Private equity (PE) firms appear to have passed a critical inflection point for growth at this point in the recovery — and what’s more, the momentum they’ve picked up shows no signs of slowing down. The predictions in the 2021 Private Equity Outlook from Pitchbook make all of this gemstone clear:

  • PE fundraising could surpass $330 billion, an all-time high, by the end of the year.
  • Overall deal value for carveouts, too, could reach the highest level on record.
  • Special purpose acquisition companies (SPACs) continue to boom — in fact, at least 20 PE-backed companies are expected to enter public markets in the U.S. through reverse mergers with SPACs in 2021.

Plus, there are any number of other factors too potent to be ignored. Most PE firms still house huge reserves of dry powder, for one. Meanwhile, we're continuing to see sky-high valuations across the board. And when you add the fact that SPACs themselves raised $83 billion in fresh capital in 2020 — more than six times the previous record — the whole situation starts to look like a lit firecracker. So watch out: PE is primed with a charge, and the results just might be explosive.

With that broader context in mind, let's unpack what's driving all the growth and excitement, forecast what's on tap for Q3/Q4 2021 — and highlight a few surprising challenges that PE decision-makers should take into consideration as well.

people working in an office boardroom
people working in an office boardroom

framing the high-level view: PE in Q3/Q4 2021

There are still six-plus months remaining in the year, so there’s a lot more to understand about the state of PE today than Pitchbook could have foreseen in making their predictions.

Where, then, is PE today?

To answer that, it’s worth looking at where PE has been. For starters, it bears reminding that everything about PE's experience in 2020 bucked the dominant narratives of the pandemic — those anchored on businesses shuttering, furloughs, layoffs and more.

Against this broader picture of economic decline, PE firms have been quietly going about their business. Or rather, not so quietly: In fact, firms in the venture industry at large attracted an astonishing $73.6 billion in funds during 2020, shattering the previous high-water mark of $68.1 billion from 2018.

Underpinning this historic growth were three factors:

  • a thriving IPO market, ensuring that investors had a healthy supply of cash in hand
  • ongoing demand for innovation
  • the accelerated pace of digital transformation initiatives, largely fueled by the pandemic

And there's also good reason at this point to believe PE's already well-stocked coffers could see even greater capital injection during the remainder of the year. Why? Two words: regulatory change.

Notably, last June the U.S. Labor Department indicated that it would allow “defined-contribution retirement plans” — think: 401(k)s — to indirectly invest in PE funds, at least under certain circumstances. Plus, in August the U.S. Securities and Exchange Commission (SEC) amended how it defines an “accredited investor” in such a way that provides greater latitude around who can legally invest in venture capital. And finally, an amendment to the so-called Volcker Rule ratified by the Federal Reserve Board, CFTC, FDIC, OCC and SEC means that banks will also have greater flexibility in investing in venture-capital funds going forward.

All of this is great news for PE firms — and good reason to suspect they'll be more eager than ever to deploy stored-up capital through major investments in Q3 and Q4.

Where is all that investment likely going to be directed? And perhaps more importantly, what challenges might that create in turn? These two questions are intimately connected — in fact, they go hand in hand.

unprecedented investment opportunities — along with emerging PE challenges

If there's any key takeaway from the recent news that Bain Capital Ventures has raised $1.3 billion in seed money to fund startups, it's probably this: Bain is not alone.

Across the board, PE companies are poised to make enormous investments in tech — and the stats clearly back this up. Startups are seeing unprecedented, and truly historic, levels of venture capital investment at the moment. And with that in mind, it's worth taking a step back to acknowledge the unique human capital challenges that are likely going to be created in turn.

Think about it: With lots of startups eyeing lucrative IPOs, it's probably safe to assume that internal capability-building will emerge as a key priority (after all, if experience is any guide, it usually does). At some point in the next months, then, all of these cash-rich companies are going to be hunting around for their first-ever CFOs.

But there's just one problem with that: Namely, where are all of these talented leaders supposed to be found? When you take into consideration the fact that there has been a 95 percent increase in the number of CFO appointments at U.S. startups in the last 12 months alone compared to the period previous, you begin to get a hint of the magnitude of the human capital challenge.

And finance leadership, while no doubt a likely pain point, won't be the only one. In fact, there could be an even bigger one just one rung above on the org chart.

That's right: CEO volatility is fast-approaching on the horizon. Why? It's simple: The road to organizational maturity is typically a rocky one. For example, one study of companies transitioning from the first rounds of venture capital financing to their IPOs found that the office of the CEO changed hands more than 40 percent of the time.

Rocky — to say the least.

Finally, a third challenge to prepare for: changing compensation structures. That is, PE firms these days are increasingly keen to restructure the compensation structures of executive leaders. More specifically, firms want to connect pay to a raft of business-critical performance-related KPIs, and environmental, social and governance issues in particular.

Exactly how they plan to do so, at the same time that these hard-to-find leaders are faced with an avalanche of new opportunities, is anyone's guess. Of course, that doesn't change the fact that all three of these challenges have make-or-break power over bottom-line performance for PE firms and their portfolio companies in the coming weeks and months.

two female colleagues working on their laptop
two female colleagues working on their laptop

looking ahead: what's next?

When we framed the PE space as a potentially explosive scene for the remainder of Q3 and Q4 2021, we weren't joking — and hopefully, you see why now. There are a host of incredible opportunities to drive growth and unlock value. But there are also a bevy of human capital challenges that could easily cause things to go off the rails.

Only time will tell how all of this ultimately shapes up, of course. In the interim, forward-thinking companies would be wise to start preparing for these and other challenges on the horizon today. That's an area where strategic partners like Tatum can contribute significant bottom-line value, whether that means directly sourcing and placing the interim and permanent executives you need or serving in a more consultative capacity.

Either way, reach out to Tatum today to find out why so many PE firms turn to us in times of need.

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