Q2 Snapshot: Key Findings from BluWave's Private Equity Insights Report

business best practices, and real-time trends.

In this episode, we discuss how the private equity industry has been taking action, securing

safety and finding success during the second quarter of 2023, as illustrated within BlueWave's

Q2 2023 Private Equity Insights Report.

This episode is brought to you today by BlueWave.

I'm Sean Mooney, BlueWave's founder and CEO.

BlueWave is the go-to expert of those with expertise.

BlueWave connects proactive business builders, including more than 500 of the world's leading

private equity firms, to the very best service providers for their critical, variable, on-point

and on-time business needs.

Enjoy.

So, let's jump straight in.

The number one trend that we see in our Q2 2023 Private Equity Insights Report is that

value creation activity continues to surge.

So, value creation activities, a percentage of all the projects that BlueWave supported,

accounted for 77% of all initiatives enacted by BlueWave in support of the private equity

industry in Q2.

That's up from 68% of all the projects during the same period last year.

You might ask, why is this happening?

So, there's a number of factors.

Number one, deal flow continues to be slow.

We're in what I've called before during these podcasts, a barbell deal flow dynamic, a barbell

economy.

And really what this means is there's a number of companies that can sell in any market that

are coming into M&A processes because they're unicorns.

And there's a number of companies that have to sell.

But the biggest bulk of companies that are kind of the really good but not great, you

know, the B pluses, the A minuses, the Bs, they're not coming to market because they're

worried about the certainty and the valuation in a topsy-turvy economy like we find ourselves

now.

The second thing that's causing value creation activity to be so high is that PE firms are

also being selective.

They're spending less time on new deals because they're passing on a lot of companies that

are coming to market.

And so, they're focusing on businesses that really they know can weather this type of

economy, this washing machine economy that's churning back and forth.

So, think about business services companies, established software companies are not the

early stage ones.

The ones that are mature, they have gross profits, they have margins, they have cash

flows, and then also some sectors of the healthcare space.

They're also looking at a lot of carve-outs and take privates.

The third reason why value creation is surging is that the private equity firms, when times

are tough, spend a lot of time honing and supporting their companies.

And they run towards them with every private equity-grade resource possible to help their

company succeed during tougher times.

Now, why is that?

Let's think about economics 101.

Private equity firms typically will earn one and a half, two and a half, maybe three times

their money on average on each of their deals.

If you blow this through an economy, that means they can't afford to lose really any

company if they want to make money themselves.

So, as a result, when times are tough, they run towards them.

They give them every resource they need.

They do everything they can to help them be successful.

And what that means is private equity portfolio companies typically outperform the rest of

the economy because they're given everything they need to be successful.

The number two major trend in the Q2 2023 Insight Report is that human capital activity

is cooling.

For the first time in about five years, we've seen a quarterly year-over-year decline in

human capital activity and private equity.

With human capital accounting for 38% of projects in the Blue Wave Activity Index, this compares

to 42% during the same period last year.

Now, let's keep in mind.

38% is still a very high amount of activity.

We're still seeing all sorts of PE-grade needs for strategic hires, replacement hires, and

tons of demand within this very unique ecosystem that we've created within Blue Wave of these

extremely capable PE-ready interim executives, so CEOs, CFOs, CHROs, etc.

Now, that having been said, we're seeing a tapping of the brakes on people a bit as this

period of economic duress lingers.

The number three trend that we're seeing in our Insight Report is that while human capital

may be slowing down a bit, we're seeing growing activity across strategy, operations, technology,

and sales and marketing.

Now, why is this?

Our read of the tea leaves is that the PE firms typically take action about a year ahead of

the broader economy.

We're seeing action right now that's going to enable their portcos to be at or near full

speed by the time the nose of this economy moves from this kind of flattish world we

live in today that's kind of dipping up and down to decidedly up.

The fourth biggest trend that is not going to be a surprise to anyone who's been present

and aware in this current world that we live in, during the second quarter of 2023, we've

received surging demand for best-in-class but trusted data, business intelligence, analytics,

and AI resources.

This category has moved from being unranked over the last three years, and not deeply

unranked, but below our top 10, to number four on Blueway's Value Creation Activity

Index.

And what I like about this, when I pull the layers of the onion back on this and see what's

really happening underneath, what I like about what our PE clients are doing in this category

is that they're being very mindful about and making sure that they have the foundation

set before they're getting overly fancy.

So they're still spending a lot of time getting their data quality, visualization, and analytics

houses in order before they're starting to throw cash at things like neural networks.

I think this is a great lesson that every business should also embrace, particularly

things like data quality.

It's not sexy, but the only thing worse than no data is bad data.

So the number five trend that we've seen, I'm going to invoke a famous line from Muhammad

Ali that comes to mind.

I'm going to paraphrase it.

I'm not humble.

I'm just good.

For good or bad, in most sense, a lot of this is bad.

I don't feel good about this.

It turns out that the predictions that I made in 2022, about 2023, have been fairly spot

on.

So in 2022, I predicted a shallow 2023 recession, the bursting of the VC bubble from all these

speculative and questionable investments made in years prior, the growing return of in-person

work, increased branding and marketing activity by PE firms themselves, and the rise of analytics

and AI across the broader economy.

We go into each of these predictions more deeply in the quarterly insights report.

And as I reflect further on these, and I'm honest about myself, I'm not really good at

this.

I'm really just a beneficiary of the experience I gained not only working for nearly 20 years

in PE, but also over the last six years working with and for a large number of the best business

builders in the world found in the private equity industry, and really learning lessons

from them every day.

And to be candid, I usually have to learn two or three times until I get it right.

But eventually, I get there.

And so the other thing that I'll say is with my performance so far this year being pretty

good, it's also a pretty safe bet that I'll be out of the predictions business in 2024.

So I don't blemish my record because it's never going to happen again.

So that's all we have for today.

Just remember, and at the risk of sounding zen, tomorrow is the first day of the rest

of our lives.

If you'd like to learn more about these topics and dig further into the diligence and value

creation trends found in our Q2 2023 private equity insights report, visit our website

at www.bluewave.net.

That's B-L-U-W-A-V-E.

For more information on this podcast, go to bluewave.net forward slash podcast.

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Onward.