NextWave Private Equity

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.

Pete Witte, EY Global Private Equity Lead Analyst, explores the key themes and market dynamics from Q1 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 1Q 2021: The first quarter of 2021 was a blockbuster quarter for PE deals, and in fact was the highest of any quarter in the past decade. Technology gained maximum traction during the COVID-19 pandemic and remains a powerful thesis. The SPAC market expanded at an unprecedented rate during the COVID-19 pandemic. Holding periods could increase as a result of the pandemic, although IPO exits rebounded strongly in 1Q. Finding the right target at the right price remains a challenge in an uncertain market.

DeJeana Chappell, EY National Workplace Leader and Senior Manager in the EY Corporate Real Estate Practice, describes the focus areas and priorities of a robust workplace reimagination strategy. Contact DeJeana: DeJeana.Chappell@ey.com Visit ey.com to read our latest private equity perspectives. The COVID-19 pandemic has given companies an opportunity to reimagine their real estate and talent strategies and self-disrupt legacy practices, philosophies and ways of working to shape their future workforce and workplace strategy. While many companies have evolved their workplaces in recent years, not all have confronted and fully digested both the real estate and talent implications of flexibility and remote work. The COVID-19 pandemic has both accelerated existing momentum on this topic and catalyzed new, and perhaps overdue, conversations. There is an undeniable disconnect between historical office occupancy metrics and executive perception. Industry data suggests that, pre-pandemic, average annual office occupancy in the US across sectors hovered around 40%; a stark contrast to leadership perceptions that teams were onsite every day. In addition, the legacy equation that high office occupancy equals high productivity has been proven obsolete over the last year. As executives struggle to reimagine their workplaces, three key focus areas have become tablestakes: Health and safety considerations such as air filtration, circulation, elevator protocols and cleaning protocols Cost savings such as square footage per headcount, geographical location strategy, reducing or eliminating space altogether, and real estate capex needs Cultural implications of flexibility, autonomy, productivity, personal accountability, collaboration and connection A robust reimagination exercise must do the following: Survey your employees to understand sentiment and needs, and know that feedback might shift over time Capture leadership insights on business needs and objectives Recognize that one size does not fit all Leverage both quantitative and qualitative data to build a holistic story around the opportunity Balance cost savings with human and cultural needs Identify employee personas and their respective scenarios Take a cross-functional and inclusive approach

Andrés Sáenz, Líder Global de Private Equity para EY, se une a los socios de EY-Parthenon, Ángel Estrada y Juan David Taboada, para explorar qué significa la NextWave Private Equity para Latinoamérica y cómo la digitalización, la transparencia, el propósito y el talento están transformando a esta industria en la región. Visita ey.com para escuchar la conversación completa de 30 minutos. Contact Ángel: Angel.Estrada2@parthenon.ey.com Contact Juan David: juan.taboada@parthenon.ey.com Andres Saenz, EY Global Private Equity Leader, joins EY-Parthenon Partners Ángel Estrada and Juan David Taboada to explore what NextWave Private Equity means for Latin America and how digitization, transparency, purpose, and talent are transforming PE in the region.

Ángel Estrada and Juan David Taboada, EY-Parthenon Partners in Mexico City and Bogotá respectively, join Winna Brown to discuss industries of interest for PE in LATAM. Contact Ángel: Angel.Estrada2@parthenon.ey.com Contact Juan: Juan.Taboada@parthenon.ey.com Visit ey.com to read our latest private equity perspectives. The number of Limited Partners (LPs) with exposure to Latin America (LATAM) continues to trend higher. According to the latest survey from the Latin American Venture Capital Association (LAVCA), about two-thirds of large LPs currently have exposure to LATAM, up from less than half five years ago. Moreover, allocations are rising: LATAM investments account for nearly 25% of LPs' emerging market investments, up from about 15% five years ago. LATAM is a heterogeneous region with a growing population and household income but is not yet mature, therefore providing attractive opportunities for private equity (PE). Industries with especially high potential for growth include: Agribusiness Renewable energy FinTech Education Health care Third-party logistics In addition, one of the biggest regional opportunities is the consolidation of businesses into truly regional "multilatinas." While this has proven to be a daunting aspiration, the size and scale of the opportunity remains compelling for PE investors. A few critical data points PE investors must understand before investing in LATAM include: Each country has unique political, economic, regulatory and cultural factors to understand and navigate. Every country of interest should be analyzed separately. Reliable data is elusive, therefore increasing its value and importance. Many companies are family- or entrepreneur-owned. Corporate governance is less mature than in the US or Europe. Investors must be flexible in dealing with stakeholders.

