— By Prasanth Ramanand, Chief Innovation Officer, Maestro
The notion that private equity sponsors must proactively engage with the portfolio to accelerate growth continues to take hold across PE, underscored by the reality that buy-and-hold strategies alone no longer constitute a viable growth plan. To varying degrees, value creation planning is becoming part of the standard operating procedure once a deal is completed and the hold period begins.
According to Bain, PE sponsors added an average of 55–75 percent in deal value from origination to exit through standard value creation strategies since 2010. For top value creators, however, that number pushed to the 350–360 percent range during the same time.
If that isn’t enough to compel and convince sponsors to adopt a structured, formalized, and data-driven approach to operational value creation planning, here are three reasons why now is the time to execute:
1. Better Starts, Faster Exits
In PE, the pressure to exit begins the moment the deal is consummated. It’s the name of the game. LPs want returns on their investment sooner than later. And like any game, getting off to a good start can help enhance the chances of a strong outcome. A formal yet nimble plan ready for execution on day one immediately creates alignment among stakeholders at all levels and increases the prospects for achieving desired outcomes in shorter timeframes. Access to a centralized plan that expressly details activities, assigns responsibility and ownership, and demands accountability at all levels ensures that stakeholders understand the purpose and are pulling in the same direction, leading to accelerated exits and repeat investments.
2. Manage Larger Portfolios with Greater Efficiency
While sponsors have continued to grow and take in greater sums of cash, spending it all is not always as easy as it might sound. Capital that is not deployed loses value, particularly in a high inflation environment. .Sponsors, therefore, are pressured to put money to work as soon as possible. Doing so means investing in more companies, leading to a larger portfolio to manage, greater demands on resources, and more time required for working directly with management teams to implement operational and financial improvements. Technology, as we all know, is designed to enable companies and individuals to do more with less. In that vein, the digitization of the value creation plan allows sponsors to reduce manual and laborious processes and manage their time and resources more efficiently, freeing operating partners and portfolio teams to dedicate their time to more meaningful endeavors.
3. Find Actual Patterns and Trends Without Passion or Prejudice
Even the best deal teams and strategists can be hamstrung by their own biases when developing and executing a value creation plan. They may use the same strategies and resources as in the past simply because they worked. Conversely, they may avoid those same approaches because, in other instances, they didn’t yield desired results. When emotions and personal experiences are involved, decisions are made without considering the context or other variables at play. Data cuts through emotions and biases and allows sponsors to detect patterns, real-world commonalities, and project with greater confidence which value creation strategies will work for a given portfolio company. With access to a structured, centralized, and digitized planning platform, sponsors can make decisions informed by data and facts, removing biases and preconceived notions from the equation.
As sponsors navigate intense competition for deals and economic challenges, LPs continue to become more selective and discerning in their investment choices. Moving forward, fundraising success will become increasingly more dependent on a firm’s ability to demonstrate a formalized, operationalized, and repeatable approach to value creation that generates desired results.