NextWave Private Equity

Pete Witte, EY Global Private Equity Lead Analyst, explores the key themes and market dynamics from 2Q 2022 that are top of mind for PE investors.

PE Pulse is a quarterly report and corresponding podcast miniseries that provides analysis and insights on private equity market activity and trends.

Visit https://www.ey.com/pepulse to view this quarter's summary.

PE firms will continue to remain active as they seek to continue to deploy more than US$1.4t in dry powder available for new deals. While market volatility, inflationary pressures and rising interest rates are combining to make the investment landscape far more challenging than a year ago, in many instances, PE firms will look to new strategies and investment themes that provide increased resilience against a macro backdrop for which few modern playbooks exist.

Famke Krumbmüller, EY EMEIA Leader, Global Geostrategic Business Group, joins Winna Brown to discuss how shifts in geopolitical power will affect growth and investment opportunities.

As a result of the war in Ukraine, three major power blocs are emerging, and it has become critical for companies to understand the allies of the markets in which they are invested.

1. Developed markets are leading one bloc, with the EU and the US having reached new levels of cooperation. Relatedly, the North Atlantic Treaty Organization (NATO) has been reinvigorated.
2. Russia is leading a small bloc of countries, including several autocracies.
3. A significant number of emerging markets, including China and India, are not aligning with either of these blocs, preferring to pursue a more neutral or transactional stance.

Several strategic sectors (i.e., farming and medical equipment, agriculture and food commodities, and critical infrastructure) have come into focus due to their relevance to national security and economic growth and the resulting geostrategic competition between these great powers in those strategic sectors. Cross-border deals have decreased as a share of global M&A in favor of more regional and intra-area deals. In this emerging multipolar world, companies are likely to see increased government intervention in their supply chains, limitations on or rejections of cross-border investments, export controls, restrictive trade measures and greater regulatory scrutiny.

Three priorities companies can incorporate to adjust to the new geopolitical environment include:

1. Assess current and future political risks annually.
2. Establish a cross-functional geostrategic team.
3. Refine the company strategy to match new geopolitical realities.

Elizabeth Seeger, Managing Director of Sustainable Investing at KKR, joins Winna Brown to discuss why KKR views ESG as a business opportunity that both creates and protects value over time.

ESG has skyrocketed to the top of many PE firms' list of strategic priorities in the past couple of years. PE firms that may have historically viewed ESG as a "nice to have" or a "check the box" exercise, are now increasingly considering ESG to be a business issue that is embedded in the business, not peripheral to it.

PE firms such as KKR that were early adopters of and believers in ESG are now in a position not only to lead the charge to net zero, but to share their learnings with other firms that may be earlier on their ESG journey. At KKR, ESG is viewed as a way to both protect and enhance value over time and is managed alongside other business issues.

KKR is focused on climate change, data and integrating ESG issues and subject matter expertise into the investment process. The firm views ESG data not as a way to score potential targets, but to identify a pathway to managing ESG-related risk sover the duration of the hold period. Lastly, KKR has identified three measurable ESG pillars across the portfolio regardless of industry: climate, human capital and data responsibility (cybersecurity and data privacy).

PE has an interesting role to play in the transition to net zero, and firms are likely to focus on 6 key areas:

1. Creating and protecting value through ESG
2. Building and deploying teams of resources and expertise
3. Integrating climate and ESG considerations into investment processes
4. Launching standalone ESG or impact funds
5. Spotlighting portfolio companies that are addressing critical environmental and social challenges
6. Collaborating and knowledge sharing to share solutions and best practices

Karim Anani, EY Americas Financial Accounting and Advisory Services Transactions Leader, and Mark Schwartz, Head of IPO and SPAC Capital Markets Advisory, join Winna Brown to explore why SPACs remain highly relevant despite market volatility and regulatory headwinds.

Contact Karim: [email protected] Contact Mark: [email protected]

In 2021, more than 40% of new public companies listed through mergers with SPACs. While SPACs have been around for decades, the boom of the last few years has dominated its narrative in the marketplace. Today, there are hundreds of SPACs seeking "transactable" targets that face potential liquidation in the next year or so if deals aren't made. Against this backdrop, SPAC sponsors are operating in an extremely choppy market environment for SPACs and other new issues, and recently proposed SEC regulation has increased uncertainty in an already uneasy deal-making environment.

Today's episode explores why SPACs remain highly relevant in EY dialogue with operating companies and their backers despite the market and regulatory headwinds.

What is in store for SPACs over the next one to two years and beyond?

• Recent innovation and complexity in SPAC mergers
• Evolving negotiation dynamics in recent dealmaking processes
• Ongoing evolution of what makes an attractive operating company for a SPAC merger
• Transforming and adapting of SPACs in the face of the current challenges

[Episode originally published 12/16/2021]

Tyler Brewster, Senior Director at EY-Parthenon, joins Winna Brown to reveal the drivers behind PE's increasing presence in pro sports and explore both the opportunities and risks for investors.

Contact Tyler: [email protected]

Private equity (PE) is now undeniably present in the world of professional sports. According to Pitchbook, over the past 18 months, PE firms have taken on passive stakes in professional sports franchises and leagues after the NBA, MLB and Major League Soccer loosened ownership rules to include institutional investors. In addition, funds focused on sports have begun to emerge. According to Pitchbook, the total value of PE investments in sports teams and leagues has doubled in the past three years from US$3.3b in 2018 to US$7.1b in 2021.

