Mark Hauser, co-managing partner at Hauser Private Equity, highlights 2024 private equity trends and explores what investors and industry professionals can anticipate this year.
Private equity investment partnerships are one of the least-understood alternative investments. That said, the rapidly growing private equity industry continues to expand its reach into new types of portfolio businesses. Private equity principal Mark Hauser explains how private equity investments work. He also highlights emerging trends and challenges facing private equity firms in 2024.
How Private Equity Investments Work
Private equity firms manage investment funds sourced by accredited and/or institutional investors. These investment partnerships typically purchase mature private or public companies. Next, the private equity fund invests in targeted enhancements to improve the acquired business’ value and other metrics. Once the acquired company meets the predefined requirements, the private equity fund makes a timely exit with a profit.
Due Diligence and Targeted Improvements
Prior to a private equity fund’s target acquisition, the private equity firm conducts extensive due diligence on the subject company. When the acquisition takes place, the private equity fund has already formulated a strategy to raise the investment’s value.
The private equity fund’s tactics may include significantly decreasing the target company’s operations costs. New technology introduction, eCommerce integration, or new market penetration could also be in the mix. In certain cases, a complete corporate restructuring could be in order.
To execute the plan, Mark Hauser says the private equity firm may tap its own management team. Alternatively, the acquired company’s managers may be tasked to make these operational changes.
4 Private Equity Industry Trends for 2024
Private equity firms collectively expect deal numbers to increase in 2024. To realize optimal results, private equity principal Mark Hauser says four trends will factor into the mix.
Retooling of Working Capital
In 2024, most private equity professionals are helping portfolio businesses focus on cash and liquidity improvements. Besides implementing common cash enhancement techniques, private equity teams are finding ways to maximize working capital and reduce expenses without decreasing growth capacity.
These innovative techniques help to optimize existing capital availability. In turn, this increases strategic options for the private equity firms and their respective management teams.
Infrastructure Investments
During recent years, private equity firms have realized substantial investment incentives relative to broadband Internet and clean energy, among other technologies. These opportunities have helped to revamp the growth of the United States‘ infrastructure while ramping up diverse decarbonization initiatives.
In 2024, private equity firms will continue to focus on infrastructure investments (particularly energy infrastructure projects). This added attention would enable more diversified funds and products that fulfill investor demands. Growing demand for renewable energy will likely spur climate technology and materials investments.
Greatly Expanded AI Implementation
In January 2024, global consulting and professional services firm EY (Ernst & Young) published its quarterly EY CEO Outlook Pulse report. This respected global firm surveyed 1,200 Chief Executive Officers (or CEOs) across the globe. Over 70 percent of survey participants acknowledged that their firms must integrate artificial intelligence (or AI) to keep their competitive edge.
Today, private equity firms in the United States continue to add new AI applications. With back-office automation relatively common, firms are expected to shift to enterprise-scale platform automation. Private equity firms will also use AI tools for due diligence functions along with standard requests and reports. Over time, these advancements will enable each firm’s macro-scale transformation.
Value Creation Innovation
With the historically slow exit opportunities for private equity firms, companies will focus on creating value in portfolio businesses’ operations. The exit market is projected to improve, so each private equity firm must balance cost reductions and laying the groundwork for growth.
Traditionally, private equity firms have adhered to a four- to six-year investment holding period. This enables the company to discover diverse opportunities that lead to value creation. In 2024, firms will primarily focus on pricing and promotions along with third-party spending. Tax savings strategies will also be at the forefront.
4 Private Equity Industry Challenges in 2024
The private equity industry continues to face substantial challenges. To illustrate, in 2023, private equity firms in the United States were affected by widespread regulatory reforms and operational scrutiny. In 2024, these concerns continue while new issues emerge. Private equity principal Mark Hauser discusses four significant challenges that collectively impact the industry today.
Highly Uncertain Macroeconomic Environment
In 2024, the United States continues to be affected by several of 2023’s holdover economic influences. Two existing overseas conflicts and several potential areas of hostility could continue to impact the United States economy. Uncertainty about the Fed’s interest rate strategy is affecting retail and professional investors alike. Some economic experts still predict a recession in 2024.
That said, many private equity firms express optimism for 2024. Adopting value-creation paths remains a priority. To accomplish this goal, firms are revising portfolio management and investment strategies. By integrating automation and artificial intelligence (or AI) technologies in the firm and portfolio business environment, companies can increase the odds of positive outcomes.
Unfavorable Fundraising and Closing Trends
The 2023 economic downturn and market fluctuations led to substantially decreased private capital fundraising outcomes. Concurrently, in-process private equity deals are taking considerably longer to close. These dual factors interrupt the normal flow of private equity transactions.
With these developments as a backdrop, private equity fund managers must work harder to build productive investor relationships. Investors currently have the upper hand, as they can choose from multiple funds that want their investment dollars.
Higher Fund Operating Expenses
Private equity firms are faced with the same higher interest rates and stubborn inflation that plague American consumers and businesses. Therefore, firms must find ways to decrease expenses they can’t pass on to individual funds. Every aspect of a private equity firm’s operations is fair game for budget cuts.
To minimize support function costs, the private equity firm should integrate automation and digitization protocols. In addition, each private equity firm’s portfolio businesses should adopt proven financial management tactics.
Cybersecurity Risks and Data Privacy Challenges
The private equity industry’s accelerating digital transformation continues to create cybersecurity and data security challenges. Private equity firms can encounter issues while using technologies that improve operational efficiencies and enable smoother remote work collaborations.
Hauser Private Equity’s Mark Hauser emphasizes that cybersecurity precautions should extend to each private equity firm’s portfolio businesses. Most firms prioritize cybersecurity during a deal’s due diligence and post-closing phases. However, gaps remain in portfolio companies’ security and enforcement protocols. Firms should quickly implement policies that close these troublesome loopholes.
Re-evaluation is Key to Optimal Outcomes
Investment opportunities don’t exist in a vacuum. External economic conditions, industry growth or decline, and other external variables can affect a private equity investment outcome. Private equity expert Mark Hauser recommends that private equity firms regularly re-evaluate their investments and adjust as needed.
