Private equity firms need to make fundamental changes to their business model to catch up with technology transformation, investors’ focus on social issues and environmental damage from companies, and the potential for more scrutiny from regulators, according to a new report from Ernst & Young.
“This report has been a big work in progress for some time,” said Pete Witte, global private equity lead analyst at EY, in an interview. “The question we posed to people across disciplines was what does the PE firm of the future look like?’”
Private equity firms will no longer be able to solely rely on restructuring companies’ finances or cutting costs with mass layoffs, outsourcing or cutting pensions. While those strategies aren’t going away, they will need to expand their digital capabilities and seriously implement impact and environmental, social, and governance initiatives. This will be a new requirement for private equity firms, whose money-making turnaround strategies still look a lot like those made infamous by the 1980s novel “Barbarians at the Gate.” The book featured KKR & Co.’s brutal restructuring of RJR Nabisco.