The Best Private Equity, VC & CFO Insights for May 2023

The CFO Story

The CFO role continues to ascend in importance with top talent courted by multiple opportunities leading to sporadic bidding wars. In-market CFOs with successful Private Equity exits or public stints have to quickly sort through many opportunities - this dynamic is forcing suiters to identify and vet talent earlier. Meanwhile the role itself continues to gain greater importance with a renewed emphasis on efficient growth (top and bottom line growth).

The Private Equity Story

Private equity (PE) continues to face macroeconomic headwinds, elongated hold periods, tighter lending and instability in the banking system. McKinsey notes four trends in Global Private Markets: 1. Everything is happening on an extended timeline. 2. There is a flight to quality in fundraising. Midsize funds with weaker track records are finding it challenging to raise money. 3. There are different realities across geographies and asset classes. Europe lags behind in venture capital and growth compared to the growing Asian and North American markets. Infrastructure investing and private credit are gaining traction, driven by banks reducing their corporate debt exposure. Secondary markets are witnessing increased demand and a larger pipeline of deals. 4. Firms are increasingly prioritizing value creation during the holding period. Many funds are establishing strong operating-partner groups and engaging in active management of their portfolio companies. They are also paying attention to areas such as data and analytics, sustainability, cost management, and resilience.

Enjoy reading the collection of data, stories and resources for MAY. Please DM with typos/errors. South Korea in May is pictured above.

1. MEGA FUNDRAISING GREENSHOOTS

VC and PE Mega-funds raised close to $50-billion in April, the 4th highest mark since 2020. Still, VC mega-fund capital raising is at just a third of its 2022 rate through April.

2. DEAL ACTIVITY UPTICKS LED BY TAKE PRIVATES & TECH

According to EY , the private equity (PE) market saw a surge in take-private deals, accounting for more than 80% of PE activity by value, as firms sought to selectively take advantage of reduced public valuations.

The PE IPO market remains on life support with just 4 PE-backed IPOs in Q1, though 29 are in the pipeline.

Overall deal activity continues to slowly pick up, this EY bar chart shows the increase in PE deals across Q1 with the tech sector accounting for 50% of total PE deal activity in the first quarter. Despite potential slowdowns in other investment sectors, cybersecurity is expected to be resilient and continue to see growth.

3. CAN CFOS CAN BE MORE HUMAN, DRIVE PERFORMANCE AND BE MORE DISCIPLINED?

Gartner is arguing that CFOs who take a more human centered approach can drive performance and efficiency. These "human leaders" (are they implying the rest are inhuman?) drive employee intent to stay up by 12 percentage points, employee wellbeing by 30 points and engagement by 37 percentage points, respectively. A human leader exhibits these traits:

• Adaptivity: Employees now seek a personalized and flexible work experience, including control over when, where, and how they work. Finance leadership needs to recognize and respond to these demands to attract and retain talent.
• Empathy: Empathetic leadership goes beyond mere kindness and involves understanding the motivations and experiences of others, leaving biases behind. CFOs need to cultivate empathy, especially considering the high burnout rates among their direct reports and the expectations of emotionally intelligent leadership from the emerging Gen Z workforce.
• Authenticity: Leaders should be personally vulnerable and authentic, fostering an environment where employees feel comfortable taking calculated risks without fearing negative consequences. Overcoming fear and promoting authenticity can help drive innovation and create a more inclusive work culture.

They argue that by putting people at the center and considering the broader impact, CFOs can effectively balance financial goals while being human leaders, making tough economic tradeoffs, and protecting financial outcomes for the entire organization.

4. AI & PE

The explosion of AI awareness driven by ChatGPTs rapid assimilation into the workplace has sparked continuous conversations and debate.

Thoma Bravo managing parnter Seth Boro?told Axios that the topic of AI is ever present in investment conversations: “It is very hard to have a discussion, even in our world, where the topic doesn’t come up, and it’s a big area of focus in our portfolio right now. We have a large portfolio of enterprise software companies, mainly selling B2B software. And certainly at every one of those companies, generative AI is a topic that management teams are working on figuring out.”

Meanwhile, Axios's Dan Primack argues that AI could impact PE firms by replacing much of the work done by analysts. And also that we haven't seen anything yet. Alan Patricof, founder of both Apax Partners and Greycroft:?"I have been in the VC business since 1970 — just at the major start of the chip revolution with Intel; then the biotech revolution with the discovery of gene splicing by Genentech in 1976; then the PC revolution in 1977 with Apple et al; then cellular in 1982; then the internet in 1980's; then cloud in the 90's. AI and Chat GPT is a bigger and more profound revolution than all of these in my opinion."

5. WHAT CEOS NEED TO KNOW ABOUT GENERATIVE AI

McKinsey breaks down Generative AI?for CEOs. They argue that every CEO needs to begin exploring and integrating generative AI in their organizations. Generative AI can create significant value across numerous use cases and create a competitive advantage. The extent of generative AI integration can vary based on the company's strategy - some may pursue transformative changes while others might prefer smaller initial implementations. The uses could: enhance productivity by providing automated help in tasks such as drafting emails or presentations, generate financial report summaries or suggest customer interaction strategies.

Here is a list of generative AI applications to explore. Author note: the best and easiest way to apply tech is against discreet tasks where the use case is obvious and the commitment is minimal.

6. AI & SAAS

Pitchbook started a new Enterprise SaaS report. Despite the decrease in deal activity, they expect strong industry expansion and long-term venture investment due to the adoption of disruptive technologies across all segments. They see enterprises focused on transitioning to SaaS and cloud-based deployments, with the integration of AI and automation driving future growth. They also see potential for AI-enabled interfaces in customer relationship management (CRM), sector-specific opportunities in enterprise resource planning (ERP), observability and efficiency improvements in supply chain management (SCM), innovative analytic platforms (AP), productivity and collaboration enhancements in knowledge management systems (KMS), and development of new application software (OAS) product lines. In Q1 2023 363 deals amounting to a total of $13.9 billion was raised by US-based enterprise SaaS companies.

7. A FOCUS ON MIDDLE MARKET

Despite a downturn in activity for the middle market, middle market funds (defined by PitchBook as funds between $100 million and $5 billion in size) are outperforming larger funds, known as megafunds, for the second consecutive quarter. There were 3,314 middle-market deals, totaling $443.8 billion in value in 2022. Larger firms are increasingly participating in smaller deals that have lower valuations but offer higher equity positions.

8. CFOS AND TECH ROI

Sixty-four percent of CFOs believe autonomous finance will be a reality in five years. Yet 70% of technology investments fail because of an outdated technology mindset in finance. Gartner argues that finance should

• Think top down by identifying where innovation is most urgent in finance and encourage experimentation. Execute from the bottom up?by building the foundation and promoting composable thinking across the organization to accelerate agility.
• Think about technology solutions and best-fit vendors that deliver specific finance capabilities.
• Drive standardization in core capabilities and differentiation in value added capabilities.
• Enable a technology governance that supports experimentation and a fail-fast culture in innovative technologies, such as AI, while sticking to traditional implementation approaches in stable technologies such as ERP.

ABOUT THE AUTHOR:

Scott Engler?is a partner at True Search and a member of the Finance practice.?Previously he spent 15 years advising C-suite executives for Gartner/CEB and ran his strategy consulting firm, StrategyFX.

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