Pete Witte, EY Global Private Equity Lead Analyst, explores the key themes and market dynamics from 3Q 2021 that are top of mind for PE investors. PE Pulse is a quarterly report and corresponding podcast miniseries that provides analysis and insights on private equity market activity and trends. Visit https://www.ey.com/pepulse to view this quarter’s summary and infographic.   Five takeaways from 3Q 2021: Global M&A markets are on their way to a record year, with private equity (PE) in the driver’s seat. PE as an asset class continues to grow, with retail and insurance markets positioned to drive future asset growth. PE firms’ continued focus on the technology sector is driven by rising needs for security, automation and the digital transformation of critical organizational functions. Health care is garnering significant interest from PE due to favorable macro tailwinds, long-term growth expectations and an anticipated increase in consumer spending. Deal activity is not limited to large-scale deals; middle market deployment is the highest since the global financial crisis.  

Hanne Thornam, EY Norway Head of Climate Change and Sustainability Services, joins Winna Brown to share why PE is in a unique position to lead our transition to a low-carbon, circular economy. Contact Hanne: hanne.thornam@no.ey.com As private equity (PE) firms focus on ESG, they must also pivot to a long-term, forward-thinking mindset. For an industry accustomed to using historical data to project the next four to five years, this is no simple task; however, it is an existential one. Climate change will mean our world looks very different in a decade regardless of the action we take (or don’t take), and PE firms are uniquely equipped to lead this mission, should they choose to accept it. ESG topics have both financial and commercial relevance, and PE must define and track KPIs that are specific to each portfolio company. It is no longer optional to engage in the ESG conversation, as a lack of awareness is an inherent business risk. Two overarching climate scenarios are possible, both of which require comprehensive adaptation and imagination: A warming scenario in which rising temperatures impact access to raw materials, stoke political stability and disrupt value chains A transition scenario characterized by increasing regulation, bans and changes in technology and consumer preferences Six ways PE firms can shift their mindset to increase their climate competence and confidence: Champion a long-term, forward-looking perspective Cross-pollinate climate data across workstreams Incorporate climate scenarios as core data points Engage diverse perspectives Embrace complexity and curiosity Verify competence on climate and environmental risks in investment teams

Political risk is creating challenges and opportunities for global organizations, including private equity (PE) firms and investors who are increasingly exploring cross-border deals as valuations soar across the US and Europe. On a previous episode, we talked about why PE firms must embed a geostrategy so they are able to recognize unique opportunities and use that strategy to inform their investment decisions. Today, we dive into three specific areas of geopolitical risk that are especially impactful for and relevant to private equity funds right now: COVID-19 pandemic: increased tension and competition between big regional powers will lead to an environment in which PE must carefully consider and anticipate the implications for cross-border deals. Tech sector: governments and regulators will have a massive influence on the tech sector in the coming years and it will create both political risks and opportunities for investors. Climate change: increasingly active governments and regulators will create a patchwork of environmental legislation which will make it much more difficult to operate across markets. Contact Famke: Famke.Krumbmuller@fr.ey.com

Luke Pais, EY ASEAN Private Equity Leader, explores why Southeast Asia is a vibrant region for PE investors who adeptly navigate local dynamics.   Contact Luke: luke.pais@sg.ey.com According to the Preqin Investor Survey conducted in November 2020, Southeast Asia is among the top three emerging markets ideal for private equity (PE) and venture capital (VC) investment in the next 12 months. The region is welcoming to foreign capital, with entrepreneurs and family conglomerates actively seeking capital and focusing on succession planning. PE’s field of play in the region is dynamic. Because the region demands quality infrastructure to support its burgeoning and young population, the field of play includes specialist funds focused on real estate, infrastructure, renewable energy and digital. The technology sector is especially vibrant and impact funds are becoming more prevalent. While credit has historically been a domain of banks, PE credit products are emerging in the region given balance sheets have become healthier since the great financial crisis of 2008. Lastly, family conglomerates in the region often function like PE funds and compete against PE funds in the deal space. PE has historically done well in the region by carefully selecting the right companies and preparing them to expand internationally. As a result, PE-backed companies have been attractive to multinationals and trade sales to strategic investors in the US, China, Europe and Japan have been the dominant exit thesis in the region. Learning outcomes: PE should consider localizing their strategy to include a regional headquarters in Singapore in combination with strong market coverage in various other Southeast Asian countries. PE firms must be clear about the value they bring to the table in a competitive deal environment in which discussions have shifted from valuation to value proposition and value creation. Successful PE funds have built local relationships over time as companies seek partnerships rooted in shared aspirations. ESG is increasingly important during due diligence, as access to capital depends on achieving ESG benchmarks and commitments.

