By Daniel Leder and Stan Miranda
1 Jun 2023
Over the past decade, Private Equity (PE) sponsors have been able to generate outsized returns. Falling interest rates have boosted returns in most asset classes, including buyouts that benefit from high leverage and low borrowing costs, as well as venture capital and growth equity that benefit from low discount rates inflating back-ended cash flows. With the end of low inflation and falling interest rates, we believe the Private Equity industry is experiencing a paradigm shift that will result in all Private Equity investors (LPs and GPs) focusing almost exclusively on the earnings growth through the PE owner’s post-acquisition operational value add (PAOVA) as the core source of value creation. We believe the future is about identifying the firms with the greatest – and most repeatable – PAOVA capabilities.
This paper focuses on the increased importance of PAOVA and how Partners Capital is responding to these pressures, including:
- The potential significant shake out in the Private Equity world, between the firms that have developed adequate value creation capabilities (in the absence of multiple expansion) and those that have not developed such capabilities
- How we have evolved our due diligence process in the PAOVA age
- New analytical tools we have developed to assess sponsors’ PAOVA capabilities
- Our assessment of various GP operating models and how we are positioning portfolios we believe add the greatest value to portfolio companies