Private Equity Financial Controllers & CFOs Workshop

A study by McKinsey & Company (Private equity: Changing perceptions and new realities, April 2014) has illustrated that private-equity performance has been misunderstood in some essential ways. It illustrated that the private equity industry decisively outperforms public equities with respect to risk-adjusted returns, but this good news comes with a caution: top private-equity firms now seem less able to produce consistently successful funds because success has become more democratic as the general level of investing skill has increased.

The study argues that the new priority for success is differentiated capabilities. Limited partners expect funds that exploit a general partner’s distinctive strengths will do well, while more generalist approaches may fall from favour. Institutional investors will need to get better at identifying and assessing these skills, and private-equity firms will need to look inward to understand better and capitalise on the factors that truly drive their performance.

Also, some LPs have begun to “insource,” effectively doing private-equity investments on their own and recent academic research has found this approach preferable for institutional investors in certain circumstances; direct private investment saves fees and can generate better results than an external manager. However, this approach is clearly not for everyone, as it involves overcoming internal structural obstacles as well as building and maintaining investment teams with the right skills.

Whatever approach is adopted, the implications for the financial specialists in the private equity firm are clear – certain key elements in terms of making investments, such as good due diligence, particularly of the commercial issues involved, valuation related issues, managing investments to create value, and exiting investments, are critical.