The Future of Private Equity Investing is all about Post-Acquisition Operational Value Add (PAOVA)

Over the past decade, almost any private equity (PE) firm has 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 currently experiencing a paradigm shift that will result in all Private Equity investors (LPs and GPs) focusing almost exclusively on the ability of the PE firm to grow portfolio company earnings faster than under the previous ownership. We refer to this as the PE owner’s post-acquisition operational value add (PAOVA), which is their set of skills and tools that are a core source of value creation. We believe the future is about identifying the firms with the greatest – and most repeatable – PAOVA capabilities.