While the last few years have seen many industries struggle to recover from the blow that COVID-19 caused to global business, 2020-21 marked a record-breaking period for private equity. Trillions in monetary, pandemic-triggered stimulus resulted in a historic rise in exits and dealmaking.
After peaking in the first half of 2022, the private equity market has now cooled off. But not for long. Private equity expert and Williams Lea Tag Group CFO Gary McGaghey explains that lulls in private equity never last, and the market is currently seeing the first signs of a pickup of transactions.
Here are Gary McGaghey’s:
- Predictions for private equity in 2023, including the likelihood of a global recession and the potential impact on the market.
- Perspectives on trends in environmental, social, and governance (ESG) strategies and the post-pandemic workplace culture for the year ahead.
Gary McGaghey explains why capability building is now a fundamental part of the CFO’s role
Gary McGaghey’s 2023 market trend predictions
While there is much turbulence in the current financial climate, private equity thrives on uncertainty. Gary McGaghey predicts that the private equity market will pick up again, making a substantial rebound by the middle of the year.
He adds that, in comparison to the outstanding performance of recent years, 2023 will still be a quieter year for private equity. But despite the relatively slow pace, the industry is powering away, and there are still plenty of opportunities to be had this year.
Balancing caution and initiative
The market has faced challenges in terms of multiples coming down softened lately, making it harder for private equity firms to generate desirable returns on investment. However, Gary McGaghey suggests the decreasing valuation of companies — and therefore lower expectations and prices for their equity — could provide cost-effective opportunities.
As prices have gone down, some of the larger private equity funds (above $5 billion) have seen more affordable targets but stayed conservative in their approaches. At this time of higher interest rates, some fringe elements and smaller firms may overleverage themselves, leading to opportunities for other private equity to sweep in and buy.
Though the CFO advises operating with caution and taking a selective approach when balancing debt and cash flows, Gary McGaghey emphasises the importance of moving on opportunities when the time is right, no matter the market environment.
Gary McGaghey on the likelihood of a global recession
Recent macroeconomic factors, such as political instability in Europe and high inflation and interest rates in Europe and the U.S., have led to concerns over a looming worldwide recession. Leading financial institutions have warned that the global economy could be “perilously close” to a recession in 2023.
While Gary McGaghey acknowledges that there’s some congruence between the unique dynamics of each global region, he doesn’t foresee a worldwide recession that will impact regions concurrently.
Instead, he predicts the next six to nine months will see a rolling recession that will affect regions at different times. This staggered recession may involve the U.S., China, and Europe each experiencing separate slowdown periods for a few months before recovering.
Depending on the industry and region, businesses will see a sliding scale of impact from negative to positive. In particular, the CFO predicts that the UK will face a tougher 2023 than most other countries due to high inflation caused by multiple factors, such as rising energy prices.
Overall, Gary McGaghey is optimistic and says the signs point to a surprisingly positive outcome. Although 2023 will face a slow first six months, by the middle of the year, “green shoots” appearing in certain regions will usher in a stronger second half.
Distress sale opportunities in retail and tech
While regional economic recessions might impede other industries, Gary McGaghey foresees the world of private equity remaining largely unaffected. Some macroeconomic factors may limit how much firms can leverage, but the sector will continue to look for opportunities regardless.
Private equity firms may look to specific industries, like retail, that higher interest rates directly impact, to generate distress sales (acquisitions of companies in financial distress).
Gary McGaghey adds that the technology sector may be another source of private equity opportunity.
After a rocky 2022, when rising inflation and increasing interest rates saw investors flee growth stocks, the technology sector is currently undervalued. As a result, some tech giants, including Microsoft, Meta, and Amazon, are announcing substantial layoffs. In 2023, private equity firms may look to snap up tech companies at a better price.
Sustainability and diversity in the private equity space
Turning away from financial markets, another trend in the private equity space that will continue in 2023 is the ongoing proliferation of strategies focused on ESG.
The private equity industry’s participation in society’s most acute challenges has come to the forefront lately. ESG trends have driven change in the popularity of investment products and
how private equity businesses operate. In one 2021 Statista study, 44% of industry experts believed ESG trends would have a significant impact on how companies would operate in 2022-23.
In his role with Williams Lea Tag (owned by the global equity investor Advent International), Gary McGaghey reports on several sustainability and diversity metrics across the firm’s portfolio. While smaller private equity players may be slower to catch up, the CFO shares that initiatives addressing sustainability and diversity issues are now high on the agenda for many of the larger firms.
