Private Equity Opportunities and Strategies for Q4 2023

As we enter the final quarter of 2023, there remains a lack of confidence within the Private Equity sector. The relentless battering that the global economy has weathered from high inflation, rising interest rates, and the perpetual threat of a major recession have left investors reluctant to make substantial financial commitments. The confidence that commentators were projecting at the beginning of the year steadily dissipated, as the first half of the year marked a steady decline in Private Equity investment.  

While Private Equity has never been under greater pressure, financial experts have remained steadfast in their opinion that ‘nothing is fundamentally broken’, and that the time has come to rekindle a more bullish attitude and get things moving again. What really needs to happen, however, is for firms and portfolio companies to rethink their strategies and show greater awareness of the growing concerns in the marketplace.

In this article, we will look at some of the suggested strategies and trends that will help get the Private Equity sector up and running again.

Preparedness Pays Off

According to Bain & Company’s Private Equity outlook for 2023, ‘Confidence boils down to learning how to underwrite risk in a time of great macro uncertainty.’ When seeking to mitigate risk, analyse the dozen or so macro factors that might be disrupting global activity. Be sure that you are well-versed and fully prepared for how each of these scenarios will play out. Chances are, only a couple of these factors will come into play for your specific situation, but if you are ready for them all then you should be able to move quickly and get out ahead.

Explore the range of potential scenarios and outcomes and devise a mitigation plan for each eventuality. Last time around, it was those who had spent time making these kinds of detailed preparations who were able to get back up and running the fastest. The better prepared you are for every possible eventuality, the more unfazed and undeterred you will be by whichever scenario you are ultimately faced with.

Even if it requires more equity or a slightly higher price than you would prefer, a good asset at a good price should not be ignored. Waiting now could well mean losing a valuable opportunity to make a profit when the cycle turns.

When Opportunity Knocks

Understandably, there is a temptation to conserve cash in these uncertain times, to reduce costs and sell whatever you can. But it is essential to remain eagle-eyed as opportunities will still emerge, and how your business navigates its exit from a recession could depend extensively upon the opportunities that you seize, and in doing so, take away from the competition. An aggressive and courageous attitude, albeit without reckless abandon, should ensure healthy and positive performance in the medium to long term.

Taking ESG Seriously

It can be tempting to look upon environmental, social, and governance concerns as secondary to more pressing investment factors, expensive add-ons perceived as little more than cosmetic sweeteners. However, at a time when climate change, geopolitical conflicts, escalating energy prices, and diversity and inclusivity have all become propulsive issues, ESG has become a primary concern for stakeholders.

PWC acknowledge that investors, companies, and employees alike have all stressed the importance of having an ESG strategy, and finding ways to effectively meet both US and worldwide requirements and regulations. ‘It doesn’t have to be an all-or-nothing exercise’, but rather they suggest ‘building an ESG strategy that focuses on adaptability of your business to mitigate risks, identify opportunities and drive competitive advantage in its industry.’

In a recent survey, PWC observed a change in attitude from Private Equity firms regarding the importance of ESG concerns. While it may be somewhat difficult to directly attribute financial value to ESG considerations, respondents to the survey overwhelmingly identified brand enhancement, risk mitigation, competitive differentiation, and client attraction as ESG’s main benefits to their organisation, all of which are only going to become increasingly significant considerations for investors in the medium to long term.

In summary, experts agree that it is time to get our feet wet again, and to venture cautiously, yet confidently, back out into the market. Those looking for quick-fix solutions will be left frustrated by the lack of opportunities, but those willing to consider longer-term plays, particularly in areas that will improve the image and accountability of companies, rather than merely direct financial gains, should find plenty of opportunities to increase the value of their assets.

Buchanan Capital is an independent adviser and strategic growth partner for unlisted firms operating in the financial services industry. We provide financial, corporate, and strategic advice, and invest in growing businesses with strong management, providing intellectual as well as financial capital to investee firms. Our objective is always to form deep, long-term relationships with the companies we invest in, which often entails board-level participation.

We aim to play to our strengths by focusing exclusively on the financial services industry and its service providers. Our clients are micro, small, and medium-sized businesses, privately owned, and typically owner-managed.