http://dealbook.blogs.nytimes.com/2009/07/23/whats-ahead-for-private-equity/

Interesting article a few days ago in the NYT on the future of Private Equity and what some recent studies are predicting. Through the Lauder Institute at Penn, we had the privilege of sitting down and meeting with some pretty important Private Equity fund managers, and all of them seem to be indicating the same strategy and reasoning:

1) Growth of portfolio companies through acquisitions. They're retrenching, and ensuring that the companies that they've already invested in continue to do well...and they're exploring a lot of M&A through their portfolio companies as the could benefit from growing their exisiting businesses and the synergies of merging them.

2) Cautious with new investments...They're still looking at opportunities that exist, but the bar has been set higher for their entry point. The fact that a company is "cheap" or trading at a good multiple is nowhere near being a sufficient justification for them to get involved.

3) Private Equity as a whole will evolve into adding more value to companies. Whereas the current split is probably 90-10 or 85-15 finance oriented versus strategy oriented, many of the managers have argued that is likely to switch. Strategy is increasingly important as they try to build value within their existing portfolio companies…and that isn’t done just by cutting costs, it’s by ensuring that their companies work more efficiently and better than their rivals. Instead of just hiring Bain to do the strategy piece of a transaction, they are looking to bring people on board within the fund itself that can manage that part of the transaction effectively.

This is good news, and will probably help change the way Private Equity is viewed in the world. If these funds start becoming intimately involved in ameliorating companies, (beyond just reducing their costs and increasing their multiples) I think you’ll find more people looking to work with PE funds. The days of easy credit and flipping companies based on financial ratios/leverage/multiples are long gone, and a new era of adding value and helping companies ameliorate themselves strategically has come.