Value Creation: Finally, Some Great News in 2023
Give and Don't Let Go
Why does the grim uncertainty of 2023 bring good news for the companies considering Private Equity backing? Because investing into strong business fundamentals is now the most attractive value creation route.
Alvarez & Marsal (A&M), a global consulting firm that specialises in turnarounds and performance improvement, has recently released their 2023 report on Transformational Value Creation in Private Equity. For this survey, A&M interviewed approximately 200 C-level executives at leading mid- and large-cap PE firms, as well as portfolio companies across 10 European countries.
Facing the high interest rates and a sobering market for private valuations, PE playbooks are shifting focus. Operational improvements, sustainable business models, and digitalisation investments are driving the PE priorities – building stronger long-term business fundamentals for the companies they own and operate.
PE- backed companies consistently outperform their public peers – both on the revenue and the EBITDA growth metrics. The shift in PE priorities in the current market is a great opportunity for all – since it’s the operational improvement skills, not the financial leverage, that creates a performance advantage.
The key insights from the A&M report are all about the increased sense of urgency, the value of operational improvements, and reduced focus on leverage and multiples expansion:
OUT:
are financial engineering and simple cost reduction
IN:
are operational enhancements through:
better pricing
operational and service excellence
digital transformation
cash and liquidity management
INCREASED INTEREST:
in automation of complex business processes through digitalisation
in leveraging machine learning to improve demand forecasting, inventory management and SIOP
HIGHER URGENCY:
Investors are keen to launch the transformation programs as early as possible in the deal cycle (not waiting 12 months post-deal anymore)
Why is this a big deal? Because it’s a huge opportunity for the privately owned companies to define their own future and a sustainable business model and execute on it.
In the past decade, value creation strategies have heavily relied on leverage and multiples expansion. It has been painfully hard to compete without access to large investment facilities. The emphasis has been on growth and footprint expansion, as well as moving the companies “up the multiples benchmark” ladder.
Some companies have been shifting their industry definition to land in the higher-multiples benchmark. WeWork, trading at the Tech multiples while managing commercial Real Estate, is probably the most extreme example.
Others invested into growth (often unsustainable) to reach the size that ensured higher multiples. While reviewing hundreds of SaaS and Digital Services businesses in my M&A work, I have seen quite a few companies create custom or non-repeat business to reach the higher-multiples of a “scale-up” rather than the “start-up” category.
Today’s shift of value creation in PE towards deeper operational performance improvement implies that the companies themselves can also define and deliver on these strategies, investing smaller and more phased amounts into talent, skills, and infrastructure – rather than having to raise large amounts for large-ticket and high-risk marketing and expansion plans.
For many companies, this is a unique opportunity to retain independence, build up internal skills and infrastructure, and align growth priorities with and sustainability of the business model.
With the right skills and relatively lightweight infrastructure, value creation steps don’t have to require a change of ownership or an investment profile.
What are the examples of such expert-supported, Do-It-With-ME (DIWM) Value Creation Levers?
1. Cash and liquidity management
Surprisingly a lot can be achieved by improving the cash flow forecasting, paired with reviewed and optimised vendor payment terms.
As pointed out by Deloitte, weekly direct cash flow forecasting has been more commonly associated with distressed companies, but no more. No longer a pure treasury exercise, this type of modeling can be embedded in — and integrated with — the larger financial planning and analysis function of the entire organisation, using operational stakeholder input to inform the analysis.
Depending on the size and complexity of the company, an experienced financial modeling expert and straightforward modeling tools can deliver an upside in a matter of months.
2. Better Pricing
As a long-time Analytics Nerd, I continue being amazed at the progress in data collection, modeling, and customer insights of the past decade. Even for the companies without the FAANG scale of tech and data infrastructure, pricing improvements are no longer synonymous with simple price increases.
It is now possible to understand and quantify the value that the customers gain from using your products, identify distinct value-based customer segments, and align pricing with value creation. A combination of real-time customer surveys, qualitative research, and triangulating internal and 3rd party data sources allows to step up the customer understanding, improve and prioritise the proposition and product development, and get the pricing to be aligned with the customer interests.
While not as much of a quick-fix as the liquidity management, value-based pricing and customer insights-driven proposition development deliver significant value uplift for the long term.
Such phased investment, paired with the data collection infrastructure that can be reused for other operational improvements, is another great way to create long-term value uplift without a step-change in company ownership or investment profile.
So, what’s in it for me, you may ask?
If your company has a clear vision, your strategy is set, and you want to gain more time to deliver results and grow value independently before deciding on the next fundraising round, there are things you can and should be doing yourself, using the PE playbook but relying on your own talented employees, supported by external experts and lightweight data infrastructure solutions.
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