How are private equity firms coping with a rich deal valuation environment? The industry is addressing the pressure rising deal prices places on returns with as many solutions as there are fund strategies. “If you’re a PE investor looking to get high teens returns, you’ve got to transform the earnings capacity of the business,” says co-chair of Morrison & Foerster’s corporate practice Mitchell Presser

The comments come as private equity investment soars. Private capital invested nearly $1.2 trillion last year, and record fundraising hauls from top private equity funds suggests the trend could continue. As competition for deals increases, so do target valuations.

“Private equity firms are best when they can do similar things at different businesses to create value,” Presser continues. “When they can spot businesses that have underinvested in getting ready for the future, make it better, and sell it. The prices they’re paying for these companies  are so high, the transformation has to be significant; you can rinse and repeat one company after another and get better and better at it.”

Current plays include investing in technology that can lower costs at portfolio companies, standard roll-ups of industries where deal multiples lag, and pre-empting auctions to avoid bidding wars.

Financial sponsors have historically created the largest returns from perfecting execution of established playbooks, agrees Accenture global M&A lead J. Neely. From the industry’s acquisition of life insurance companies to provide pools of permanent capital to the prop co/op co REIT transformation wave of a previous decade, the most lucrative plays have inspired imitators.

“The only thing about PE is it tends to be an industry where if a playbook works for some, there’s other adopters,” Neely says.

Brandon Zero