Why PE must embed geostrategy to win in the market

Jon Shames, Senior Partner and Leader of the EY Geostrategic Business Group, joins Winna Brown to explore why PE must embed geostrategy in both deal lifecycle and organizational culture to recognize unique opportunities and drive investment decisions.

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The geopolitical landscape is shaped by four disruptive forces: globalization, technology, demographics and the environment. Private equity firms need geostrategy to manage a shifting political environment with the objective of finding opportunity amid geopolitical risk. It is necessary to develop a culture in which these considerations are explored, resourced and incorporated into all steps of deal flow, ESG and LP relationships.

A geostrategy is a powerful way for private equity firms to differentiate themselves and win in the market. Some PE funds have a more sophisticated and proactive approach to geostrategy while others are more reactive and ad-hoc: whatever the chosen approach, there is ample room for PE to further embed geostrategy into investment committee decisions.

Geopolitics shouldn’t just be about risk and worrying about the downside: it should be about driving the investment strategy from a proactive, informed perspective that yields unique opportunities that may not have otherwise been considered. It’s also about making sure a deal makes sense given the complexity of risk in the current geopolitical and broader ESG environment. 

A successful geostrategic framework should follow:

• Scan: establish and maintain the ability to identify, monitor and assess political risk.
• Focus: evaluate the impact on key performance indicators, mapping the political environment to the company footprint.
• Act: develop a portfolio of robust geopolitical risk management instruments and build a growth-oriented geostrategy.

Five key geostrategic practices PE executives can adopt:

• Political risk is here to stay and is increasingly more complex.
• Firms need to refine their philosophical and organizational perspective.
• PE firms must embed geostrategy into every stage of the deal lifecycle from origination to exit.
• Consider developing a geostrategic center of excellence (COE) that empowers executives to move beyond risk identification to opportunity assessment.
• Geostrategy is more than a “check the box” compliance exercise: it should be integral to a firm’s investment decision process, incorporated into ESG and culturally valued.