The continued expansion of financial assets looks to be an enduring feature of the investment environment, which private equity (PE) firms will need to reckon with for a long time to come. However, the very forces that rescued the boom-year investments—record low interest rates and plentiful capital—are magnifying two issues that are making it more challenging for general partners (GPs) to profit from investments they make today. First, asset prices are and will remain high as investors of all types wield record amounts of capital and are willing to bid up acquisition multiples to acquire assets. Plentiful low-cost debt merely adds upward pressure on prices and ensures they will stay high.
Instead of waiting for gains from market shifts referred to as “beta” to do their work for them, leading GPs are stacking the odds in their own favor. They are stepping up their due diligence to ensure they can identify the winning factors in a target company that can become the basis for a value-creation plan that can withstand any economic or market climate. As discussed in an earlier post, “