It’s no longer business as usual in the private equity industry. Investors are concerned about myriad economic indicators, such as inflation, interest rates, and market volatility. As EY notes in its most recent Private Equity Pulse:
“PE firms must look to new strategies and investment themes that provide increased resilience against a macro backdrop for which few modern playbooks exist.”
Faced with these headwinds, consultants must reevaluate the tools they use to collect insights. Secondary research, which is always part of the traditional playbook, will quickly become outdated. That makes it more critical than ever to collect data in real-time to get a pulse on the current situation and predict future activity. Failing to do so might lead you and your clients to conclusions based on inaccurate information.
The Only Certainty Now is Uncertainty
Karen Harris, managing director of Bain & Co.’s Macro Trends Group, said in a recent Dry Powder podcast that the challenges facing businesses have never been more obvious or numerous:
“Many of the risks that you and I have been talking about for years: rising rates, declining workforces, demographics, geopolitics shifting, they set the stage for a transitioning economy. Then we had a pandemic, a kinetic war in Europe, and boom, many of the risks that we were aware of in the periphery became a crucial part of how we think about the operations of businesses.”
Surveys Are the Solution
Surveys have always played a significant role in research for due diligence engagements, and in this economic climate, they have become even more important. That’s not just true for consumer research, where surveys have been commonplace for many years, but also for B2B insights.
Compared with other types of research, surveys deliver up-to-the-minute information directly from respondents. As an added benefit, when you ask respondents about their future plans – what they intend to buy in the next six months, for example – their responses are based on current economic factors. That’s much more valuable than data from a poll conducted a few weeks or months earlier.
You have probably already seen how economic uncertainty can make a lot of secondary research, and even some types of primary research, meaningless. In 2020, when the Covid-19 pandemic began, nearly all forward-looking information, such as consumer sentiment data, became outdated in days or weeks. Surveys were practically the only way to obtain timely and useful information.
The Stakes Are High
PwC’s midyear PE report noted a 26% decline in PE deals in the first half of 2022, with most of the drop in deal volume happening in the second quarter. While PwC expects dealmaking to recover, it points out:
“The near-term investing climate is likely to be a test for this generation of private equity firms, most of which saw their fortunes increase in the last decade. Performance could start to diverge as the cost of debt rises and exits are more difficult.”
One of the implications is that PE firms must be much more discerning in their decision-making. A misstep might be manageable in a boon period, as the firm can still rely on the resiliency of the economy to make the investment worthwhile – the proverbial rising tide that lifts all boats. However, when the economy fares poorly, a misjudgment may expose the firm to a much greater downside.
And, as both you and your clients know, write-downs reflect very poorly on PE firms and don’t make money.
In this uncompromising situation, clients rely on you to provide timely, useful, and actionable insights. Since surveys allow you to collect current information, your clients can confidently make fully informed investment decisions.
What About When the Economy Improves?
Eventually, the economy will turn around. When that happens, surveys will also prove extremely beneficial for the same reason they are today – research collected when the economy is in a downturn will no longer accurately describe the current situation or predict future activity.
The bottom line: Any time you and your clients are faced with uncertainty – in good times and bad – turn to surveys for the most accurate and up-to-date information.