In a new report, KPMG has explored the evolving landscape of private company investments, highlighting key drivers such as financial performance, technological advancements, and rigorous governance practices.
Addressing investor concerns regarding overvaluation, economic volatility, and cybersecurity threats, the research study shared by KPMG provides insights into “securing funding and fostering growth, with a particular focus on the strategic importance of sustainability, AI, and transparency in financial reporting.”
To take a pulse on the market, KPMG surveyed “301 institutional investors who invest in private companies, including private equity, venture capitalists, hedge funds, asset managers, and family offices.”
A high-level overview of the key research findings from KPMG are as follows.
Private market investors are seemingly prioritizing “a combination of financial performance metrics and scalability potential when assessing investment opportunities.”
According to KPMG, important takeaways are:
Investors reportedly consider several factors in “assessing the disruption, market position, and competitive advantage of private company investment opportunities.”
While traditional decision-making factors continue to “dominate investment strategy, non-financial metrics are becoming increasingly important.”
When evaluating investment opportunities, financial performance metrics (38%), ROI expectations (31%) and scalability potential (24%) “are the most important factors.”
Notably, 62% evaluate investment opportunities with a balanced short-term and long-term focus “on financial performance but are split on whether they place more importance on a company’s concept (38%) or a company’s founder(s) (31%).”
Investors view technology as both “an industry disruptor and crucial driver of growth.”
Furthermore, 45% believe that technological advances will be the “primary driver of economic growth over the next 18 months.”
Perhaps unsurprisingly, AI is expected to transform nearly every “facet of portfolio companies within the next year, with the greatest impact in data analytics and business intelligence (52%), cybersecurity (52%) and finance and accounting functions (50%).”
In addition to this, investors expect significant investment activity “across key tech sectors over the next 18 months, particularly in AI, machine learning and big data (63%), 5G and advanced connectivity (36%) as well as DLT / blockchain/cryptocurrency (33%).”
65% of investors assess innovation and patent records “as part of their due diligence, while 64% evaluate the adoption of emerging technologies to determine competitive positioning.”
However, investors are cautious about risks that could “hinder economic growth.”
Inflation (35%), interest rates (33%) and cybersecurity risk (27%) “are the top risks investors monitor.”
Investors are particularly wary of the risks associated with data breaches and cyber-attacks, with “81% saying cybersecurity and data protection reporting measures have increased in importance over the past year.”
Nearly half (48%) of Private Equity investors note “increased value in this area of reporting, likely due to higher levels of investment in financial services and fintech where data privacy risks are top-of-mind.”
As stated in the update from KPMG, governance, cybersecurity, as well as sustainability are “increasingly critical in investment strategies.”
Private market investors are also recognizing “that long-term resilience and sustainable growth are closely linked to strong governance, ethical practices and social responsibility.”
While financial performance, future projections and return on investment (ROI) “remain the top considerations, governance and non-financial reporting are increasingly critical to driving investor confidence.”
Meanwhile, private equity investors are more focused “on pricing and profitability”
And venture capitalists place more importance “on evaluating a company’s unique value proposition.”
Additionally. asset managers are prioritizing the “evaluation of a company’s technological capabilities and innovation pipeline.”
As the investment landscape for private companies continues to evolve, financial performance, technological innovation, and governance “remain central to investor decision-making.”
The KPMG report concluded that while investors are eager to capitalize on high-growth opportunities, concerns about “overvaluation, economic uncertainty, cybersecurity threats, and regulatory changes highlight the risks associated with private company investments.”