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Navigating the Future: Key Private Equity Trends for 2024

Writer's picture: Emil GasparyanEmil Gasparyan

As the private equity landscape evolves, firms are gearing up for 2024 with a focus on strategic value creation, optimizing working capital, and expanding into retail markets. With a slowdown in deal activity, private equity firms are poised to leverage technology and operational efficiencies to enhance their portfolio companies.

Key Takeaways

  • Value Creation: Emphasis on operational improvements to drive returns.

  • Working Capital Optimization: Increased focus on cash visibility and liquidity management.

  • Retail Market Expansion: Growing interest in retail investors and wealth management services.

Value Creation Strategies

Private equity firms are expected to prioritize strategic and operational improvements as the primary sources of returns in 2024. With exit opportunities currently slower than historical averages, firms will concentrate on enhancing value within their portfolio companies. This involves:

  1. Identifying Cost Drivers: Understanding the true cost drivers of the business to take appropriate actions.

  2. Focusing on EBITDA: Using rapid diagnostics to pinpoint opportunities that will drive earnings before interest, taxes, depreciation, and amortization (EBITDA).

  3. Balancing Cost-Cutting and Growth: Finding the right balance between reducing costs and investing in future growth.

Working Capital Management

Research indicates that many portfolio companies have significant opportunities to improve their working capital management. Key strategies include:

  • Improving Cash Visibility: Enhancing visibility into cash and liquidity needs is crucial, with 80% of surveyed professionals indicating increased attention to this area.

  • Cash Improvement Methods: Common tactics include extending supplier terms, reducing old stock, and factoring debtor books.

  • Holistic Tools Adoption: Firms are considering comprehensive tools to optimize working capital without sacrificing growth potential.

Retail Market Opportunities

The retail market presents a burgeoning opportunity for private equity firms. As retail investors seek the same benefits as professional investors, firms are adapting their strategies to attract this demographic. Notable trends include:

  • Investment in RIA Portfolio Companies: Over 150 private equity firms have invested in registered investment advisor (RIA) companies, with many offering crossover opportunities.

  • New Targeting Methods: Firms are developing innovative methods to target retail investors, recognizing them as a fast-growing source of new funds.

  • Wealth Management Services: Many firms are well-positioned to offer wealth management services, potentially creating a first-mover advantage in this space.

Leveraging Technology for Transformation

The current slowdown in deal activity provides private equity firms with a unique opportunity to invest in technology and operational efficiencies. Key areas of focus include:

  • Artificial Intelligence and GenAI: Utilizing advanced technologies to drive value creation and transformation in portfolio companies.

  • Operational Efficiencies: Streamlining operations to enhance performance and prepare for future market rebounds.

In conclusion, as private equity firms navigate the complexities of 2024, their ability to adapt to these trends will be crucial for sustained success. By focusing on value creation, optimizing working capital, and expanding into retail markets, firms can position themselves to capitalize on new opportunities as the market evolves.

Sources

  • Five key trends for private equity firms in 2024 | EY - US, EY.

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