J. Lynette DeWitt, Research Manager, Investment Management, Deloitte Services LP, May 25, 2016
“I always avoid prophesying beforehand because it is much better to prophesy after the event has already taken place,” said statesman Winston Churchill. Well, I would certainly agree to that perspective, in part. While this approach makes for accurate newscasts, I respectfully differ from Mr. Churchill’s opinion when it comes to market forecasts. Taking the risk associated with modeling the future can pay off in the form of more robust strategic plans.
Take private equity (PE) for example. The PE industry is less liquid than, say, that of mutual funds or even hedge funds. As a result, market data takes longer to collect. So, even if PE is changing at a fast pace, gaining insight into industry trends may take longer than desired. Given this reporting delay, it becomes even more important for PE firms to be proactive with forecasting, since regulatory and competitive pressures are not slowed by similar forces.
Recent reports on deal volume, exits, and PE firm shares indicate that PE growth is slowing.1 One needn’t worry about prophesying that near-term growth may not match the historic 13.7 compound annual growth rate (CAGR) of PE assets over the past decade;2 there seems to be a strong consensus on that point.
So what should PE firms do to align their approach to changing markets? We suggest managers embrace the prophesying step that Churchill described, and take a closer look at scenario planning, defined by Deloitte as “a plausible sequence of future events that can affect an organization’s strategy and operations.” The four phases of scenario planning provide a range of future-focused lenses from which growth may be viewed, and support the organization in framing a response. These phases are: 1) defining purpose and scenarios, 2) financial impact analysis, 3) adaption and refinement, and 4) analyzing impacts and identify responses.3
Our 2016 report, “Private equity growth in transition: Evolve to meet tomorrow’s challenges,” features a proprietary five-year growth model that can support PE firms in phase one of this scenario-planning exercise.4 Our model details growth percentages and specific PE asset levels for direct use in the planning process.5
What the model shows
Our PE growth model features three different viewpoints for PE managers to consider in “what-if” scenarios:
And if you are looking for detailed numbers in the model, we invite you to check out our interactive graphic, located here. Envision potential market outcomes for the next five years, and use this model as one of the many inputs for planning an approach for PE industry growth.
What do you think about these estimates? Do you agree with the moderate viewpoint, or do you think growth will be either higher or lower than this?
1Jon Marino, “Private Equity May Be Wall Street’s Canary,” CNBC, February 3, 2016.
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via Quick Look financial services blog