Are You Maximizing the Operational Value of Your Portfolio Company?

Revenue growth is the largest driver of shareholder value creation, yet most private equity 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, private equity firms can unlock large benefits and realize the portfolio company’s full operational value.

 

THE VALUE DRIVERS

Revenue growth is the largest driver of shareholder value returns for top performing companies (Figure 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 private equity 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.

 

TAKING A WIDER VIEW

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

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

 

 

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 strategic initiatives and tactical initiatives, as these go a long way to increasing the odds of creating value.  As a result, private equity firms are able to sell portfolio companies at a premium and drive superior returns on investment.

To learn more about strategic expansion and organic growth, get our reading: “Business Strategy: Uncover The Greatest Potential to Add Value.”