Bridget Walsh, John Morris, Paul Pan, Luke Pais
Private equity (PE) firms thrive on their ability to acquire and build great businesses, even during difficult times. They are adept at creating value quickly and adapting plans as circumstances change. They always have a differentiated approach that gives them an edge, and their interventionist nature is the key to profiting in a competitive market.
Given the continuing significant changes in the macroeconomic environment, how are PE firms changing now? And what can corporate leaders learn from how these companies are adapting? Is not it?
Value creation strategies put in place as the world emerges from the pandemic may be based on assumptions that no longer hold true. Inflation has returned to levels not seen in decades in developed countries, supply chains have been shaken, debt has become much more expensive and the global economy is in trouble.
This means exit valuations can be difficult to achieve and typical holding periods are longer. Achieving desired multiples upon exit is typically more difficult, especially as there is a lack of affordable talent and new technologies, particularly artificial intelligence (AI), are causing waves of disruption across the business landscape. It has become.
Given this uncertainty, PE funds are doing what they do best: quickly adapting to changing times. The five key areas PE-owned companies are looking to transform are cash and liquidity, costs, talent, technology, and sustainability.
1. Cash management becomes more sophisticated.
Making the most of the cash available to a company is always important to how PE operates. That’s because cash is much more valuable to highly leveraged companies than to publicly traded companies. PE portfolio companies are much more sophisticated in how they release trapped cash across all businesses and areas.
Liquidity has become a higher priority. Many PE portfolio companies are critically examining their balance sheets, using better tools to predict cash needs, and establishing sophisticated cash transfer and pooling systems to provide centralized liquidity. maximize and better manage the use of working capital and funds.
2. Costs can be seen under a microscope.
Cost control is important for PE-owned companies, and the approach to it has changed recently. The Fund is currently making targeted investments to upgrade its treasury functions to transform the cost management capabilities of its portfolio companies.
New priorities include generating data insights to inform more detailed cost decisions and implementing more robust governance controls for spending and investment decisions and reporting.
PE funds are also working hard to create operating structures that allow them to increase operating leverage as their portfolio businesses grow. Some funds are recruiting operating partners to handle specific treasury functions to facilitate this effort.
3. Increase value creation by revolutionizing talent management.
Talent management often means giving talent, such as finance or technology, the tools and support they need to improve their performance. And when funds make acquisitions, they take a more granular view of talent, what skills they have, how those skills can be improved, and what other companies in their portfolio are doing. You are asking how you can pool or move to benefit the. A company-wide specialized team to prepare for the risk of cyber attacks.
4. AI is dominating the technology agenda.
With businesses under financial pressure, the appetite for large-scale digital transformation is decreasing. The fund focuses on how to extract more value from the technology you already have.
The rise of AI is causing many private equity leaders to rethink their technology priorities. The potential impact of AI has become more prominent in due diligence over the past year. Funds are asking: How can AI disrupt businesses, their operating models and balance sheets? Where will AI create opportunities and where will it pose threats? ? PE funds are asking more questions about how AI can lower barriers to entry, allow competitors to enter the market, or create opportunities for companies to enter adjacent markets and segments.? I am.
Alongside strategic thinking, funds are doing a lot of work to prepare their businesses for AI, including generating or collecting the kind of data needed for effective AI. AI also increases sales value through revaluation and increased multiples.
5. ESG is a catalyst for value creation.
Improving the environmental, social and governance (ESG) performance of portfolio companies is often an integral part of their value creation strategy. Some initial public offering (IPO) routes are closed upon exit if a company is unable to meet his ESG reporting requirements.
Another reason why funds are likely to stick to advanced ESG approaches is because the investments they receive often have ESG commitments attached to them. While his ESG contribution to investments should not be overestimated, PE funds are more likely to view his ESG as a source of value rather than a risk issue.
Relentless focus on value creation
What can we learn from how PE firms are responding to today’s climate?
Some funds hold companies for the long term, but that doesn’t mean they’re slowing down the pace of value creation.
PE has always taken an interventionist approach and relentlessly focused on what matters most. In these uncertain times, companies are innovating their approaches to value creation and portfolio transformation. This allows companies to optimize performance during long hold periods while achieving interim performance goals and building agility for exit options and speed when opportunities arise.
All of these approaches to developing value creation strategies can also be applied to the corporate world, as business leaders seek to learn from the PE firms doing the best.
Learn more about how our private equity value creation team can help your organization.
Bridget Walsh is EY’s Global Private Equity Leader
John Morris is a UK private equity value creation leader
Paul Pan is the Value Creation Leader at EY-Parthenon Americas
