Continued uncertainty in the private equity markets, delayed exits, and a general lack of confidence in the economy will further increase reliance on strategic and structured value creation. At the same time, the pressure to identify new growth opportunities and revenue streams will compel PE-backed companies and sponsors to forge ahead despite external challenges. These are our predictions as we wind down the year and look ahead to 2024:  

Increased Emphasis on Value Creation

The private equity industry understands that a hands-off, buy-and-hold strategy is unlikely to generate desired returns in any environment, let alone the complex one we live in today. Amid continued uncertainty around interest rates and inflation, the unknowns related to future actions by the Federal Reserve, and the unsteady economic climate in general, expect sponsors to increase their proactivity and operational involvement in the year ahead while continuing to adopt formalized and operationalized value creation approaches to drive growth. To accomplish this, sponsors will continue to embrace the technology solutions that enable the collaborative and strategic execution of value creation plans and more readily flag portfolio outliers that could drag down performance and imperil the ability to raise the next funding round. 

Preserving IRR Amid Exit Delays

Continued macroeconomic and geopolitical challenges will likely force sponsors to further delay exits and retain investments longer than originally intended. To continue driving value from existing assets and offset potential reductions in IRR, sponsors will need to engage in late-stage value creation exercises to find creative ways to extract even more value in the later stages of the holding period. For new investments, deal and operating teams will be motivated to dive headlong into creating and executing the value creation plan as soon as possible, eschewing the slower starts and more casual honeymoon periods that tend to characterize the first several months of a new sponsor-portfolio company relationship. 

Navigating the AI Hype

Generative AI created a frenzy across multiple industries in the past year. Private equity firms, PE-backed companies, and just about every business imaginable explored how best to leverage and incorporate Gen AI into their business operations. For sponsors, extracting data from the portfolio and unlocking the insights contained within will continue to be a key priority, no matter whether Gen AI has a role to play or not. Generally, expect some of the hoopla around Gen AI to subside as well, with the increased recognition of it as an imperfect tool that may not be applicable to all business cases.

Elevated Investor Scrutiny

Investors of all kinds are more sophisticated than ever before, aided by access to real-time data and performance insights. The scrutiny with which investors monitor results and require information will only continue to heighten in the year ahead, especially should economic sluggishness and threats of delayed exits persist. Sponsors and PE-backed management teams eager to stay in the good graces of investors must be prepared to respond to queries and showcase, on demand, the impact of their value creation strategies on portfolio performance with granular detail. 

A Return to Dealmaking Activity 

Finally, there seems to be a growing acceptance that the pervasive external challenges that exist in the world today will probably not be resolved anytime soon, at least not entirely. Inflation may continue to ease, but it will do so slowly. Global tensions will likely continue to put strains on supply chains. Whispers of recession threats will continue each time the Fed meets. A return to normalcy, however, that may have once been defined, is not likely. However, businesses of all varieties, particularly PE-backed companies facing pressure to perform and produce results, must simply forge ahead. Expect increases in deal activity as sponsors and portfolio companies seek to expand product portfolios, geographic footprints, and do what is necessary to propel growth.

To learn more about how Maestro helps private equity sponsors and PE-backed companies maximize value creation outcomes, contact a representative today!