NextWave Private Equity

In this episode, Laura Grattan, Managing Director at Crosspoint Capital, and Jeff Vogel, Head of the Software Strategy Group at EY-Parthenon, join Winna Brown to explore how PE firms can position themselves to win tech deals in today's highly competitive market.

Contact Laura: [email protected] Contact Jeff: [email protected]

According to the latest EY PE Pulse report, 2021 was the year of the tech deal: 30% of total capital deployed last year was allocated to technology companies. The technology sector, once just another industry vertical, now permeates every sector, claiming an ever-increasing share of deals as more companies differentiate themselves based on their technology regardless of the industry in which they sit or serve.

Crosspoint Capital focuses on the cybersecurity, privacy and infrastructure software sectors. PE firms that choose a niche specialization in the tech sector can bring deep sector expertise that translates to value creation for their portfolio companies. In an increasingly competitive tech environment, PE firms that focus on a highly targeted category of assets can find themselves in a differentiated position. They are able to quickly discern where to spend time, recognize the opportunities and limitations of an asset, and identify patterns indicative of future success.

Three characteristics of today's tech deal environment include:

1. Increasing presence of and need for club deals
2. Increasing speed at which deals are clearing
3. Developing deal theses early

Pete Witte, EY Global Private Equity Lead Analyst, explores the key themes and market dynamics from 4Q 2021 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 4Q 2021:

1. 2021 was a year for the record books for private equity (PE) firms, with investment activity surpassing the trillion-dollar mark for the first time.
2. 30% of the total capital deployed in 2021 was allocated to technology companies, followed by firms in the consumer space, which saw 24% of aggregate deals by value.
3. Growth equity funds raised US$102b throughout the year, up 53% from 2020 and up 74% from the average raised for growth funds over five years prior.
4. PE exits saw record activity levels in 2021, with value and volume seeing increases of 107% and 56%, respectively.
5. If 2021 will be remembered for anything, it will be the way that ESG and issues of sustainability catapulted to the top of PE firms' agendas, driven by broad recognition that it's the right thing to do and pressure from the whole gamut of PE's stakeholder groups.

In this episode, Nic Humphries, Senior Partner and Executive Chairman of Hg, joins Winna Brown to explore how Hg's philosophy of curiosity and experimentation has enabled it to become one of the most active technology investors in the world.

Contact Nic: [email protected]

As an early adopter of artificial intelligence (AI), machine learning and analytics, Hg has embraced an investment and organizational philosophy of curiosity and experimentation that has enabled it to become one of the most active technology investors in the world.

In this episode, Winna and Nic explore:

• Why AI and machine learning are a lead indicator and differentiator of Hg's market position
• How AI has increased the sophistication of Hg's origination process
• Where AI has made transformative impacts in the portfolio
• Why AI has caused job creation and retention rather than attrition
• How AI will drive the investment landscape moving forward
• Why people skills will remain vital in PE despite the increasing presence of AI and data analytics

4 areas where AI can create and unlock value in PE include:

1. Churn propensity modeling
2. Upsell and cross-sell modeling
3. Target identification and origination
4. Predictive analytics across the portfolio

In this episode, 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.

Tricia Glynn, a Partner at Advent International, shares best practices from Advent's renowned DEI program and discusses how private equity (PE) firms can build an inclusive culture and incorporate diversity, equity and inclusion (DEI) into their value creation thesis. Tricia has been a PE investor for over 20 years and currently serves on boards such as Lululemon and Olaplex, and co-leads Advent's North American Retail, Consumer and Leisure sector team.

To read EY's new report on DEI in PE, visit ey.com/privateequity.

DEI is not PE's strength. According to Preqin's Women in Alternative Assets report, only one-fifth of industry employees and 12.2% of senior roles were female in 2020. The situation for underrepresented minorities in the industry is dismal, with only 2% Hispanic and 1% Black venture capital (VC) investors in the US (Gompers and Kovvali, 2018). As of December 2020, nearly 50 buyout firms and investors had signed a global initiative launched by the Institutional Limited Partners Association (ILPA) to improve diversity among their ranks; a substantive and public step in the right direction, but as Tricia says: "The industry has a long way to go."

A PE talent strategy must incorporate a proactive approach to DEI with a strong tone set "from the top," ensuring diverse employees feel wanted, valued and sponsored. Incorporating a comprehensive DEI strategy addresses a firm's commitment to elevating society while expanding its talent pool and creating new perspectives in investing. Advent views DEI as foundational to its business model, competitive positioning and talent strategy so it can be both the chosen buyer and chosen employer.

Five things PE can do to build DEI companies and cultures include:

1. Find, engage and learn from DEI experts in your network.
2. Hire experts (i.e., advisors, academic researchers) who understand your industry and know how to drive DEI culture.
3. Track data to identify your biggest problems, determine where you want to drive change and hold yourself accountable.
4. Give permission to speak openly: fear of "saying the wrong thing" holds leaders back from engaging in DEI so allowing well-intentioned people to learn in real time is important.
5. Hold everyone in the organization accountable.

Entrepreneurs and companies seeking investment may find a family office (FO) a compelling alternative to private equity (PE).

According to Preqin, family office deals currently represent 2.5% of total M&A deals, a small share but one that has been steadily increasing since the great financial crisis. The Economist estimates family offices manage assets worth an estimated US$4 trillion, with individual offices averaging $500 million to $1 billion in AUM according to Forbes.