Indeed, more individual companies and private equity business associations have made progress on ESG and diversity, equity, and inclusion (DEI) initiatives in light of recent social justice movements. Many bigger private equity companies are following the example set by other professional services firms and hiring DEI consultants, or chief diversity officers, to internalise ESG processes.
Embracing ESG strategies isn’t only good news for the wider world: Diversity and sustainability initiatives are good for business, too. Gary McGaghey explains that many major private equity companies are now taking these metrics more seriously as they recognise value-creation opportunities in driving ESG initiatives. Such initiatives can attract talent, draw in the right buyers, and help with higher valuations.
2023 trends in remote working and office culture
COVID-19 caused a major shake-up for the private equity sector, not only in financial strategies (with an emphasis on sustaining cash flow generation) but also in business operating models.
During the pandemic, many companies that were looking to remove costs from the business model and ensure fiscal security undertook significant reorganisation. Williams Lea Tag was one of these companies: Gary McGaghey shares that an aggressive approach to restructuring and cutting costs resulted in the group emerging from the pandemic as a more profitable business, despite an impacted turnover line.
As was the case for most businesses, the overwhelming transition to remote work was one of the most fundamental changes the private equity group saw to business operations. This transition represented a monumental shift that is still influencing work culture.
On top of this, the proliferation of technology-enabled processes and the rise of remote work:
● Accelerated the offshoring of operations to India and other offshore centres.
● Opened up new opportunities to offshore further core processes in businesses.
This trend provided businesses with significant cost savings opportunities and access to new talent pools offshore.
Remote work during the pandemic
At the peak of the first wave of the pandemic in April 2020, nearly half of UK workers were working from home, with just 31% travelling to work. As of February 2022, remote working had become a new normal for many, with 38% of UK workers aged 30 to 49 still working from home.
The story is similar in other regions of the world, although Gary McGaghey explains that Williams Lea Tag’s large centre in India struggled more with the transition to remote work than its UK offices. While shifting from the company office to home offices in London was, on a whole, a manageable transition, teams in India required additional support to set up the technology and communications infrastructure that would allow them to work at home.
Williams Lea Tag quickly and successfully altered its business model to suit the new work-from-home requirements for teams around the world. Before the pandemic, none of the group’s employees worked from home: At the height of the pandemic, 80% were working remotely.
Gary McGaghey shares that, today, the group’s model still hasn’t returned to where it was pre-pandemic — around 60% of employees still work from home. He doesn’t foresee the figure coming down and predicts that, despite many companies’ attempts to coax workers back into the office, most employees will eschew five office days a week for two or three days a week at most.
The new normal: Enhancing company cultures
At Williams Lea Tag, the adapted business model is far more agile and, with technology now in place to facilitate remote working, Gary McGaghey believes this new normal will continue to operate well.
Many companies are now adopting remote work and hybrid working arrangements — some have even made the full transformation to become fully remote. A McKinsey study found that nearly 60% of U.S. workers can work remotely at least some of the time.
As companies seek to optimise hybrid working models, Gary McGaghey foresees that 2023 will continue a growing trend of enhancing company cultures. For firms that hope to tempt employees back into the office, the CFO advises against pushing the narrative that effective collaboration is only possible in person. Companies and their employees have seen first-hand that remote collaboration is entirely possible.
Instead, cultivating a positive company culture and an enjoyable working environment may be the key to bringing workers back into the office space.
Discover more private equity insights from Gary McGaghey
About Gary McGagheyWith extensive experience as a CFO, Gary McGaghey has helped several private equity, privately owned, and listed companies across various sectors (including fast-moving consumer goods, media, pharmacy, and beverage) maximise outcomes. He joined Williams Lea Tag in 2019: In his role as CFO for the €1.3 billion end-to-end marketing production and business services group, Gary McGaghey is responsible for an expert finance team that works to achieve transformation for the company. He oversees cost restructuring, carve-outs, divestitures, mergers and acquisitions (M&A), balance sheet refinancing, and meticulous working capital cash flow management. Before joining Williams Lea Tag, Gary McGaghey held leadership roles for companies like Unilever, Robertsons, and Nelsons. Gary McGaghey has a Bachelor of Commerce degree from the University of Natal and a postgraduate Bachelor of Commerce degree with honours from the University of South Africa. He also holds a Non-Director Executive Diploma. He is a chartered accountant in South Africa and a chartered management accountant in the UK. |
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