December Private Equity & CFO Report

The Private Equity Story

“There is a growing recognition that this can’t go on for much longer.” ~ David Kamo, Goldman (as reported by the WSJ.)

The great PE activity freeze has begun to thaw. Deal activity dropped dramatically across the board in '23 off 10-40% depending upon what measurement you look at. But from multiple investor conversations, it's clear that barring a change in the macro picture that PE activity will pick up in '24.

That activity, at least initially, will be highly targeted.

Increased certainty around interest rates, an IPO market that is off death's doorstep (KKR backed BrightSpring Health filed for a US IPO on Jan 2), a need to generate liquidity, some seller price capitulation and still massive amounts of dry powder will push activity forward.

'23 forced both sponsors and operators to re-evaluate, streamline and focus. That type of refocusing is periodically needed and often sets the stage for disciplined and profitable activity.

The CFO Story

At the portco level, that refocusing is felt most acutely in the CFO chair. As one operating partner told me, they're going to be re-assessing their CFOs through a different lens in '24 with an eye toward to exits. Here's how I would summarize the thinking: "Can this CFO accelerate our hold time and drive exit value?"

There's a focus on training up new CFOs vs. recycling CFOs. With the push for liquidity, the CFO role will be pushed even more into the spotlight.

Enjoy reading this collection of data, stories and resources for DECEMBER. Please DM with typos/errors.

1. DEAL CREATIVITY AND RECORD LEVELS OF DRY POWDER

While fundraising was stunted in 2023, reduced capital deployment led to an 8% increase in Global Dry Powder to $2.59 trillion in 2023, an amount just shy of the GDP of France.

The top 25 PE firms held 21.8% of the total dry powder, with 19 of these firms based in the US. Apollo Global Management Inc. had the largest amount of uncommitted capital at $55.14 billion.

In the deals that did get done, creativity and low debt strategies led to smaller investments like corporate carveouts and add-on transactions.

S&P expects that the technology, energy and healthcare sectors will remain attractive for private equity.

2. DEPLOYMENT STRATEGIES FOR '24

Pitchbook sounded out PE advisors to try to understand how sponsors will likely deploy capital in '24. Here are some key thoughts:

1. Optimizing Existing Assets: PE sponsors are pivoting to enhance their current holdings, focusing on divesting non-core segments to bolster balance sheets and improve operational efficiency.
2. Divestitures and Carveouts Trend: PE firms are expected to sell off parts of their portfolio companies to streamline focus and raise capital. Such transactions often attract strategic buyers willing to pay a premium.
3. Rise of Add-on Acquisitions: With the challenge of securing cheap debt, add-ons have become essential, allowing PE firms to incorporate smaller businesses into their platforms and boost EBITDA.
4. Focus on Internal Growth: PE managers are likely to continue growing their existing platforms, indicating that 2024's deal activity will mainly involve add-ons, mirroring 2023's trends.

3. THE CFO AS COO

I've long argued that the best CFOs are defacto COOs, especially in mid-market companies where the job is arguably more strategic and more interesting from an impact perspective. Operational #CFOs take many of the COO activities on this chart (via Nicolas Boucher) and work hand-in-hand with the#CEO on the activities on the left. CFOs who step into this breach create enormous value.

Crist/Kolder's Clem Johnson and Russell Reynold's Jenna Fisher see a blending of CFO and COO responsibilities and a new demand for CFO-Plus, operationally focused CFOs. RRA data shows that 39% of S&P 500 companies have a COO with CFOs often stepping into the breach.

4. AI VALUE CREATION AND RISK FOR THE CFO

I recently hosted FairNow 's Guru Sethupathy for a conversation on AI value creation and risk for the CFO. Guru highlighted 3 general AI use cases: Efficacy, Experience and efficiency. He also talked in-depth about the risks and implementation challenges.

"Just finished a fantastic webinar on AI with industry experts Scott Engler and Guru Sethupathy. This was, by far, the most helpful to me" ~ Ed Franowicz , Leaderboard

It's still available for replay for another two weeks: https://www.dhirubhai.net/events/aiandthecfo-governanceandvaluec7138369822626680832/comments/

5. AI FOR FINANCE AND BEYOND

McKinsey sees AI impacting the finance function in 3-ways: Automation, augmentation and acceleration.

• Automation: performing tedious tasks
• Augmentation: driving productivity
• Acceleration: extracting and indexing knowledge to speed decision-making and innovation

They advise CFOs to think about implementation in three ways:

1. CFOs must strategically identify and prioritize high-value investment opportunities in gen AI, ensuring a balanced focus between gen AI and other significant projects.
2. Integrating gen AI into business processes, as exemplified by Microsoft and Morgan Stanley, can enhance various aspects from customer attraction to operational cost reduction.
3. CFOs should proactively engage with gen AI, staying innovative and managing risks, by understanding new technologies and allocating capital for profitable, visionary growth.

Pulling out to the organizational level, here's how organizations are currently using gen AI by function.

6. SOFTWARE TO LEAD '24?

Lower valuations of private assets (compared to public markets,) a revival in bank lending for leveraged buyout (LBO) transactions, a host of platforms ready to build upon and substantial reserves of PE dry powder could drive software activity in '24.

"PE has built up a war chest of 5,000 portfolio companies to go vacuum up lots of other great software companies," said Ben Howe , CEO of AGC Partners . Howe is expecting that 80% will be add-on deals. 2023 levels reached pre-pandemic levels. Notably, Clearlake Capital Group and Insight Partners completed their acquisition of Alteryx for $4.4 billion

7. THE NEW GROWTH PLAYBOOK: DISCIPLINED COST AS A COMPETITIVE ADVANTAGE

PE-Xcelerate Executive Solutions recently hosted Insight Operating Partner Roxi Wen to talk about growth with cost discipline. Roxi highlighted the fact that disciplined growth is not only an imperative, but a team capability that creates competitive advantage.

8. TOP FINANCE PRIORITIES FOR 2024

Gartner listed the top priorities for CFOs in 2024. Note #4, increasingly change management (traditionally HR) is landing on the CFOs remit.

9. THE LARGEST US PE FIRMS BY AUM

1. Blackstone $1.0 trillion
2. Apollo $598 billion
3. KKR $510 billion
4. The Carlyle Group $381 billion
5. Bain Capital $165 billion
6. TPG Capital $137 billion
7. Thoma Bravo $127 billion
8. Silver Lake $98 billion
9. Vista Equity Partners $96 billion
10. Insight Partners $90 billion

PE-Xcelerate '23

Closed out 23’ with momentum at PE-Xcelerate. We:

• wrapped up our first Private Equity CFO 5-week Accelerator with 9 CFOs
• issued our first accreditations
• booked our first Performance CFO keynotes for ‘24
• planning our first #chro accelerator
• are launching a portco execution platform

A taste of the early feedback from CFOs: "This course “super-charged” my roadmap to becoming a top private equity CFO" | “Invaluable" | "Game-changer"

Our next PE CFO Accelerator 5-Week virtual program taught by experienced PE CFOs starts Jan 23rd. Go here to reserve a spot: https://www.pexcelerate.com/cfo-accelerator-jan-24