Disruption, in the form of new technology and geopolitical climate, are set to be the biggest themes shaping private equity in the year to come. How can you make the most of the opportunities and evade the threats?
#1: Technological disruption
Private equity loves disruption. The industry views itself as nimble, disruptive and opportunistic, as well as having the capability to respond to disruptive trends. From looking at the discussions last year, we can identify three major ways in which technological disruption will directly impact private equity: Artificial Intelligence (AI) advancement, growing investments in technology, and releasing value through technological change.
Hear from Prof. Jürgen Schmidhuber, the Father of Modern AI, about what our future will look like when we have "super-human AIs" that are smarter than we are.
The most obvious is technology as an investment theme. As industry after industry is disrupted, the technology specialists have attracted huge amounts of capital across the whole spectrum, from Venture Capital (VC) through growth to the buyout of large technology companies. With the vast market capitalisations of the technology giants and new disruptors moving in all the time, there is no sign of this trend abating.
More contentious is how and whether technology can disrupt the alternatives space itself. In an industry based on relationships, trust and handshakes, it is hard to see how the kind of disruption which has already taken place in the mutual funds and banking space can be applied to private equity. It will be interesting to see whether the industry will remain unmoved or will bend with the flow through innovations.
#2: Geopolitical disruption
Private equity has traditionally viewed itself as a long-term micro play, and to a certain extent immune from the geopolitical upheaval, but the seismic political events of the past couple of years, from Brexit to the Trump administration, are making themselves felt in the ways that investors are allocating to the asset class.
The turning credit cycle, U.S. tax and regulatory reform, and changing societal values on political parties in power could all have a major impact, leading to increasing divergence between the U.S. and European credit markets, as well as the global financial relations on a macro scale.
With new risk factor coming into play, it will be interesting to see what whether and how things will change.
The private equity response: innovative and opportunistic
Private equity professionals are nothing if not smart and it will be fascinating to see the innovations that will arise from all the current uncertainty. We need to apply the flexibility and creativity needed to respond to emerging trends and turn threats into opportunities.
One thing is certain: be prepared for the changes afoot.