Our guest is Katherine Hill Ritchie, Director and Board Member of Nottingham Spirk, a 50-year-old innovation firm with a family office. Katherine has 18 years of finance, investing and family office experience and started her own firm working with family offices and alternative investment funds and companies. Katherine is also an Angel Investor and advisor who supports and invests in female and diverse founded venture capital funds and companies and is on the board of several organizations. She has spoken at over 100 global investment conferences, lectured at universities, and was recently awarded a lifetime achievement award for her family office work.

Contact Katherine: [email protected]

8 things companies should know about FOs:

1. FOs can and do compete with PE for direct investments.
2. FO fund structure, investment thesis, acquisition requirements, portfolio and shareholder mix are frequently opaque.
3. FOs have flexibility to change their focus.
4. FOs are not beholden to a 7-10-year exit timeline.
5. IPO is not always the exit strategy for a FO.
6. FOs don't face the same regulatory requirements as funds.
7. FOs may or may not care about ESG requirements for their investments.
8. Companies must build relationships with FOs to ensure alignment of objectives.

Pete Witte, EY Global Private Equity Lead Analyst, explores the key themes and market dynamics from 3Q 2021 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 3Q 2021:

1. Global M&A markets are on their way to a record year, with private equity (PE) in the driver's seat.
2. PE as an asset class continues to grow, with retail and insurance markets positioned to drive future asset growth.
3. PE firms' continued focus on the technology sector is driven by rising needs for security, automation and the digital transformation of critical organizational functions.
4. Health care is garnering significant interest from PE due to favorable macro tailwinds, long-term growth expectations and an anticipated increase in consumer spending.
5. Deal activity is not limited to large-scale deals; middle market deployment is the highest since the global financial crisis.

Hanne Thornam, EY Norway Head of Climate Change and Sustainability Services, joins Winna Brown to share why PE is in a unique position to lead our transition to a low-carbon, circular economy.

Contact Hanne: [email protected]

As private equity (PE) firms focus on ESG, they must also pivot to a long-term, forward-thinking mindset.

For an industry accustomed to using historical data to project the next four to five years, this is no simple task; however, it is an existential one. Climate change will mean our world looks very different in a decade regardless of the action we take (or don't take), and PE firms are uniquely equipped to lead this mission, should they choose to accept it.

ESG topics have both financial and commercial relevance, and PE must define and track KPIs that are specific to each portfolio company. It is no longer optional to engage in the ESG conversation, as a lack of awareness is an inherent business risk.

Two overarching climate scenarios are possible, both of which require comprehensive adaptation and imagination:

• A warming scenario in which rising temperatures impact access to raw materials, stoke political stability and disrupt value chains
• A transition scenario characterized by increasing regulation, bans and changes in technology and consumer preferences

Six ways PE firms can shift their mindset to increase their climate competence and confidence:

1. Champion a long-term, forward-looking perspective
2. Cross-pollinate climate data across workstreams
3. Incorporate climate scenarios as core data points
4. Engage diverse perspectives
5. Embrace complexity and curiosity
6. Verify competence on climate and environmental risks in investment teams

Political risk is creating challenges and opportunities for global organizations, including private equity (PE) firms and investors who are increasingly exploring cross-border deals as valuations soar across the US and Europe.

On a previous episode, we talked about why PE firms must embed a geostrategy so they are able to recognize unique opportunities and use that strategy to inform their investment decisions. Today, we dive into three specific areas of geopolitical risk that are especially impactful for and relevant to private equity funds right now:

1. COVID-19 pandemic: increased tension and competition between big regional powers will lead to an environment in which PE must carefully consider and anticipate the implications for cross-border deals.
2. Tech sector: governments and regulators will have a massive influence on the tech sector in the coming years and it will create both political risks and opportunities for investors.
3. Climate change: increasingly active governments and regulators will create a patchwork of environmental legislation which will make it much more difficult to operate across markets.

Contact Famke: [email protected]

Luke Pais, EY ASEAN Private Equity Leader, explores why Southeast Asia is a vibrant region for PE investors who adeptly navigate local dynamics.

Contact Luke: [email protected]

According to the Preqin Investor Survey conducted in November 2020, Southeast Asia is among the top three emerging markets ideal for private equity (PE) and venture capital (VC) investment in the next 12 months. The region is welcoming to foreign capital, with entrepreneurs and family conglomerates actively seeking capital and focusing on succession planning.

PE's field of play in the region is dynamic. Because the region demands quality infrastructure to support its burgeoning and young population, the field of play includes specialist funds focused on real estate, infrastructure, renewable energy and digital. The technology sector is especially vibrant and impact funds are becoming more prevalent. While credit has historically been a domain of banks, PE credit products are emerging in the region given balance sheets have become healthier since the great financial crisis of 2008. Lastly, family conglomerates in the region often function like PE funds and compete against PE funds in the deal space.

PE has historically done well in the region by carefully selecting the right companies and preparing them to expand internationally. As a result, PE-backed companies have been attractive to multinationals and trade sales to strategic investors in the US, China, Europe and Japan have been the dominant exit thesis in the region.

Learning outcomes:

1. PE should consider localizing their strategy to include a regional headquarters in Singapore in combination with strong market coverage in various other Southeast Asian countries.
2. PE firms must be clear about the value they bring to the table in a competitive deal environment in which discussions have shifted from valuation to value proposition and value creation.
3. Successful PE funds have built local relationships over time as companies seek partnerships rooted in shared aspirations.
4. ESG is increasingly important during due diligence, as access to capital depends on achieving ESG benchmarks and commitments.