One hot area for private equity deals in innovation last year was cybersecurity, following a few years of somewhat stagnant growth, the AIC report said. The report called out identify theft as affecting hundreds of millions of people in 2020 and 2021. To grow and innovate, more than 200 cybersecurity companies welcomed private equity investment to fund development, broaden offerings and open doors to other industries.
A surprising contribution of the private equity investor is the acceleration in moving ESG from a compliance burden to an opportunity to create value.
“This is the massive shift that we’ve seen in ESG just over the past 18 to 24 months,” Carnegie said. “It’s this big mindset shift that’s happened that looks at ESG not just as a set of discrete factors that have implications for particular types of companies, geographies or industries, and not just something that is seen from a risk management perspective.”
Carnegie said ESG is, for private equity firms, a top-of-mind conversation that is happening across the industry, even for firms that don’t have ESG in their agenda. “It’s recognizing the role that ESG plays in helping to build better companies,” she said. “If we take the example of cybersecurity, this is an issue that affects companies across the board.”
From that ESG perspective, Carnegie said her private equity clients would first confirm that they’re managing the risk associated with cyberattacks on their portfolio companies, but then they’d also look at the value creation side and consider how they can invest to contribute to solutions.
“It really is a sea change,” Mincey agreed. “In the old days, maybe two years ago, ESG was confined to impact investors or niche, special purpose funds. ESG was a red flag exercise and a risk exercise. But now, easily, 70% of all firms look at ESG factors in the early stages of deal evaluation. And at the bigger funds, it’s 88%. They’re looking at ESG and the value creation in the deal assessment and due diligence process.”
And despite the latest Washington, D.C., news surrounding the SEC’s new rules on private equity cost and performance disclosures, overall the panel was unperturbed by the change.
“PE doesn’t invest in the moment,” Mincey said. “What does the future for PE look like in a red or blue administration? It doesn’t matter. We don’t invest in the cycle, but through the cycle.”