The Changing Landscape for Investors: What’s Ahead for Private Equity?

Ropes & Gray was proud to sponsor the Markets Group 12^th Annual Private Equity New York Forum in New York, held on May 15.  At the conference, attendees heard from leading fund managers on a broad range of important topics impacting the private equity industry today, including the key challenges and opportunities for private equity investors in the US and around the world. Here are some of our observations from the discussions:

Key Market Drivers

The investment landscape is undergoing significant transformations driven by several major forces including energy transition, the disruptive power of generative AI and increased regulation in certain sectors including healthcare. Private equity investors need to understand and adapt to these forces of change to stay ahead in the market.

Energy Transition; Infrastructure

Energy transition refers to the global movement towards cleaner and more sustainable energy sources driven by the need to combat climate change and reduce greenhouse gas emissions. The estimated capital required to achieve "net zero" by 2050 is staggering, ranging from $200 to $300 trillion. This capital will be needed to fund renewable energy projects, energy-efficient technologies, and other initiatives aimed at reducing carbon emissions.

Private equity firms expect to play a significant role in energy transition not only by providing a key portion of the necessary capital across a broad range of asset classes, including transportation and logistics, but also by implementing the right governance models to achieve sustainability goals. Even beyond energy transition, we are seeing continued resilience in infrastructure investing as demand has shifted towards essential assets and services.

Generative AI

Generative AI is causing unprecedented disruption across industries by automating tasks, improving efficiency, and unlocking new possibilities. AI developments offer valuable tools for operational improvements and value creation, and it is crucial for private equity investors to understand the potential impact of generative AI, both positive and negative, across their portfolio companies. Moreover, private equity investors looking to deploy capital in generative AI must be able to separate the hype from the technologies and applications that will truly increase productivity.

Healthcare & Life Sciences

As private equity investors look to resilient sectors capable of withstanding inflation and market contraction, the health care and life sciences industry has become a more attractive investment. As mentioned above and like many other industries, the proliferation of data and data-driven technologies such as artificial intelligence and machine learning has been and continues to be transformative in health care and life sciences. 

Private equity investors focused on investments in technology and data-driven support services in the health care industry as offering particular opportunities, as well as continued interest in biopharma investments. However, private equity investors are aware of increased attention by the Federal Trade Commission and other federal and state regulators to market consolidation and the role of private equity in the health care industry. 

While investors believe it is important to monitor these developments, the majority were not deterred by this increased regulatory focus, noting that all industries face a certain degree of regulatory scrutiny and that such scrutiny waxes and wanes with political and geopolitical changes. In addition, legislative and regulatory developments, such as the Inflation Reduction Act of 2022, continue to impact drug pricing and certain segments of the health care and life sciences industry.  Investors need to continually monitor federal and state regulatory initiatives in the context of investment decisions and strategic planning for portfolio companies.

A Gradual Recovery

While deal volume has not achieved the levels forecast by market participants at the end of 2023, to date we have seen a 20% increase in deal activity relative to 2023.  Structure is playing a key role in dealmaking today, with seller paper and rollover equity helping to bridge valuation gaps and improve alignment between buyers and sellers in control deals, while minority investments and other non-control investments, including preferred equity structures, are becoming more prevalent.  Corporates are playing a significant role in private equity deal activity, driving carve-out activity and also seeking out joint ventures with private equity firms to fund future investments. 

Subscribe to Ropes & Gray Viewpoints by topic here.