Monday Market Minute | Oct 23, 2023

PE sponsors pivot from deal volume to operational value creation

What Moved

With exit markets effectively closed and new deal activity running at subdued levels, Canadian PE sponsors redirected their energy toward operational improvement of existing portfolio companies. Firms reported increased investment in digitalization, supply chain optimization, and strategic add-on acquisitions at depressed multiples. The "buy-and-build" strategy — acquiring smaller competitors at low valuations to bolt onto platform companies — became the dominant deployment model, allowing sponsors to create value without relying on multiple expansion or leverage.

Why It Matters

The operational pivot separated genuine PE skill from financial engineering. In the low-rate era, returns could be manufactured through leverage and multiple expansion alone. At 5.00% base rates, those levers were impaired, and sponsors needed to generate returns through genuine business improvement. For LP investors evaluating PE fund commitments, the current environment provided a real-time test of which managers possessed authentic operational capabilities versus those who had simply ridden favourable macro conditions. The 2023 vintage would likely reward operators and punish financial engineers.

Signal to Watch

Whether PE sponsors would increasingly turn to continuation vehicles — fund restructurings that extended holding periods — as a substitute for traditional exits, and what discounts would be required to attract secondary capital into those structures.

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