The Private Equity Toolkit. Tamara Sakovska

       Geopolitical change. Political decisions can radically change the attractiveness of certain markets. Any shifts in policy that affect the prosperity of the economy, taxation, social environment and corporate governance will have profound implications for private equity transactions. For example, I owe thanks (and deals) to the following geopolitical developments that influenced my private equity career: the introduction of the single currency in the Eurozone, the inclusion of certain Central and Eastern European states to the European Union, the admission of China to the World Trade Organization as well as market deregulation reforms that followed the economic liberalization in India.

       Secular trends. Examples of secular trends include long-term shifts in the demographic makeup, the need of labor migrants to sustain economic expansion, vast differences in wealth distribution across generations, rising obesity rates and distinctive preferences of younger consumers, just to name a few. Any sustainable long-term macro shift could provide a fertile ground for investment.

       Changes in regulation. Deregulation is typically very beneficial for businesses, as their growth becomes less constrained and they can play by the rules of the market economy. Companies typically need to rationalize their operations in order to compete. On the other hand, when regulation tightens, businesses often have a need for fresh capital in order to comply with the changes that might be as extensive as having to adapt their entire business model. There are second-order effects too, such as the rise of new entrants providing tools and services that aid compliance in the new regulatory setting.

       Technological change. Do you remember how the world worked 10 years ago? Technological advances can be very disruptive for companies. Apart from requiring additional investments in infrastructure and personnel, technological shifts might compel companies to alter their strategic direction and invest in new capabilities in order to survive.

       Innovation in financial markets. Increasing market sophistication has a direct impact on the private equity industry. Examples of complex transactions that added fresh momentum to the sector include the advent of the LBO and securitization of leveraged loans. The introduction of certain structural features in private equity transactions such as a “sale and leaseback” has been replicated across numerous private equity–backed businesses that own hard assets.

       Changes in capital market conditions. Buoyant markets enhance deal activity. During record market highs, even businesses with no earnings, no revenues and, sometimes, no customers get bought and sold. When the markets are very liquid and are forgiving of corporate shortcomings, hubris takes over the world. As I mentioned earlier, private equity activity, at least theoretically, should abate. It does eventually but, as a rule, a little too late.

       Industry disruption. Private equity firms are generally enthusiastic about backing industry disruptors. Traditional classroom education providers, retail banks and insurance companies are examples of industries being disintermediated by new entrants backed by private equity investors. However, it would be fair to mention that private equity funds sometimes fail to spot a terminal inflection point in the industry and let disruptors attack companies in their own portfolio. For example, some of the biggest losses in private equity occurred when the business models of music publishing and brick-and-mortar retail companies were completely dismantled by the online competition.

       Sectors with substantial capital requirements. Sometimes there are entire industries that announce large capital expenditures that will need to be incurred by companies operating in that sector. Examples of such capital investments include purchases of new spectrum in telecommunication auctions, the move to hybrid or electric engines in the automotive sector, the development of new techniques to extract fossil fuels and financing the gradual switch to alternative energy sources in power generation.

       Applying successful business strategies to new industries. Private equity excels at identifying proven business models that can be applied to new sectors. On-demand services, asset-light operations, outsourcing, “buy and build” strategies are just a few examples of what has been replicated across industries. Private equity investors look for appropriate business analogies and think: If restaurants operate as a chain, why don't nurseries or schools operate as a chain?

       Replication of successful deal types in new geographical markets. When private equity arrives in a new geography, especially in emerging markets, first deals tend to happen in telecommunications, breweries and branded consumer goods. Why? Because straightforward deals happen first. Private equity funds always seem to be keen to pursue proven investment theses in new countries where there are enough imperfections to warrant a high return.