There is no doubt that adding value to a portfolio company is a complex endeavor that involves more than just financial investment. Every company brings its own set of challenges, with considerable effort needed to figure out what levers to pull, and when.
Soaring inflation, supply chain disruptions and a continued hiring crunch suggest that steps from the familiar PE playbook for the first 100 days post-acquisition — such as streamlined processes, renegotiated sourcing agreements, lean manufacturing and cost management — may no longer yield sufficient value.
According to findings shared at EY’s Strategic Growth Forum, achieving long-term value today requires PE-owned businesses to look beyond their traditional tactics, PE firms need to widen their approach to value creation itself and add new initiatives to their 100-day playbook and beyond, EY panel members said.
An updated approach to value creation
The shorter timeframe and tougher competition of today’s PE deal landscape has only reinforced the emergence of different strategies to create value, as well boost returns for investors.
Improvements in the 100-day playbook take aim at EBITDA upside through strategic outsourcing, digital transformation, ESG initiatives and talent optimization.
Strategic outsourcing as a value lever
PE-owned companies may avoid outsourcing, based on misguided concerns over work quality or an outdated assumption that outsourcing is suitable only for large businesses. However, strategic outsourcing is emerging as one of the most significant trends in value creation today.
The current economic disruption has burdened PE firms with additional tasks. Aside from strategizing EBITDA improvements at portfolio companies, management teams now must identify new value levers befitting changing business conditions. Outsourcing can ease the load of this resource-intensive process and at the same time provide meaningful partnerships.
By outsourcing processes that don’t add to the business’s top line, along with functions requiring expertise beyond what can be supported in-house, PE-owned businesses are freed to focus on their core competencies. For example, outsourcing FP&A to a trusted business service provider provides PE firms with KPIs/ metrics they rely on to create forecasts and drive improvements within their portfolio.
In addition to FP&A, candidates for strategic outsourcing include cybersecurity, IT management and support, compliance and tax services, all of which potentially demand more time, up-to-date skills or technology than can be managed internally. Outsourcing can be implemented quickly, making it well-suited to the short holding period of three to five years sought by PE investors.
Outsourcing key transactions of a company’s back office can yield savings of 30% or higher than a traditional in-house model. In short, adding strategic outsourcing to PE’s 100-day playbook can lead to revenue-generating opportunities while cutting costs and accessing greater expertise.
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Digital transformation as a value lever
KPMG’s 2022 Market Insights Survey estimates that digital transformation and tech investments will double in importance by 2025 as value levers for PE firms.
Digital transformation refers to the adoption of innovative digital technology by an organization, such as robotic process automatic, big data, AI, social media and machine learning, to improve efficiency and value.
However, many PE firms still rely on manual processes, even though digital transformation can revolutionize the speed and accuracy of operations while conferring a competitive edge. For example, tapping into digital customer engagement — such as social listening and online marketing — can better assess rapidly evolving consumer preferences, in turn reducing churn.
AI is another digital tool that frees up PE-owned companies to focus on core activities that provide long-term growth. Just over half (51%) of PE firms consider AI to be an important value lever in the next 18 to 24 months, according to EY’s Global Private Equity Divestment Study. The technology can support automation of repetitive manual tasks, as well as forecasting and decision-making that affect margins and cash conversion, for example.
The pace of adoption of machine learning, AI and other digital tools will only accelerate among PE firms, to manage the soaring amount of data associated with every deal, according to the KPMG report. “Tools are continually being developed to help ingest, decipher, and interpret greater volumes of data at ever-quicker speeds, helping to drive conviction in analysis and deliver stronger results,” the report states.
Sustainable investing as a value lever
With ESG (environmental, social and governance) a new value driver for businesses and its importance rising quickly, it is important that PE firms put ESG initiatives at the heart of their 100-day plan.
Prioritizing sustainability can help PE management teams uncover new opportunities for value creation as ESG investing is embraced by more stakeholders. Purpose-driven businesses are likely to attract a broader base of talent as well as customers — particularly millennials and Gen Z cohorts, who are most willing to associate themselves with companies committed to high values, strong ethics and sustainability.
Talent optimization as a value lever
PE’s value creation levers historically have tended to remain unchanged in the absence of significant external pressure, according to a report from the Business Talent Group. But the global talent shortage is spurring PE firms and portfolio companies to prioritize talent optimization as a lever to prevent threats such as knowledge gaps, slowed work on critical initiatives and impaired ROI.
Putting the right people in place at portfolio companies, and doing it quickly, is a significant challenge that PE firms grapple with. Some 92% of PE professionals report that delaying action on talent-related issues has caused portfolio company underperformance, according to Bain & Company. Firms with the best results are deliberate about making talent decisions that match closely with the requirements established in the value creation plan.
To prioritize talent optimization as a value creation lever, firms should gain a systematic understanding of employees’ expectations and areas for improvement while also monitoring for issues in the recruiting process. To identify factors behind employee turnover within portfolio companies, they can employ quantitative research methods, like real-time compensation data analyses and social media mining.
Insights gathered through these measures can be used to develop a better strategy to reduce attrition and build a culture to retain talent. Ultimately, improved productivity and lower talent acquisition costs should result in compelling EBITDA upside for portfolio companies.
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