The future of private equity – by Thomas von Koch

Thomas von Koch

It can sometimes be tricky to explain private equity’s role in society, however, the answer to me seems quite simple – it is our responsibility to build better and successful companies that can provide for people’s future.

And if we are to survive not just the next 20 years, but the next 100 years, then private equity investors need to practise what they preach to their portfolio companies.

In these turbulent times, it can seem like the future has never been more challenging. There is quantitative easing, record-low interest rates, widespread political instability, and Brexit. How will the private equity industry evolve and tackle these challenges?

Private equity investors often focus on building companies into better businesses, but they need to apply the same principles to themselves too.

What I mean by this is sustainability. People often assume that sustainability is a purely environmental initiative, and while this is part of it, it is also about ensuring the long-term success of a business. One of the failings of the private equity industry has been a slowness to appreciate that sustainability is good and smart business sense. Thinking about the long-term impact and health of a company helps you build better businesses that in turn tend to attract higher-quality buyers willing to pay well.

In my experience, these buyers are also more likely to keep developing the company and carry on its success for years to come. This can only be a good thing for all stakeholders involved.

Private equity firms that do not embrace this will become extinct. Investors, management teams and other stakeholders are increasingly taking interest in what private equity general partners do; demanding more responsibility and transparency in return for giving us a “licence to operate”.

There is an important lesson in this – private equity firms often think success means becoming the largest, but in the future success will mean being the most reputable. This means being the partner of choice, both to investors and management teams of attractive portfolio companies.

I believe the most important factor in achieving this is to foster a corporate culture that both emphasises a desire to be part of society and encourages a mind-set that everything can be improved at all times. Having such a culture will help general partners achieve what we as private equity professionals have spent our careers encouraging portfolio companies to do – grow fast and sustainably.

The importance of growth cannot be understated, as there is a clear intersection between sound culture, growth and long-term success. To succeed in any business you need to recruit people who share your values. To attract and retain these people you must grow, simply because you need to be able to offer interesting and competitive career opportunities.

But it is not just culture, it is also about adapting to change. For example, I am a big believer that advances in technology and digitalisation trends are affecting every single business on the planet. Business owners are faced with a choice – either disrupt your business to adapt to change, or wait for a competitor to do it for you and risk becoming an uncompetitive laggard.

This readily applies to private equity’s work with portfolio companies, but, again, it also applies to the private equity firms themselves. I will not be surprised if over coming years, digitalisation experts become a fundamental part of general partners’ advisory teams, tasked with improving portfolio companies and the way they work.

Private equity as a whole is experiencing a fundamental shift and is consolidating as it increasingly becomes an integral part of the global economy. There is an ongoing trend of more money going to fewer managers, with investors increasingly favouring a smaller number of stronger, long-term relationships.

There are different ways that private equity firms have reacted to this shift, from focusing on a single strategy limited to certain regions, or building a global multi-product alternative investment firm that acts as a one-stop shop for investors. Only time will tell which approach proves to be the most successful at building a firm that will last, but I know that after I am gone, EQT will still be around. And, my successors at the helm will be busily preparing for what comes next.

Thomas von Koch has more than 22 years of private equity experience and is managing partner of EQT, the global alternative investment firm he helped found in 1994

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