Are You Maximizing the Operational Value of Your Portfolio Companies test?

Revenue growth is the largest driver of shareholder value creation, yet most PE firms rely on asset structure and cost reduction to add value. That doesn’t have to be the case. With a wide set of top-line initiatives at their disposal, PE firms can unlock large benefits and realize the asset’s full operational value.

 

VALUE DRIVERS

Revenue growth is the largest driver of shareholder value returns for top performing companies (Exhibit 1). Its contribution grows even more impressive over time. Interestingly, cost reduction makes for only a fraction of shareholder value creation.  And yet, most private equity firms rely primarily on asset structure and cost reduction in their quest to add value. All too often the PE firms that focus on revenue growth rely on a limited set of initiatives, mostly pricing and sales effectiveness, and to a lesser extent, expansion through M&A. This limitation affects end results and, ultimately, company value.

 

Exhibit 1. Source of Total Shareholder Return for Top-Quartile Performers
(U.S. S&P 500, %, 1997 – 2005)

Source: BCG, Great Prairie Group

 

TAKING A WIDER VIEW

With average time to exit getting to 6 to 7 years, PE firms can easily get beyond the usual quick hits of pricing and sales effectiveness. Top PE firms use shareholder-value growth initiatives that are increasingly critical to creating operational value and that public corporations have been using for years.  These include the following:

  • Strategic initiatives to expand a profitable core business into attractive markets
  • Tactical initiatives to grow market share by maximizing customer acquisition, profitability, and retention.

 

Exhibit 2. Operational Value Improvement Initiatives

Source: Private communication, Great Prairie Group

 

BENEFIT

Fielding a wider set of top-line growth initiatives enables PE companies to realize the asset’s full potential, and unlocks many important benefits, including:

  • Accessing More Deals.  Deals become possible that would otherwise not justify
  • Realizing More Value.  Simply put, profitable growth generation adds more value to the deal
  • Reducing Risk.  Increased value-added introduces a large margin of safety to improve low shareholder returns
  • Simplifying Exit.  Increased value of the firm enhances its attractiveness, both as a strategic sale or as an IPO candidate

Successful private equity companies usually take advantage of these initiatives, as they go a long way to increasing the odds of creating value, selling companies at a premium and driving superior returns on investment.

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