This episode dives into the current drivers, opportunities and risks shaping PE's presence in the sports industry. We discuss why this is an attractive industry for investors, the opportunities for continued growth such as media rights, asset diversification, and digital transformation, as well as the reputational risks and considerations for PE as it steps into the sports industry spotlight.

Greg Daco, EY-Parthenon Chief Economist, joins Winna Brown to discuss how macroeconomic factors such as inflation, monetary policy and the labor shortage will impact PE investment decisions and theses.

To discover more PE perspectives and insights, visit ey.com/privateequity.

These seven gauges will indicate how much PE activity will take place in the coming year:

1. The positioning of a company in its sector
2. Whether the sector is positively or negatively impacted by inflation
3. How much pricing power a company has
4. A company's ability to pass on higher input and labor costs
5. The price at which a company is acquired considering the higher cost of credit due to higher interest rates
6. How resilient a company is in this economic environment
7. The long-term value potential of a company and the type of value it brings

Pete Witte, EY Global Private Equity Lead Analyst, explores the key themes and market dynamics from 1Q 2022 that are top of mind for PE investors.

PE Pulse is a quarterly report and corresponding podcast miniseries that provides analysis and insights on private equity market activity and trends.

Visit https://www.ey.com/pepulse to view this quarter's summary and infographic.

Five takeaways from 1Q 2022:

1. The macroeconomic environment is top of mind for investors as uncertainty impacts growth, inflation and interest rates
2. PE deal activity decreases 27% from 1Q 2021: despite a softening in activity from the breakneck pace of last year, this level of activity is still quite robust
3. Geopolitical uncertainty: PE firms are using the same playbook they used during the COVID-19 pandemic to manage the impact from the war in Ukraine
4. PE exit activity decreases 60% by value from 1Q21: PE will continue to do what they have always done, which is execute on strategy and look to exit when conditions are more amenable
5. Secondaries market reaches new heights: GP-led deals are key drivers of this trend, as they providing optionality for LPs

Greg Schooley, EY-Parthenon US Value Creation Leader, joins Winna Brown to discuss what tasks PE is outsourcing across business functions such as finance, IT, HR and customer service to create value.

The path to successful value creation in private equity (PE) today goes beyond typical levers such as G&A cost-cutting, sales force effectiveness and strategic sourcing. It's about an approach that leverages digital tools including automation, strategic outsourcing and advanced analytics.

Going forward, PE-owned companies of all sizes may need to look at outsourcing as a way to access cutting-edge technologies and capabilities that can lead to revenue growth opportunities, in addition to reducing costs.

Danny Warshay, Executive Director of the Nelson Center for Entrepreneurship at Brown University, explores how the "See, Solve, Scale" entrepreneurial process can help PE investors screen potential investments.

Partnering with a private equity (PE) firm has become especially attractive for founders of lower and middle market companies that aim for transformational, sustainable growth. As active and engaged investors, PE brings not only capital, but specialized industry expertise and experience, and generally a large network of professionals and operating resources. But to which entrepreneurs and founders is private capital flowing and what factors are influencing those investment decisions?

Danny Warshay is the Executive Director of the Nelson Center for Entrepreneurship at Brown University in Providence, Rhode Island, and author of "See, Solve, Scale: How Anyone Can Turn an Unsolved Problem into a Breakthrough Success." Danny asserts that much of the same "See, Solve, Scale" process that has empowered so many entrepreneurs can also be helpful to investors as a screen for potential investments. The episode also explores how the legacy culture, bias and ways of doing business in PE can shape investment decisions and cause investors to overlook promising opportunities and entrepreneurs.

Entrepreneurs should keep three things in mind when seeking to raise private capital:

1. Seek to fix problems that actually exist rather than be "a solution in search of a problem."
2. Having abundant resources can burden the entrepreneurial process, while scarce resources can actually be beneficial.
3. Aspire for diversity among founders, management teams and investment teams because diverse teams are better positioned for success.

Pam Jackson, CEO of Level20, joins Winna Brown to reveal how mentorship programs can help women build long-term careers in PE.

According to a report that EY teams recently published on diversity, equity and inclusiveness (DEI), the private equity industry's ability to meet stakeholder demands, access capital, win deals and compete for talent is increasingly contingent on progress against DEI metrics. Talent management has become the number two strategic priority across PE firms of all sizes, second only to asset growth. DEI initiatives are now proliferating in private equity as the industry begins to address how its culture has historically impeded diversity.

Level20 is a non-profit organization based in the UK that is dedicated to improving gender diversity in the European PE industry and specifically in senior leadership roles at PE firms.

Read "Can PE win deals if it doesn't deal with DEI?": https://www.ey.com/en_gl/private-equity/can-pe-win-deals-if-it-doesn-t-deal-with-dei

Calculate how long it will take to achieve your diversity goals: https://kenaninstitute.unc.edu/diversity-integration-model/

Ten ways male PE leaders can support and mentor their female colleagues:

1. Serve as role models and mentors
2. Engage with colleagues who are different from yourself
3. Encourage women to realize their value
4. Promote stories of inspiring women
5. Engage in small interventions
6. Embody inclusive leadership
7. Give cultural shifts time to come to fruition
8. Build a diverse talent pipeline from the bottom over time
9. Recognize that recruiting senior women is not a "quick win"
10. Model how long it will take to achieve your diversity goals with the EY Diversity Integration Model