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Private equity value creation

Strategies for operational value creation

Many of the characteristics of private equity investing that led to strong returns have shifted over time, and the pace of change is accelerating. The COVID-19 pandemic has only emphasized the need to have a strong value creation mindset behind every private equity transaction. Aside from the several value creation levers most commonly employed by private equity acquirers, it might be time for financial buyers to look beyond the traditional and usher in a new era for value creation.

The changing value creation playbook

In the current environment, private equity buyers need more impactful value creation levers if they expect to consistently outperform. They need a value creation playbook that extends beyond traditional tactics such as short- or medium-term cost-cutting.

In every private equity acquisition, buyers should examine the potential for strategic improvements and, in some instances, may want to pursue more sweeping business transformations. Their goals should revolve around unlocking value through revenue growth and margin expansion, not just cost control.

We’ve explored several private equity value creation levers beyond those most commonly employed by acquirers.

To identify and deploy the most appropriate levers for a given situation, a comprehensive and innovative approach is required. Private equity buyers should keep a clear focus on developing value creation choices during diligence, validating them during the period between signing and closing a deal, and prioritizing them for execution postclose.

Value drivers beyond traditional expense controls

As deal structuring and cost-cutting provide fewer opportunities for outperformance, successful private equity buyers need a deeper value creation playbook. In addition to the most commonly employed value creation levers, there are two value driver categories financial buyers can tap into: 1) cost transformation that goes beyond traditional expense controls and 2) data-driven growth informed by cutting-edge analytics.

Cost transformation

To try to compensate for an increasingly challenging environment, private equity investors have faced pressure to pull harder on known cost levers in an attempt to squeeze out greater cash flow. The goal of cost transformation is to seek out the cost advantages that come from more fundamental changes in how a business operates.

A range of private equity value creation levers are available under the rubric of cost transformation that can improve margins with lasting effects and without crippling the longer-term prospects of a business:

  • Service delivery model: Find improvement opportunities for support services based on the value they create and their relationship to the business.
  • Organizational design: Create more value by developing sophisticated approach to workforce changes that are built around strategic goals.
  • Business process optimization and automation: Identify processes across a company that can be simplified, standardized, or automated.
  • Demand management: Eliminate unnecessary work to ease the level of effort dedicated to support services. 
  • External spend management: Find opportunities to leverage or reduce spending on purchased goods and services.

Data-driven growth

Value creation levers are all about deriving insights from data-rich environments. Cultivating the capabilities to fully exploit big data allows an organization to be agile and effective in uncovering and monetizing new market opportunities. We see two primary categorizes for PE owners to develop data-driven growth capabilities that can boost revenue and expand addressable market opportunities. They can significantly increase customer lifetime value through digital customer engagement and make better decisions through data-backed market insights.

  • Digital customer engagement. Producing an enjoyable customer journey has become central to customer acquisition and retention. Customers now expect a coherent and seamless experience and a level of engagement that can only be created in a data-rich environment.
  • Data-backed market insights. By combining real-time data on customer behaviors and buying decisions with traditional business experience and knowledge, businesses can pinpoint customer segments, refine pricing, and measure market success. Insights grounded in data allow executives to have a more fact-based and science-backed decision-making process.

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