No Regret Moves: Actions PE Leaders Must Take to Optimize Portfolio Company Value in the Face of High Interest Rates

DOING NOTHING IN THIS ENVIRONMENT IS EXACTLY WHAT NOT TO DO

The Private Equity (PE) industry finds itself in a very dark place after experiencing unprecedented highs in recent years with record deals, volumes and fundraising activities. Interest rates have risen precipitously with no expectation they will retreat from their current levels for some time to come, leaving liquidity strained, debt difficult to acquire and firms facing lower returns.

For the PE sector, this is a new environment. Following a boom of deal and fundraising activities in 2021 and early 2022 and the cheap money that enabled it, the rate hikes in 2022 had an almost devastating impact on deal activities, exits and exit valuations:

• Fundraising is at a significant low. The second quarter of 2023 was the worst for raising capital since 2018, reaching a mere $106 billion.
• Unrealized value is at an all-time low with exit activity virtually at a standstill.
• Limited partners are now cash-flow poor.

For many general partners, such uncertainty may lead them to adopt a “wait and see” approach, but that has never been a good strategic plan and is one of the worst things they can do in the current environment. While PE firms should not stop fundraising efforts, now is the time to turn their gaze inward, toward operations and liquidity management, rather than outward toward dealmaking.

Liquidity and margin management are the tools needed for the day — skills most management teams don’t often wield effectively. Their comfort zone is scaling deals for growth with an exit window in mind.

Smart PE firms will take the opportunity in the face of industry headwinds to manage and optimize cash burn now.

Read the full article to learn actionable insights that can empower the future of your portfolio companies.

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