how it can be integrated throughout – disrupting business models as a whole.

Technological disruption is a core component of transforming a company, and can be used as both an offensive and defensive strategy. This applies across sectors, regardless of whether you’re working to grow an industrial filters service business or a web content management software company. GPs must ensure that their portfolio companies capture the opportunities and emerge as winners.

Technology does not just have the power to transform portfolio companies, it can also change GPs for the better. In tech parlance, private equity managers must disrupt themselves. At its most basic, new technologies can improve communication, make internal processes more efficient and help due diligence be smarter.

But one particularly exciting area is artificial intelligence. While growing businesses requires vision, creativity and more than just crunching data, in the future, technology like AI will help provide investors with better information, faster.

This commoditisation of data means that focus must be on how to get access to new thinking and different ideas, and use widely accessible data in a better way. For example, building integrated deal teams with specialist technology experts and ESG experts was once unusual, but that is no longer the case.

This means that the days of small, siloed groups of investment advisors from similar backgrounds are coming to an end in the industry. The trend will be towards larger, more diverse, and more integrated teams.

These teams are helpful in other ways. Across private equity there is a trend that you have to act quickly or risk losing out on the best deals. This is particularly the case as strategic and family offices become increasingly competitive, vying for the opportunity to invest in private companies.

As we enter 2018, there is another reason private equity firms must be creative in driving growth and ‘future-proofing’ their portfolio companies – it is a key part of preparing for, and even benefiting from, changing market conditions. Commentators point to another year of growth for Europe, but no-one can predict when the next shock will happen, and it would be naive to think that it won’t happen again.

There are numerous balance sheet concerns and markets must deal with the tapering-off of quantitative easing. The next shock could come from anywhere, so general partners would do well to prepare now to ensure that portfolio companies can survive a downturn and come out stronger.

We cannot predict what will happen in 2018 and beyond, but one thing is clear – the private equity industry must find new creative solutions to drive growth in an increasingly challenging market.

Christian Sinding is deputy managing partner and head of EQT Equity