In today’s private equity landscape, building sustainable businesses and delivering on the investment thesis means having a robust value creation plan that implements operational performance improvements and pursues multiple and diverse strategies for achieving growth.
While sponsors have different portfolio management approaches and strategies, it’s widely accepted that the days of financial engineering and simple cost-cutting exercises have long since passed.
Today, it’s about identifying the levers that drive value, including non-financial metrics like talent management and ESG strategies, and effectively managing the massive list of value planning priorities.
Last month, Maestro’s Amy Newlan moderated a panel discussion at the Real Deal Value Creation Summit in London. The panel featured Private Equity Partners leading value creation efforts initiatives across a wide range of portfolio company types, from debt-free start-ups to underperforming and challenged businesses to those in sector-specific funds. Among a wide range of issues, the panelists discussed their respective approaches to value creation planning at their firms, the emerging role of ESG as a growth driver, the still-overlooked criticality of talent, and how operational enhancements can propel growth, even in a challenging economic climate.
With many topics and issues integral to value creation success addressed, the dominant high-level takeaways were as follows:
Measuring ESG Impact
ESG continues to be a force in private equity, but the extent to which it is driving value and ultimately multiple expansion is still not entirely clear. The consumer environment is seeing a more direct correlation between ESG and growth as companies respond to demands from consumers willing to pay more for products that are sustainability sourced, protective of the environment, and more. In the B2B world, however, the impact of ESG is less tangible, varying by industry, type of company, maturity of that company, and perhaps most notably, the extent to which individual LPs see ESG as a key priority and insist on it a strategic focus.
ESG Remains Nebulously Defined
In a similar vein, while ESG remains a pervasive topic of conversation across the PE spectrum, it is defined very differently across disparate companies and industries. In some cases, it is about diversity in hiring while in others it can be about pay equality or environmental preservation and protection. At the end of the day, the industry agrees that ESG should be cared about at the highest levels of management and be prominently included in any strategic value plan, even as there remains little consensus as to how exactly it should be defined.
Maintaining Planning Flexibility
Finally, value creation planning is all the rage in PE and remains a hot topic. Equally important to having a plan at the outset of the investment thesis execution is prioritizing activities and having the flexibility to change course, shift priorities, and adjust to market conditions on the fly. External forces and macroeconomic conditions are impacting companies and industries in varying ways. Successful value creation plans will be malleable enough to respond and react, guiding management teams through potentially unforeseen muddy waters.