Reimagining private equity with a model that goes beyond financial returns

As the private equity industry matures, it needs to create value beyond the traditional fund life cycle, according to Jose Caireta, Founder and Managing Partner at Squircle Capital.

The private equity industry is projected to grow from over $10 trillion in 2021 to almost $18 trillion by 2026, according to Preqin, which comes as no surprise considering the asset class has been consistently outperforming public markets for years. Following the collapse of Silicon Valley Bank and UBS’s planned takeover at Credit Suisse, there are new challenges emerging for private equity firms, as the ability to secure leverage will only decrease during this new banking crisis whilst the cost of financing acquisitions continues to rise on the back of higher interest rates. Despite these new headwinds, institutional investors have been increasing their exposure to alternatives, enticed by a range of factors, including record levels of fundraising, deal-making and returns in recent years. Private equity firms themselves have experienced accelerated growth, with assets under management increasing at an annual growth rate of more than 22% since 2017 and an all-time record of dry powder at the disposal of managers as they look for new acquisitions.

While the private equity industry has grown rapidly – and looks set to continue along that path – it suffers from reputational issues that it has struggled to shake off for decades. Firms are still perceived by some as asset strippers that are solely focused on making fast returns. Debates around high management fees or the worthiness of super carry, have long been a source of criticism and further fuelled the notion of the “greedy” private equity industry. In simplistic terms, buyout firms are often accused of seeking out poorly performing businesses, loading them up with debt, restructuring them – and then selling them on a few years later with no regard for the wider impact.

However, this doesn’t reflect the evolution that has taken place within much of private markets. Today, many firms are moving towards a more conscious approach that focuses on long-term value creation. In fact, some might say that private equity managers (and investors) have started becoming concerned with KPIs and performance benchmarks not only linked to IRRs or money multiples. Also, the state in which an investment is left, post-exit, is increasingly important.

Breaking the traditional fund life cycle

Firstly, we should not forget that private equity, in its essence, has always been about extracting value from companies that others haven’t seen. In order to uncover an asset’s potential, we need to look beyond financial returns.

Many private equity strategies are constrained to the timeline of their funds. Deals are sourced, analysed and ultimately closed with the end result, a profitable exit, firmly in mind. Being only focused on the “harvest period” prevents GPs from identifying the vast range of opportunities to genuinely transform an asset that could be implemented when thinking more long-term. In my view, it’s important to think outside the traditional fund cycle. We at Squircle Capital strongly believe that there is more to chomping at the low-hanging fruit. Where others look for short-term results, we are excited by impactful transformation and know real value is built over time. This often allows us to nurture the strong relationships that we have built between the asset owner, its management team and our in-house industry experts, while leveraging our experience in asset management.

Focussing on conscious asset management

The real work (and value-add) comes after a deal closes. The most successful private equity firms all have one thing in common: operational excellence. This requires a long-term outlook and a sustainable approach when investing in and managing assets. In other words, you have to recognise the importance of being a committed custodian. Those focussing on building real value over time for stakeholders are able to leave a positive legacy while delivering on the more traditional private equity promise of producing returns for investors. This is a long way from the asset-stripping, barbarians-at-the-gate reputation the industry once had.

The fundamentals of private equity investing are still true: finding efficiencies, implementing a new strategy and, when appropriate, bringing in an experienced management team – all of which improve operations and ultimately help us reach our target returns. With this vision in mind and the belief that private equity should leave a positive legacy, it is possible to unlock value not limited to financial performance.

An example of this is our ongoing commitment to a sustainable future for superyachting, through MB92 Group, the world’s leading superyacht refit, repair and maintenance group, in which Squircle Capital owns a controlling stake. MB92 recently announced its latest offering, which will help with the implementation of the latest technology to drive sustainability of superyachts. Things like LED light conversions and biofuel optimisation, which have the potential to reduce CO2 emissions by up to 90%, are all front and centre for owners who are consciously looking to reduce their environmental impact. There are approximately 6,000 superyachts over 30 metres in length currently in operation worldwide, and we are backing the increasing number of proven solutions that have the potential to lessen their impact on the environment.

Finding a purpose

The purpose of private equity houses is to generate returns for their shareholders, but that does not mean they cannot also leave a positive legacy. In fact, they should – and they can. It is in everyone’s interest to ensure an asset is managed with care so it is sustainable beyond the traditional life cycle of a private equity fund. Implementing strategies with the benefit of all stakeholders in mind requires a long-term approach to create lasting value. Moving from a shareholder to a stakeholder focus and applying a “nourish” approach – rather than the outdated “buy and flip” method – represents the future of private equity. Those focussing on building real value over time for stakeholders are able to deliver returns that go far beyond traditional financial measures.

I hope that going forward, more buyout firms will embrace this attitude to help private equity leave a positive legacy and project the reputation the industry deserves.

© 2023 funds europe



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