As the Federal Reserve maintains historically low interest rates, private equity firms in the middle market have an opportunity to make more affordable capital investments that will pay off in the future.
The time is now to pull forward investments in technology and productivity that will pay off in the future.
It’s the result of the unusual current environment on interest rates, with the yield on 10-year Treasury securities hovering around negative territory when adjusted for inflation. Private equity firms can pull forward strategic investments into the next year or two that they had planned to make in the coming years.
Firms can still maintain their set investment strategies, but they now can enhance their plans by investing in improved data analytics, technology and employee experiences.
RSM has identified three areas where these investments will pay off in the long run, leading to increased profitability and higher multiples when equity stakes are sold:
- Improving analytics: These investments can aid predictive analytics to better understand customer behavior, growth from existing customers, repeat buying habits and spending levels. All of these will create better performance tracking throughout the life of the investment. And they will help private equity firms measure the performance of their portfolio companies against competitors.
- Embracing ESG: One of the most compelling reasons to act boldly and make investments now is to better adhere to environmental, sustainable and governance practices, or ESG. These practices have proven to generate above-normal business results, and investors are asking more about it. Data will permit firms to perform deeper analysis of company performance that will drive greater investor returns.
- Valuing employees: Then there is the life of the private equity firm itself. Private equity has long offered competitive rewards and health benefits, but investing in nonfinancial benefits, like executive-level education, social cohesion and communications will ensure that not only basic employee needs are met – like safety, stability and security – but also that employees come out of the pandemic more agile and skilled to deal with a different investment environment.
Investments in emotional wellness, digital fitness subscriptions and executive education will become more popular among private equity firms. Firms are already adding C-suite positions with names like chief people officers to improve their drive for diversity, emotional well-being and engagement among employees. It ultimately leads to a more productive workforce during a post-pandemic recovery.
Private equity firms in the middle market, like all businesses, have a rare opportunity with the current low interest rate environment to make investments that will help them compete in the digital economy of the future. Fortune favors the bold, and the time to act on making these investments is now.
For more information on how the coronavirus pandemic is affecting midsize businesses, please visit the RSM Coronavirus Resource Center.