Private Equity: Creating Value in the Current Environment

Private equity has become a major force in financial services.? Whilst different firms have preferences as to whether they want to take balance sheet risk by buying banks or prefer more capital light investments such as payments, many firms have developed deep sector expertise.? Amidst a change in the economic environment and structurally higher costs of capital how will private equity firms drive value in a market that’s as dynamic as it is demanding?

Private equity benefited from favourable trends post financial crisis

Post financial crisis private equity has generated internal returns of 15% plus.? Analysis of how this has been created point to a combination of market effects and improvement of operational performance.? The improvement in market valuations has been a primary driver of value creation.? Whilst private equity has benefitted from a lower cost of financing and ample liquidity, generating increased revenues and expansion of margin has played a very important role in the exits achieved.? In the new environment, with higher costs of capital and potentially lower economic growth operational levers will play an even larger role in achieving superior results.

Driving operational performance improvement

Private equity portfolio teams play an important role alongside management to drive a performance culture and deliver operational improvements.? By its nature the precise levers to pull vary by company, and situation.? In some cases, it may be around market positioning, growth of customer numbers, investment in brand, in some cases M&A, in some cases operational efficiency and reduction of cost.? More likely than not there will be a combination of levers needed.

Technology is likely to be a key enabler of organic growth and efficiency improvement.? There are enough stories about the challenges in successfully executing transformation that this will remain a differentiator in the near term.? However, CapEx tends to be front-loaded and the benefits realised over time.? Looking forwards this will places more pressure on managing expenditure, realising benefits sooner or extending holding periods.

The role of artificial intelligence in value creation

Artificial intelligence (AI) has the potential to be a game-changer but we are at an early stage and private equity and companies are experimenting with use cases. Incorporating AI into investment strategies, has the potential to optimize operational functions and carve out new pathways for revenues. AI platforms can also aid in sculpting a more robust value creation narrative, ultimately strengthening the position of an investment at exit.

AI can enable firms to reduce costs by automating routine tasks and giving managers the space to focus on the bigger picture. For example, AI can be used to develop chatbots for customer service teams, streamline the lending process, and improve KYC and AML procedures. It can further give insights into market trends, helping firms act quickly and confidently.?

The potential of the CEE region

The financial services sector in CEE provides a fertile ground for private equity players. Firms are finding that this part of Europe offers a variety of investment opportunities. Here, it's not just about leveraging financial engineering but harnessing a deeper understanding of the regional nuances that shape the sector's investment climate.

The region's financial markets are less saturated, which means there are more chances to find unique deals. Additionally, the economic growth in these countries is often faster, offering attractive prospects for investments to grow in value.

Private equity firms active in the CEE region are not just investing in companies; they're actively improving these businesses. They use their expertise and resources to strengthen financial services companies, helping them become more efficient, more competitive, and more profitable.

When it comes to the financial services sector, investors need to keep a close eye on regulatory environments, which vary from country to country. Being aware of these rules and adapting to them is essential for success. With the right approach, strategic investments in financial services in the CEE region can yield substantial rewards. The key is having a deep understanding of local market trends and being agile enough to adapt to economic shifts.

Rethinking value creation strategies

The next phase of private equity investing is likely to focus more on robust, operationally driven strategies. This shift necessitates a balance of keen operational oversight with the infusion of technological advancements like AI to maximize returns.

The financial services sector, especially within the CEE region, offers a compelling narrative for PE firms. Through a dynamic re-evaluation of investment approaches and an unyielding commitment to operational excellence, the sector promises the prospect of thriving in an era marked by transformation and opportunity.

The journey is not easy or straightforward – but it can be a rewarding one if approached with a forward-thinking strategy underpinned by experience, innovation, and a deep understanding of the markets in which we operate.