As part of BluWave’s quarterly Private Equity Insights Report, BluWave CEO Sean Mooney shares predictions on the PE industry and economy at large.
These forecasts are based on BluWave’s proprietary data, publicly available economic data and Mooney’s instincts from nearly 20 years working in private equity.
To hold himself accountable, here’s a look back at past prognostications and how they fared, as well as current predictions.
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2024 Predictions
Prediction 1
An Economic Rebound Takes Root
The economy is set to enter a new traditional 6-to-8-year market cycle during the second half of 2024, with the Federal Reserve’s monetary policy more closely reflecting past pre-boom cycles as compared to the “all gas, no brakes” approach during the most recent 15-year cycle.
Prediction 2
PE Sponsors Start Selling
The exit logjam will start to break, driven by an increase in sponsor-backed deals. The median age of PE portfolios is at a nine-year high, and distributions as a percentage of NAV are at a 13-year low. Limited partners are pressuring general partners to provide liquidity and persuading GPs to sell assets, even if below full potential. Top-tier companies will continue to sell at premium valuations, but companies viewed as lower quality will adjust toward more traditional pre-2022 peak-cycle valuations. M&A investment bankers will also support this trend as they need to cover overhead and increase their revenues.
Prediction 3
Now is the Time to “Buy the Bottom” and “Hit the Gas”
Private equity deals completed in 2023 and the first half of 2024 will yield the best returns over the next 6-to-8-year deal cycle, capitalizing on the bottom of this most recent economic cycle.
Prediction 4
Dealmakers Realize AI is a Tactic, Not a Strategy
Just like with the internet circa 1995, the AI boom will evolve, with businesses newly understanding and leveraging AI technology as a value-creating tactical tool that can lower costs, increase the speed of processes and improve decision-making, rather than an overarching ill-defined business strategy in itself.
Prediction 5
Follow the Data
Data scientists will be the hottest new hire in PE firms. As modern data sets continue to expand and evolve and competition in PE grows, PE firms will look to more fully make use of the large data sets that are available, use statistics and apply more powerful tools like Python, SQL and ML/AI techniques. Some private equity firms have already established a considerable first-mover advantage in acquiring these skilled professionals, and the rest of the industry will increasingly follow.
2023 Predictions
Prediction 1
A Recession is Coming
A recession has to be created in some form by the Fed in order to prevent a situation like the 1980s from happening again. Look for a shallow recession in 2023. PE-backed portfolio companies as a whole will outperform their peers due to their access to liquidity and the preparations that they have taken during the past two years. As such, look for PE portcos to emerge first and the rest of the economy to follow. Expect to see real bankruptcies for the first time in more than a decade, which will avail opportunities for special situations investing. Add-on acquisition opportunities will likely also be high as baby boomer owners don’t want to wait for the next cycle and wounded companies seek safety in the hands of more stable PE-backed portfolio companies.
Outcome
We were largely on target here. Whether key segments of the economy are growing less than ~1% or declining ~1%, the impact on broader business was largely the same.
Accuracy
3/3
Prediction 2
Bursting of the VC Bubble
FTX is a canary in the coal mine. Close to $1 trillion was invested in VC during 2017-2021, ~1/3 of which occurred in 2021. Many in the current vintage of VC-backed companies were invested in with relatively little due diligence and are burning significant cash at a time when few can afford to. This will likely lead to a large number running out of runway. For PE tech investors, this will provide platform turnaround and product add-on tuck-in acquisition opportunities.
Outcome
The bank failures at SVB, Signature and First Republic ultimately catalyzed the tumult in VC. Many later-round, non-AI VC-backed companies will continue to experience significant pain and failures. Seed-round companies are and will be funded at more reasonable valuations. A gigantic wave of funding is going into AI startups, in many cases based on the reputation of a single person. Look for many losers and a smaller number of winners in this cohort to ultimately change the world.
Accuracy
3/3
Prediction 3
Return of In-Person Work
Productivity rates plunged by the sharpest rate since 1947 in 2022, in large part because of virtual work, which isn’t as efficient as in-person work. As more companies catch on to this correlation, expect to see in-person work continue to make a return. Hybrid working environments will stay around, but fully virtual environments will increasingly come to an end because businesses with those models are quickly losing ground to more agile in-person competitors.
Outcome
Most of the PE firms we support have strongly returned to mostly in-person work. Many of the latest AI startups in Silicon Valley are also reported to be doing the same based upon the inherent competitive advantages and enhancements to agility and collaboration. Individual contributor roles that don’t require collaboration and mentorship may likely continue to be virtual. Those roles that require collaboration, mentorship and developmental management will increasingly return to meaningfully in-person work.
Accuracy
3/3
Prediction 4
Branding in PE Becomes More Important
In 2023, brands will become evermore important in private equity. Capital is no longer a differentiator, so firms must therefore be able to clearly communicate their unique capabilities to businesses and those in search of capital in the form of a brand. Look for more “Chief Marketing Officer” roles being played in the PE firm landscape.
Outcome
We are seeing ever-increasing engagement by PE firms in places like LinkedIn, email marketing and media channels such as our Karma School of Business private equity podcast. We have yet to see a meaningful increase in chief marketing officers at PE firms but believe this trend will ultimately come to fruition over time.
Accuracy
3/3
Prediction 5
The Broad Rise of Analytics and AI
Tools that were previously only accessible to businesses with multi-million-dollar tech budgets are now accessible to virtually every business. Every company should at the very least be using tools like Snowflake and Tableau or Power BI. The harder part for newly adopting businesses is going to be data quality and defining key metrics. Capable third parties are making use of these tools more actionable. After data quality and visualization are taken care of, PE portcos will move on to higher-order analytics, machine learning, and AI.
Outcome
Throughout Q2 and Q3, we received strong demand for BI, analytics and artificial intelligence for both PE firms and portfolio companies. The advent of AI is proving to be the biggest single catalyzing technology since the dawn of the modern internet in the mid-1990s.
Accuracy
3/3
