Slow growth is the new normal in investing and private equity must adapt. For investors, the current market means shifting value creation levers and working even harder to deliver top quartile returns. It also means a more deliberate and cautious approach to deal making.

A flight to quality

When investors could rely on low interest rates, economic growth, and a variety of exit routes to bolster weaker deals, they could afford to deploy capital faster and take a more short-term mindset.

But the dangers of this have become painfully apparent in the last couple of years as  riskier investments have ultimately failed, and any sliver of flexibility has disappeared., A flight to quality has brought huge competition for A grade deals, which makes sense, but inevitably leads to higher prices, and lower returns.

Unearthing hidden gems

In a market where competition is fierce and margin for error is lower, the key to outsized returns is spending the time unearthing hidden gems, while building as close to 100% conviction as possible in every deal. Bain Capital echoed this sentiment recently,  as a way to operate in a slower investment regime, to minimise downside risk.

Here’s what high conviction investing looks like in practice:

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• Data-driven deal-making: Out of all the deals in a given segment, investors will only end up bidding on a small percentage - and win even fewer. So, true conviction is only possible by having access to a large market to ensure 90% of the possible deals are in the funnel to begin with. At Copilot Capital, by sourcing across the whole of Europe we give ourselves the largest surface area to find the winners. Taking a data-driven approach to systematising and tracking deal flow is also vital, to identify the deals where you can have the biggest impact. You can’t pick winners without seeing the whole field.
• Deep asset selection discipline: This isn’t a market for blindly trusting your gut. While investor instinct is always important, in a tough market, it must be backed up by strict criteria governing which deals you invest time in, and which you ultimately go for. From levels of growth, to ARR, profit levels, to cash status, success comes from knowing what your ideal target looks like and what your red flags are. Within our team, we have clear criteria on what a Copilot deal is, allowing us to force rank deals and go hard at the best with conviction.
• Fewer deals, more hands on: As value creation levers shift, investors are taking a more hands on role in the businesses they back. But this doesn’t just start post deal. Potential for impact should be embedded in pre-deal analysis and due diligence. Conviction comes from defining your core value levers and pursuing deals where you have the greatest potential to make a difference, through active partnership, not passive capital. At Copilot, we do this through defining how we add value (our 5 value creation levers) and working with management to plan the scale-up journey and how we can help from day one of negotiations.
• A culture of accountability: You can have all the data in the world, but deals are still done by people, and human judgement is the ultimate predictor of success. Conviction comes when team members at every level are empowered to take ownership and accountability – both before and after the contract is signed. Senior partners can’t be across every detail so those doing the analysis must have the agency to speak up – whether they agree or disagree - rather than deferring to management or external factors. If those on the frontline are given that agency, you can be sure they’ll do everything in their power to make the right decision.

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There will always be risk in private equity - that’s all part of investing. What is important, particularly in the current market, is putting the processes and guardrails in place to identify and pick the 'hidden gem’ deals with the greatest potential for your business, avoiding the ‘analysis paralysis’ which means you never take the plunge. That only comes from focus, clarity, and, most importantly, a culture which rewards those with courage in their convictions.

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