Industry disruption is threatening PE value creation
The PE industry faces an interesting combination of challenges. Interest rates have been kept artiﬁcially low for several years, LPs have become more risk-tolerant in search of yields, and PE ﬁrms have amassed a lot of dry powder. Increased demand has also resulted in higher asset prices; with credit being so cheap, PE ﬁrms face competition not just from one another, but from strategic buyers as well.
Traditional remedies for value creation in portfolio are no longer sufficient. Exponential technologies are disrupting the mature industries that have proven attractive to PE in the past. This is in part because of AI and automation, but also because the structure of these industries is changing. Technologies are enabling capital-eﬃcient business models that decouple assets and people from ﬁrms. The nature of ﬁrms is changing too; one can now rapidly build global businesses with a handful of people. Instagram was acquired for $1B with just 13 employees.
Startups are exploiting disruption opportunities faster than mature ﬁrms, which are hampered by a lack of awareness, cultural impediments and organizational structures focused more on eﬃciency (e.g. Lean) than innovation and renewal. PE firms themselves face cultural as well as know-how challenges. PE firms must upgrade their ability to detect and exploit industry disruption, and for this they need outside support.