Cybersecurity professionals John Nugent, Vice President at Apax and Paul Harragan, Associate Partner at EY-Parthenon, explore how PE can manage cybersecurity risk and why it should be viewed as a value creation lever rather than a cost. Contact Paul Harragan: paul.harragan@parthenon.ey.com  Cyberattacks happen constantly, and companies display a wide range of preparedness. Private equity (PE), like any other industry, is not immune from this growing threat. 1H2021 saw increase in ransomware attacks in PE portfolio companies, which is especially troublesome for an industry that has traditionally taken a less rigorous approach to information security and cyber defense. PE has, however, begun to embrace the necessary investments needed to understand their intrinsic risk, prepare for the inevitable breach and respond quickly. While it is inherently difficult to gauge or predict the monetary cost of a breach, PE must consider that a breach can degrade an asset’s sale price or, in rare cases, be a “dealbreaker” altogether. In addition to potential impact on transactions, skyrocketing insurance costs render the cost of negligence far greater than the cost of investing in a comprehensive cybersecurity strategy. Cybersecurity due diligence is increasingly becoming industry standard and should focus on past, present and future. For PE, future risk is an especially critical consideration since capital deployment can dramatically change the threat landscape of an asset. Five gold standard cybersecurity practices for PE include: Understand your threat landscape Identify what a hacker would find valuable and attractive about your company Identify critical business functions and adopt procedures to monitor, defend and preserve functionality in the event of an attack Inform security leadership of the technology strategy and broader business plan so they can anticipate changes to the attack surface Understand how new technology can generate new attack vectors and impact your threat landscape

Pete Witte, EY Global Private Equity Lead Analyst, explores the key themes and market dynamics from 2Q 2021 that are top of mind for PE investors. The PE Pulse is a quarterly report and corresponding podcast miniseries that provides analysis and insights on private equity market activity and trends. Visit https://www.ey.com/pepulse to view the summary and infographic.   5 takeaways from 2Q 2021: Exit activity via M&A and IPO are seeing record levels of activity, which is impacting the entire PE life cycle, including fundraising. Fundraising is picking up as demand from investors strengthens and funds start to close in earnest once again. Deal activity and deal volume are on track to comprise the most active half-year on record. Deal sizes are increasing due to increasing post-pandemic certainty and the accumulation of dry powder. Club deals are increasing in prevalence for large-scale deals.

Lindsey Kiely and Bhakti Nagalla of the EY-Parthenon Consumer Industries and Private Equity practices join Winna Brown to explore the consumer product categories, behaviors and trends investors should keep an eye on. Contact Lindsey: lindsey.kiely1@parthenon.ey.com Contact Bhakti: bhakti.nagalla@parthenon.ey.com  The consumer products and retail sectors have certainly been ones to watch. The COVID-19 pandemic both accelerated existing trends and forced the industry to accommodate novel consumer need states and demand shifts. Evaluating the sustainability of growth in these categories has become a key part of the diligence process as investors struggle to predict future consumer demand. In today’s competitive deal environment, investors are seeking proprietary deals or early LOI more aggressively and are also pivoting to industries that support consumer goods and services (i.e. contract manufacturing, logistics, technology).   Consumer behaviors have shifted as they spend more time researching products online, increasingly favor masstige price points and demand next-level experiences from brands and retailers both online and offline. These shifts are causing investors to more heavily scrutinize a brand’s online presence, pricing model and cost models. Interesting categories for investors to watch include: Consumer health Pet health Home products In-home entertainment and hobbies Online retail Supporting industries

