NextWave Private Equity

Cybersecurity professionals John Nugent, Vice President at Apax and Paul Harragan, Associate Partner at EY-Parthenon, explore how PE can manage cybersecurity risk and why it should be viewed as a value creation lever rather than a cost.

Contact Paul Harragan: [email protected]

Cyberattacks happen constantly, and companies display a wide range of preparedness. Private equity (PE), like any other industry, is not immune from this growing threat. 1H2021 saw increase in ransomware attacks in PE portfolio companies, which is especially troublesome for an industry that has traditionally taken a less rigorous approach to information security and cyber defense. PE has, however, begun to embrace the necessary investments needed to understand their intrinsic risk, prepare for the inevitable breach and respond quickly.

While it is inherently difficult to gauge or predict the monetary cost of a breach, PE must consider that a breach can degrade an asset's sale price or, in rare cases, be a "dealbreaker" altogether. In addition to potential impact on transactions, skyrocketing insurance costs render the cost of negligence far greater than the cost of investing in a comprehensive cybersecurity strategy.

Cybersecurity due diligence is increasingly becoming industry standard and should focus on past, present and future. For PE, future risk is an especially critical consideration since capital deployment can dramatically change the threat landscape of an asset.

Five gold standard cybersecurity practices for PE include:

1. Understand your threat landscape
2. Identify what a hacker would find valuable and attractive about your company
3. Identify critical business functions and adopt procedures to monitor, defend and preserve functionality in the event of an attack
4. Inform security leadership of the technology strategy and broader business plan so they can anticipate changes to the attack surface
5. Understand how new technology can generate new attack vectors and impact your threat landscape

Pete Witte, EY Global Private Equity Lead Analyst, explores the key themes and market dynamics from 2Q 2021 that are top of mind for PE investors.

The 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 the summary and infographic.

5 takeaways from 2Q 2021:

1. Exit activity via M&A and IPO are seeing record levels of activity, which is impacting the entire PE life cycle, including fundraising.
2. Fundraising is picking up as demand from investors strengthens and funds start to close in earnest once again.
3. Deal activity and deal volume are on track to comprise the most active half-year on record.
4. Deal sizes are increasing due to increasing post-pandemic certainty and the accumulation of dry powder.
5. Club deals are increasing in prevalence for large-scale deals.

Lindsey Kiely and Bhakti Nagalla of the EY-Parthenon Consumer Industries and Private Equity practices join Winna Brown to explore the consumer product categories, behaviors and trends investors should keep an eye on.

Contact Lindsey: [email protected] Contact Bhakti: [email protected]

The consumer products and retail sectors have certainly been ones to watch. The COVID-19 pandemic both accelerated existing trends and forced the industry to accommodate novel consumer need states and demand shifts.

Evaluating the sustainability of growth in these categories has become a key part of the diligence process as investors struggle to predict future consumer demand. In today's competitive deal environment, investors are seeking proprietary deals or early LOI more aggressively and are also pivoting to industries that support consumer goods and services (i.e. contract manufacturing, logistics, technology).

Consumer behaviors have shifted as they spend more time researching products online, increasingly favor masstige price points and demand next-level experiences from brands and retailers both online and offline. These shifts are causing investors to more heavily scrutinize a brand's online presence, pricing model and cost models.

Interesting categories for investors to watch include:

1. Consumer health
2. Pet health
3. Home products
4. In-home entertainment and hobbies
5. Online retail
6. Supporting industries

Greg Brown, Executive Director at the Institute for Private Capital and Finance Professor at the University of North Carolina (UNC) Kenan-Flagler Business School, joins Winna Brown to discuss what the Institute's academic research says about PE's performance and the role private capital plays in the global economy.

To get in touch with Greg, email [email protected]

The Institute for Private Capital (IPC) is a non-profit, multi-university research initiative that's housed at the University of North Carolina (UNC). Its mission is to improve public understanding of private capital's role in the global economy by providing unbiased and independent research, conducted by a network of academic affiliates, with support from private sector companies. There are more than 35 member institutions involved in IPC – EY is one such institution – and these institutional supporters play a critical role in ensuring IPC research solves specific, practical issues affecting the PE industry.

Two topics are consistently top of mind for PE investors: PE's role in the investment portfolio and the specific factors that predict future returns. IPC research explores an array of additional topics, and some of their findings include the following:

• Portfolios with private fund investments have superior returns on a risk-adjusted basis.
• There is a "risk-return pecking order" in which PE produces better risk-adjusted outcomes.
• The performance of individual deal partners is a reliable indicator of future fund performance.
• There are distinct determinants of performance at various stages of a fund's life cycle.
• PE makes meaningful and direct contributions to portfolio company operations.
• After PE enters a new market, there is a positive spillover to the broader economy in the form of an overall productivity increase.

Over the coming years, there are two major focus areas for research and discussion in the academic community regarding private equity:

1. To more deeply understand how private assets fit into the broader portfolio management process
2. To identify performance drivers at PE-backed portfolio companies and explore how this has changed over time

Jeff Vogel, EY-Parthenon US Managing Director and Head of the Software Strategy Group, joins Winna Brown to explore the complexities and key trends shaping the software deal landscape.

Visit ey.com to read our latest private equity perspectives.

The "software economy" is comprised of companies that sell or license software as well as software-enabled business services companies that differentiate themselves on the basis of their software.

Because a software asset is especially complex to valuate and diligence, PE firms and the advisors who serve them have transformed their talent strategy to attract a wide spectrum of operational experts ranging from serial CTOs to young entrepreneurs. A passion for technology combined with partnering experienced executives with curious young talent helps teams remain agile and responsive to rapid change.

