On Private Equity – Enhancing Value

Creating Value is at the core of private equity firms.  Value is the primary drive for private equity firms to make the acquisitions better than they were before.  The result is to achieve growth in a period of time.  According to Preqin, a data provider, private equity assets stood at nearly $2.6 trillion worldwide at the end of 2016 and have plenty of room to grow for years to come.  Nobody can argue that private equity is more than an asset class, it is a style of investing in which investors purchase privately held companies with the aim of finding operational efficiency over long holding periods, generally 5-7 years.

Different players in the industry are constantly on the look towards finding new strategies and approaches to deliver the best results, however there are very few that stand out from the rest.  According to a study performed by the Boston Consulting Group (BCG), the acquisitions added to a portfolio of private equity should focus primarily on operational improvement to become the most successful.  According to the study, a strategy which is known as buy and build deals has been the denominator of higher exit valuations generating an average internal rate of return of approximately 30% from entry to exit compared with approximately 23% for standalone deals.

It has been proven that small portfolio companies often have the most to gain from add-on acquisitions only if they develop a distinct strategy.  According to the BCG study, private equity firms implement value creation on add-on acquisitions in three ways:  deleveraging, multiple expansion and operational improvements.  Private equity firms have to deleverage in an effort to have a strong and stable cash flow; to define clarity on the company’s strategy as well as to lower its risk profile; and the most important to take action is the operational improvement which takes different angles.  Robust operational improvement strategy is essential to charting a future path to successful growth and returns.

Private equity firms must raise their game in all phases of their business in order to discover opportunities across the full spectrum of growth pathways.  It is the only way to create value in all markets and in all stages of the economic cycle.  Emphasizing the importance of value creation is the primary aim of any business entity and it is increasingly represented in the intangible drivers like innovation, ideas and brand.