Preparing for PE’s Future: A Conversation with Pam Hendrickson

The world of middle-market private equity is changing on multiple fronts. How can PE firms anticipate evolving market dynamics and prepare?

Pam Hendrickson, vice chairman of The Riverside Company and chairman of the board of the American Investment Council, joined ACG CEO Brent Baxter to discuss industry shifts and challenges during the “Innovations Shaping the Future of Middle-Market Private Equity” webinar, held Oct. 28.

In this dynamic discussion, Hendrickson gazed out five years from now to forecast trends in market competition, public policy, private capital, the influence of AI, and more. We captured some of the webinar’s highlights below.

Competitive Pressures

Kicking off the webinar, Hendrickson offered a blunt reality about the current state of middle-market PE: “The growth phase of private equity is over.”

Middle-market firms, in particular, are operating in a saturated market and facing greater competition from larger firms and strategics. More founders are preparing to retire, many without a succession plan. What does this mean for the future? Hendrickson predicts industry consolidation and even greater pressure for midmarket firms to remain competitive in a market expected to contract.

Private Capital’s Rise Continues

Private capital has experienced a meteoric rise in recent years as high interest rates and regulatory uncertainty have limited access to capital from traditional lenders. With non-bank lenders, sovereign wealth funds, and family offices stepping into the private capital space, PE firms will continue to benefit from expanded access to finance.

What Hendrickson emphasized, however, is that providers of private capital must rise to meet the needs of business operators not only seeking financing but a strategic partner to support business growth.

Addressing some policymakers’ concerns over private credit risks, Hendrickson clarified common misconceptions. “What’s important is to educate members of Congress that with private credit, the risks are not systemic,” she said, adding that a lender’s financial losses if a portfolio company goes bankrupt are isolated to that one portco and investment firm. Further, matching private capital to borrowers is more tailored than it typically is at a traditional bank. And because capital is locked up for a longer period of time, “you can’t have a run on a private credit firm” like you could at a commercial financial institution.

The New Norm of Hold Periods

Private equity holding periods are at a historic high, hovering around six years, averaging even higher in some sectors,. That’s compared to less than five years in 2020, according to S&P Global data.

When asked whether longer hold periods are the new norm, Hendrickson suggested the briefer hold periods of yesteryear—sometimes as short as three years—was perhaps a bit too quick. “It’s probably healthier for firms and for the market if it’s a five-year hold,” she said. “Three is very fast. You don’t have time for value creation.”

However, PE firms will continue to face pressure to exit and return capital to LPs. Exploring alternative ways to exit and to ensure buyers have “exit optionality” at the time of acquisition will be key strategies moving forward, noted Hendrickson.

More Favorable Public Policy

During the webinar, Hendrickson pointed to several areas of the One Big Beautiful Bill favorable to the middle-market private equity space. These included some pro-growth policies, like making interest deductibility permanent, as well as some growth-incentive tax programs, like carried interest and the expansion of Section 1202.

Overall, Hendrickson’s regulatory outlook for the next five years was optimistic. “We’re positive toward less regulation,” she said. “We expect a much more serene regulatory environment.”

Embracing AI

Artificial intelligence remains on everyone’s mind in middle-market M&A, and the technology will continue to reshape how firms operate. Hendrickson advised M&A professional to get acquainted with the technology and wield it to their advantage.

Currently, The Riverside Company is using AI for deal sourcing, taking advantage of the technology’s efficiency to find potential targets based on specific attributes. For PE firms, using AI to process financials may also be a valuable use of the technology, though Hendrickson emphasized the importance of clean data—admittedly a challenge for many PE firms.

AI adoption should also be a factor in acquirers’ due diligence queries of investment targets moving forward. “Checking their digital readiness is very important,” said Hendrickson. “That means, does their culture embrace it? Do they have clean data? Are their data systems talking to each other? That’s really critical.”

Building a Better Rap

An audience survey during the webinar revealed the majority of attendees—59%—expect deal flow in the next year to increase slightly. Hendrickson agreed with that sentiment, noting that she’s optimistic based on signals of bigger deals returning, pent-up dry powder getting deployed, and valuations rising slightly amid declining interest rates.

With dealmaking expected to pick up, Hendrickson says PE firms will have an opportunity in the coming years to address and shift public perception of the industry, which has attracted some negative attention in recent years. She offered two key tips for firms: One is to send exit announcements not only to major news outlets but to the local media of the market in which the exit occurred, as well as to announce those deals on social media. The second is to invest in communications professionals with strong government relations experience. Doing so could help increase understanding of the value of PE. “It’s an asset class that has proven over the years to outperform public markets, because people care,” said Hendrickson. “It’s our own money, so we really care about what happens.”

Carolyn Vallejo is ACG’s senior editor.

Middle Market Growth is produced by the Association for Corporate Growth. To learn more about the organization and how to become a member, visit acg.org.