In this episode, Karim Anani and Alex Zuluaga, EY Global SPAC Practice Co-Leaders, explore why SPACs attract PE investors and advise how they should manage SPAC transactions. Contact Karim: karim.anani@ey.com Contact Alex: alex.zuluaga@ey.com Visit ey.com to read our latest private equity perspectives. Special Purpose Acquisition Companies (SPACs) are rapidly evolving from an interesting option to a desired path of taking a company public. This malleable vehicle is becoming better understood, more widely accepted and is proving to be a highly adaptable way to meet the needs of both operating companies and investors. A key factor in this flexibility is because a SPAC transaction is a merger, not an IPO. Unlike a traditional PE fund vehicle in which a fund invests in multiple companies, a SPAC will instead effectuate a single transaction. As a result, a PE fund's investment philosophy, strategy and approach for a SPAC differs from its traditional investment model. A SPAC appeals to private equity (PE) investors for several reasons: Speed at which capital can be raised Opportunity to expedite entry to public market Ability to tell the story with the aid of future projected earnings of the company Opportunity to explore a different investment thesis Potential for significant upside as SPAC sponsor Definition of minimum cash and financing structuring options on the front end create a lower risk of deals falling apart PE funds interested in utilizing a SPAC as an exit vehicle should consider the following recommendations: Define transaction goals and value drivers Choose a SPAC that aligns with the industry of operating company "Get your house in order" to be more attractive for a SPAC exit Attend to backward-looking compliance procedures Ensure company is able to function like a public company from an operational and talent standpoint Anticipate the regulatory and compliance landscape to continue evolving

Sally Jones, EY UK Trade Strategy and Brexit Leader, recaps the current state of Brexit and advises PE executives how to navigate the transition. Contact Sally: sally.jones@uk.ey.com Visit ey.com to read our latest private equity perspectives. The Brexit deal released at the eleventh hour of 2020 caught many businesses off-guard. According to research by UK in a Changing Europe, the economic impact of Brexit is projected to have twice the impact of the COVID-19 pandemic on the UK economy. The path forward for service-based business remains especially uncertain. Services have become potentially unlawful to provide, as member state regulation, movements of people, and dataflows between the UK and Europe are either unclear or restricted. Questions service providers must now ask themselves include: Am I lawfully allowed to provide my services? Can I travel to my client to deliver my services? Can I legally deliver my services remotely? Many private equity (PE) investors had already assumed a no-deal Brexit, choosing to pre-emptively migrate business operations from the UK to Europe so they could avoid disruption as Brexit negotiations progressed. Foreign direct investment (FDI) into the UK fell to near zero in 2020, as wary investors allocated capital to other markets in which they had more confidence. It is possible the retrospective elements of the UK National Securities and Investments Bill and the resulting uncertainty and risk it creates for investors could be damaging to UK attractiveness. The US has now eclipsed the UK as the #1 most attractive G7 nation for investment. Over the coming months, as the immediate disruption ends, PE investors will have a better idea of how to resize and reshape investments and operations as the "lay of the land" emerges in the UK. PE firms must monitor how their portfolio companies are trading, as value can erode quickly. Portfolio companies can employ five tactics to navigate post-Brexit uncertainty: Create a response team that includes senior decision-makers Communicate transparently and frequently to all stakeholders Monitor rapid changes to legalities around dataflow between the UK and EU Anticipate cost increases and decide whether to absorb them or pass them to customers or suppliers Understand new regulations as quickly as possible

Andres Saenz, EY Global Private Equity Leader, explores three hypothetical future scenarios and how they impact PE's right-to-win in 5-10 years. Visit ey.com to read our NextWave Private Equity report. The future for private equity (PE) is going to look very different in the coming years. New technology, tighter regulation, retail investor empowerment, growing digitalization and increased competition are set to impact heavily on how the PE industry functions. To bring these impacts to life, we explore three hypothetical scenarios for PE in this new landscape. "Democratization of investing" Retail investors (investing relatively small sums) can participate in the PE universe in a way they have never been able to before. New PE fund structures combine with online trading apps and brokerage platforms to allow ordinary investors access to the same functionality previously reserved for pensions, endowments and foundations. "First artificial intelligence fund raises over US$20b" A PE firm competes with top Silicon Valley names for talent and resources to build the first fund driven entirely by artificial intelligence (AI) and data analytics. Pulling data from thousands of disparate sources, the fund algorithmically originates deal ideas, monitors portfolio companies and charts an optimal path for exit. "A private equity firm becomes the world's largest employer" While this represents great success for the PE sector, it also increases levels of responsibility. Regulatory bodies scrutinize more heavily the duty of care that PE firms have to their employees, portfolio companies and the general public. PE firms must begin to think now about how they will thrive in a future in which these scenarios are playing out in real time. Acquiescing to a lagging position is not an option for PE if they want to remain competitive in 5-10 years as the industry landscape and right-to-win continues to evolve.