Private equity insiders gave us their predictions for 2030: here are the 5 biggest factors that will reshape PE over the next decade
- Business Insider canvassed private equity recruiters, consultants, and finance execs about what they think is in store for the industry in the coming decade.
- Their answers highlighted five big shifts that will shape how private equity firms function by 2030.
- Investor dollars are expected to continue flowing to the private markets, even if a recession materializes. With more competition and lots of dry powder, it will become more difficult for PE firms to achieve the same returns they have historically hung their hat on.
- PE firms will increasingly rely on data analytics to inform their investment decisions in a bid to differentiate themselves. And new technology sweeping a variety of industries will change up how PE firms staff their professionals.
- More of a focus will be placed on ESG factors, impact investing as well as diversity and inclusion efforts.
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Private equity firms had a big year of high-profile deals, and are sitting on mountains of unused investor dollars.
With 2020 quickly approaching, we were curious about what the next decade holds for the industry.
When Business Insider canvassed private equity recruiters, consultants and finance executives about how they expect the industry to change over the next 10 years, five predominant themes emerged, from technology specialists comprising more of a PE firm's roster, to the increased use of data informing investment decision-making.
And that all comes as the capital being allocated to the private markets is expected to balloon and PE firms engage in more and larger buyouts, making them a more vital player in the global economy, experts said.
1) Even bigger funds
Blackstone broke records this year when it raised the biggest-ever PE fund, which came in at $26 billion. And records could continue to be rewritten.
"We've seen funds north of $20 billion; we could see $30 billion or $40 billion funds over the next decade," said Brenda Rainey, a consultant at Bain & Co.
As the PE industry matures, Rainey and others said, firms will also adopt more sophisticated software that take care of PE back-office tasks such as accounting and finance, as well as front-office tasks, such as due diligence and deciding when is best to exit a company.
2) More data and analytics
Bain has already partnered with a data analytics company that has access to the financial particulars of tens of thousands of PE transactions, which offers insights into the risk-return profile for deals.
"We are just now tapping into how data can help investors make better decisions across the entire life cycle of the investment value chain," Rainey said.
These capabilities will only further expand over the next 10 years, she and others said, equipping a PE firm's investment professionals with better clarity on decisions about whether to buy a company or what changes to make once it makes an investment.
The use of data, which is already being developed by firms such as Blackstone, KKR and Neuberger Berman, will be an important differentiator in an environment where firms face bigger challenges to achieve the same kind of returns PE has traditionally seen, experts said.
"In coming years, we expect more [private equity firms] will try to find an edge in data, where several are already starting to lay the groundwork for using advanced analytics and digital tools to improve their investment performance and their operating efficiency," wrote Bryce Klempner, a consultant at McKinsey & Company who advises private equity clients.
3) Continued competition for assets will pressure returns
Andrea Kramer, head of fund investments at Hamilton Lane, called private equity's pricing challenges "extreme" and said that she expected competition to only increase in the coming years.
"We expect to see a continued reduction in absolute returns across the industry," she said.
Returns, she said, will be realized by cost cuts and revenue enhancements, some of which will be driven by data analytics and software "to access real-time information."
She said that PE will invest in data scientists, technology, human resource training and recruitment specialists, sector experts and integration specialists.
4) PE firms will staff more tech specialists
At the same time, new technology affecting many industries in which PE portfolio companies operate is expected to shape the PE workforce as firms continue to morph into giant asset managers, launching and expanding new products for investors, experts said.
By 2030, PE firms will likely have whole teams of specialists who dedicate themselves to implementing and maintaining new technologies at a wide variety of portfolio companies across sectors, recruiters told Business Insider.
"The sectors themselves may also be categorized differently" within the PE firm, said Noah Schwarz, a recruiter at Korn Ferry. "For example, old line Industrial Manufacturing will likely be called Industrial Technology."
5) More of an LP focus on ESG, impact
Kara Helander, chief inclusion and diversity officer at The Carlyle Group, noted that she expected firms would expand their investing in impact and ESG, and improve the overall diversity make-up of their professionals, as investors' want to do good while achieving high returns and work with private equity firms that reflect those values.
"One of the things we see is our stakeholders - more and more our LPs and our portfolio companies - care about how well we are managing for total impact," she said.