Private equity is the ‘asset class of the moment,’ as opportunities for acquisition and corporate turnaround increase.

Although private equity is likely to have the lowest CAGR of the four asset classes between now and 2025 (6% to 7.7%), it will remain the largest asset class and is growing by the greatest amount in absolute terms. The secondary market could see especially fast growth. This development reinforces private equity growth opportunities, as it improves liquidity in this classically illiquid market.

A shift from public to private markets is also driving fund expansion, though the change is being offset by growth in special purpose acquisition companies, through which several private companies have gone public again. These parallel developments, though they seem to

conflict, attest to a rapid evolution in ownership and investment strategies, with private equity at the heart of both.

Strong fundraising has heightened pressure to put dry powder to work and has therefore inflated valuations in the market. Prices for potential targets listed in the public markets have also remained higher than many would have expected given the state of the global economy. These high acquisition prices increase the need for managers to boost returns.

These circumstances underline the need for an active value creation approach all the way through from deal strategy to exit planning. The shock of the pandemic has highlighted the importance of expertise in liquidity and crisis management, in particular. As we move to recovery and longer-term turnaround, we’re also likely to see a growing focus on value levers that traditionally have been viewed as overly complex or difficult to control. These levers include strategic repositioning, maximizing top-line growth, and developing the engagement, incentives and cultural understanding needed to retain and motivate key talent.

The challenges of delivering financial outperformance will have managers looking for new ways to create value, including through ESG. Indeed, ESG has moved from being a differentiator to being a core imperative for private equity. It will need to be integrated fully into deal strategies, portfolio management and performance evaluation.