A software asset is different from a traditional asset for three important reasons:

• Markets are amorphous and difficult to size.
• Revenue potential and gross margins are high; however, R&D expenditure is also high because the product is must constantly evolve to stay competitive.
• Technical debt, unlike traditional debt, is difficult to quantify and does not appear on a balance sheet, so a PE investor may unwittingly sign up for obligations requiring significant capex.

Five trends shaping the PE/software deal landscape:

• Role of PE: PE is shaping the software landscape by providing access to capital and focusing on building companies.
• Long-term value: PE is increasingly prepared to hold software assets for longer and are therefore optimizing for LTV.
• Growth: high valuations require PE to underwrite for growth, not solely for cash flow.
• Hybrid deals: PE firms that were traditionally majority stakeholders are now considering minority stakes.
• PIPE deals: private investment in public equity (PIPE) deals are leading to cross-fertilization in management and strategy between public and privately held companies.

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.

For more information on Advent's DEI program, visit https://www.adventinternational.com/about/diversity-and-inclusion/

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.

Pete Witte, EY Global Private Equity Lead Analyst, explores the key themes and market dynamics from Q1 2021 that are top of mind for PE investors.

The 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 the summary and infographic.

5 takeaways from 1Q 2021:

1. The first quarter of 2021 was a blockbuster quarter for PE deals, and in fact was the highest of any quarter in the past decade.
2. Technology gained maximum traction during the COVID-19 pandemic and remains a powerful thesis.
3. The SPAC market expanded at an unprecedented rate during the COVID-19 pandemic.
4. Holding periods could increase as a result of the pandemic, although IPO exits rebounded strongly in 1Q.
5. Finding the right target at the right price remains a challenge in an uncertain market.

DeJeana Chappell, EY National Workplace Leader and Senior Manager in the EY Corporate Real Estate Practice, describes the focus areas and priorities of a robust workplace reimagination strategy.

Contact DeJeana: [email protected]

Visit ey.com to read our latest private equity perspectives.

The COVID-19 pandemic has given companies an opportunity to reimagine their real estate and talent strategies and self-disrupt legacy practices, philosophies and ways of working to shape their future workforce and workplace strategy.

While many companies have evolved their workplaces in recent years, not all have confronted and fully digested both the real estate and talent implications of flexibility and remote work. The COVID-19 pandemic has both accelerated existing momentum on this topic and catalyzed new, and perhaps overdue, conversations.

There is an undeniable disconnect between historical office occupancy metrics and executive perception. Industry data suggests that, pre-pandemic, average annual office occupancy in the US across sectors hovered around 40%; a stark contrast to leadership perceptions that teams were onsite every day. In addition, the legacy equation that high office occupancy equals high productivity has been proven obsolete over the last year.

As executives struggle to reimagine their workplaces, three key focus areas have become tablestakes:

1. Health and safety considerations such as air filtration, circulation, elevator protocols and cleaning protocols
2. Cost savings such as square footage per headcount, geographical location strategy, reducing or eliminating space altogether, and real estate capex needs
3. Cultural implications of flexibility, autonomy, productivity, personal accountability, collaboration and connection

A robust reimagination exercise must do the following:

• Survey your employees to understand sentiment and needs, and know that feedback might shift over time
• Capture leadership insights on business needs and objectives
• Recognize that one size does not fit all
• Leverage both quantitative and qualitative data to build a holistic story around the opportunity
• Balance cost savings with human and cultural needs
• Identify employee personas and their respective scenarios
• Take a cross-functional and inclusive approach

Andrés Sáenz, Líder Global de Private Equity para EY, se une a los socios de EY-Parthenon, Ángel Estrada y Juan David Taboada, para explorar qué significa la NextWave Private Equity para Latinoamérica y cómo la digitalización, la transparencia, el propósito y el talento están transformando a esta industria en la región.

Visita ey.com para escuchar la conversación completa de 30 minutos.

Contact Ángel: [email protected] Contact Juan David: [email protected]

Andres Saenz, EY Global Private Equity Leader, joins EY-Parthenon Partners Ángel Estrada and Juan David Taboada to explore what NextWave Private Equity means for Latin America and how digitization, transparency, purpose, and talent are transforming PE in the region.

Ángel Estrada and Juan David Taboada, EY-Parthenon Partners in Mexico City and Bogotá respectively, join Winna Brown to discuss industries of interest for PE in LATAM.

Contact Ángel: [email protected] Contact Juan: [email protected]

Visit ey.com to read our latest private equity perspectives.

The number of Limited Partners (LPs) with exposure to Latin America (LATAM) continues to trend higher. According to the latest survey from the Latin American Venture Capital Association (LAVCA), about two-thirds of large LPs currently have exposure to LATAM, up from less than half five years ago. Moreover, allocations are rising: LATAM investments account for nearly 25% of LPs' emerging market investments, up from about 15% five years ago.

LATAM is a heterogeneous region with a growing population and household income but is not yet mature, therefore providing attractive opportunities for private equity (PE). Industries with especially high potential for growth include:

• Agribusiness
• Renewable energy
• FinTech
• Education
• Health care
• Third-party logistics

In addition, one of the biggest regional opportunities is the consolidation of businesses into truly regional "multilatinas." While this has proven to be a daunting aspiration, the size and scale of the opportunity remains compelling for PE investors.

A few critical data points PE investors must understand before investing in LATAM include:

• Each country has unique political, economic, regulatory and cultural factors to understand and navigate.
• Every country of interest should be analyzed separately.
• Reliable data is elusive, therefore increasing its value and importance.
• Many companies are family- or entrepreneur-owned.
• Corporate governance is less mature than in the US or Europe.
• Investors must be flexible in dealing with stakeholders.