Greg Brown, Executive Director at the Institute for Private Capital and Finance Professor at the University of North Carolina (UNC) Kenan-Flagler Business School, joins Winna Brown to discuss what the Institute’s academic research says about PE’s performance and the role private capital plays in the global economy. To get in touch with Greg, email uncipc@kenan-flagler.unc.edu  The Institute for Private Capital (IPC) is a non-profit, multi-university research initiative that’s housed at the University of North Carolina (UNC). Its mission is to improve public understanding of private capital’s role in the global economy by providing unbiased and independent research, conducted by a network of academic affiliates, with support from private sector companies. There are more than 35 member institutions involved in IPC – EY is one such institution – and these institutional supporters play a critical role in ensuring IPC research solves specific, practical issues affecting the PE industry. Two topics are consistently top of mind for PE investors: PE’s role in the investment portfolio and the specific factors that predict future returns. IPC research explores an array of additional topics, and some of their findings include the following: Portfolios with private fund investments have superior returns on a risk-adjusted basis. There is a “risk-return pecking order” in which PE produces better risk-adjusted outcomes. The performance of individual deal partners is a reliable indicator of future fund performance. There are distinct determinants of performance at various stages of a fund’s life cycle. PE makes meaningful and direct contributions to portfolio company operations. After PE enters a new market, there is a positive spillover to the broader economy in the form of an overall productivity increase. Over the coming years, there are two major focus areas for research and discussion in the academic community regarding private equity: To more deeply understand how private assets fit into the broader portfolio management process To identify performance drivers at PE-backed portfolio companies and explore how this has changed over time

Jeff Vogel, EY-Parthenon US Managing Director and Head of the Software Strategy Group, joins Winna Brown to explore the complexities and key trends shaping the software deal landscape. Visit ey.com to read our latest private equity perspectives. The “software economy” is comprised of companies that sell or license software as well as software-enabled business services companies that differentiate themselves on the basis of their software. Because a software asset is especially complex to valuate and diligence, PE firms and the advisors who serve them have transformed their talent strategy to attract a wide spectrum of operational experts ranging from serial CTOs to young entrepreneurs. A passion for technology combined with partnering experienced executives with curious young talent helps teams remain agile and responsive to rapid change. A software asset is different from a traditional asset for three important reasons: Markets are amorphous and difficult to size. Revenue potential and gross margins are high; however, R&D expenditure is also high because the product is must constantly evolve to stay competitive. Technical debt, unlike traditional debt, is difficult to quantify and does not appear on a balance sheet, so a PE investor may unwittingly sign up for obligations requiring significant capex. Five trends shaping the PE/software deal landscape: Role of PE: PE is shaping the software landscape by providing access to capital and focusing on building companies. Long-term value: PE is increasingly prepared to hold software assets for longer and are therefore optimizing for LTV. Growth: high valuations require PE to underwrite for growth, not solely for cash flow. Hybrid deals: PE firms that were traditionally majority stakeholders are now considering minority stakes. PIPE deals: private investment in public equity (PIPE) deals are leading to cross-fertilization in management and strategy between public and privately held companies.

Tricia Glynn, a Partner at Advent International, shares best practices from Advent’s renowned DEI program and discusses how private equity (PE) firms can build an inclusive culture and incorporate diversity, equity and inclusion (DEI) into their value creation thesis. Tricia has been a PE investor for over 20 years and currently serves on boards such as Lululemon and Olaplex, and co-leads Advent’s North American Retail, Consumer and Leisure sector team.  For more information on Advent's DEI program, visit  https://www.adventinternational.com/about/diversity-and-inclusion/  DEI is not PE’s strength. According to Preqin’s Women in Alternative Assets report, only one-fifth of industry employees and 12.2% of senior roles were female in 2020. The situation for underrepresented minorities in the industry is dismal, with only 2% Hispanic and 1% Black venture capital (VC) investors in the US (Gompers and Kovvali, 2018). As of December 2020, nearly 50 buyout firms and investors had signed a global initiative launched by the Institutional Limited Partners Association (ILPA) to improve diversity among their ranks; a substantive and public step in the right direction, but as Tricia says: "The industry has a long way to go.” A PE talent strategy must incorporate a proactive approach to DEI with a strong tone set “from the top,” ensuring diverse employees feel wanted, valued and sponsored. Incorporating a comprehensive DEI strategy addresses a firm’s commitment to elevating society while expanding its talent pool and creating new perspectives in investing. Advent views DEI as foundational to its business model, competitive positioning and talent strategy so it can be both the chosen buyer and chosen employer. Five things PE can do to build DEI companies and cultures include: Find, engage and learn from DEI experts in your network. Hire experts (i.e., advisors, academic researchers) who understand your industry and know how to drive DEI culture. Track data to identify your biggest problems, determine where you want to drive change and hold yourself accountable. Give permission to speak openly: fear of “saying the wrong thing” holds leaders back from engaging in DEI so allowing well-intentioned people to learn in real time is important. Hold everyone in the organization accountable.