The Business Times

Macro now matters for private equity

PE firms can no longer focus on the microeconomics of businesses alone.

By Hugh MacArthur, Graham Elton, Bill Halloran and Suvir Varma

First published on maio 06, 2014
min read


This article originally appeared on The Business Times (Singapore). For decades, private equity (PE) firms made money by focusing on the microeconomics of businesses and letting the macro conditions take care of themselves. While investors focused on industry dynamics and company performance, macro factors such as currency movements, monetary policy, technological changes and demographics faded into the background. The global financial crisis marked an emphatic end to that era. As we explain in Bain & Company's latest Global Private Equity Report, macro now matters. The economic upheaval of the past several years vividly demonstrated how a PE fund can own a great company in a great industry, but when the macro environment shifts, macro trumps all. A recent Bain & Company analysis of the factors that spelled success or failure across deals done by a range of PE firms disclosed that firms are vulnerable to two common macro-fundamental errors. First, firms misread the timing or sensitivity of deals to economic cycles. Second, firms overlook disruptive competitive, technological or other important shifts affecting their portfolio company's industry. PE firms have undervalued the need for macro analytical capabilities in due diligence and portfolio management because, until recently, they were of minor importance. The PE industry came of age during a period of steady growth, long economic cycles, and largely stable interest and exchange rates. While it is still uncertain how the next global cycle will evolve, key factors that sustained that moderate growth will no longer be in play. The nearly three-decade decline in long-term real interest rates is finding a bottom. China's one-time jolt to the global supply of labour dampened inflation and supported corporate profit margins; it is now done. The declining consumption by the giant demographic wave of ageing baby boomers will drag on growth for years to come in many markets. Read the full article at The Business Times (Singapore) - subscription may be required

This article originally appeared on The Business Times (Singapore).

For decades, private equity (PE) firms made money by focusing on the microeconomics of businesses and letting the macro conditions take care of themselves. While investors focused on industry dynamics and company performance, macro factors such as currency movements, monetary policy, technological changes and demographics faded into the background.

The global financial crisis marked an emphatic end to that era. As we explain in Bain & Company's latest Global Private Equity Report, macro now matters. The economic upheaval of the past several years vividly demonstrated how a PE fund can own a great company in a great industry, but when the macro environment shifts, macro trumps all.

A recent Bain & Company analysis of the factors that spelled success or failure across deals done by a range of PE firms disclosed that firms are vulnerable to two common macro-fundamental errors. First, firms misread the timing or sensitivity of deals to economic cycles. Second, firms overlook disruptive competitive, technological or other important shifts affecting their portfolio company's industry.

PE firms have undervalued the need for macro analytical capabilities in due diligence and portfolio management because, until recently, they were of minor importance. The PE industry came of age during a period of steady growth, long economic cycles, and largely stable interest and exchange rates. While it is still uncertain how the next global cycle will evolve, key factors that sustained that moderate growth will no longer be in play. The nearly three-decade decline in long-term real interest rates is finding a bottom. China's one-time jolt to the global supply of labour dampened inflation and supported corporate profit margins; it is now done. The declining consumption by the giant demographic wave of ageing baby boomers will drag on growth for years to come in many markets.

Read the full article at The Business Times (Singapore) - subscription may be required