08/06/2024
It’s no secret that private equity M&A activity has been slow—but just how slow and to what end? Deals have been on a dramatic downward trend since Q2 2021, with June 2024 deal volumes recording the lowest level since May 2020. While signs of optimism are not lost—H1 2024 deal counts are up by 6% from H2 2023 and interest rate cuts are now meaningfully on the horizon—those who can, may hold their investments for now.
Graphic Courtesy of Ropes & Gray
It has become much harder for PE firms to see returns on their assets, as the investment lifecycle is now longer and requires value creation within the company itself. Many portfolio companies, particularly those acquired during the high-valuation period of 2021 to 2022, would now sell at lower multiples than when they were initially purchased. With many PEs holding companies longer than expected, there’s a new need to address operational improvements and, in some cases, change the original investment thesis.
Five Ways to Maximize Value Creation in Your Portfolio’s Investment Lifecycle
Undoubtedly, the market conditions will eventually improve for PE firms. Until then, here’s what you can do to create value and better position your firm for future sales, mergers, and acquisitions:
1. Drive operational efficiency. In this more austere environment, the focus must turn to driving operational improvements and increasing efficiency. Taking the first step can be the biggest hurdle. Start by picking a function or business unit and assess the processes in that space. From there, identify ways to cut waste and unnecessary delays. Evaluate your investment portfolio to identify synergies between subsidiaries and promote the creation of favorable partnerships and deals.
2. Leverage technology for added value. There are two primary ways to optimize your technology stack: growth and reduction. Despite the seeming contradiction, these processes actually work hand-in-hand. On the growth front, AI is a remarkable tool for applying efficiencies to work smarter and faster. Be wary of implementing a large-scale AI tool just to be able to say, “we use AI,” as this can be costly with little short-term return. However, educating your team about and investing in useful AI tools is a successful strategy. Additionally, utilizing AI well requires companies to invest in cultivating their most valuable resource—data. You get out what you put in. On the reduction front, develop a plan to achieve cost savings through an application rationalization effort. Software platforms with redundant capabilities create a considerable amount of recurring financial waste. A platform strategy driving consolidation to fewer key platforms can reduce operating expenses in a meaningful way.
3. Implement governance across all investments. Create a governance framework to manage risk, change, and communication and then apply that same model across all companies. Where project work is underway, create separate governance processes for project management as well. Creating accountability and clear communication channels will help you track and achieve your goals.
4. Create a human capital strategy. A strategy to assess and manage human capital is not just important immediately after acquisition. Make sure you have the right people (and a strategy to keep them) and the organizational structure to make improvements over the mid-term that will drive value creation.
5. Re-evaluate strategies for growth, differentiation, and profitability. In this environment of higher interest rates, business expansion focuses more on organic growth. For PEs wanting to bring companies to market to sell, there will need to be a clear value story with the promise of that building in the years to come.
There are many factors impacting the environmental uncertainty of the PE market, whether it be macroeconomic, geopolitical, or our upcoming presidential election. However, the market is hopeful. S&P Global writes that “cooling inflation and a potential reversal of high interest rates are priming M&A markets for more private equity-backed deal activity.” The time of buying and selling for profit without making strategic and significant changes is over. By leveraging these tips to maximize value creation and improve the bottom line, PEs can choose to wait out the current environment and have a better shot at realizing strategic outcomes in the future.
Struggling to maximize the future ROI of your investments? Contact Sendero to learn more about the strategic ways you can improve your portfolio and begin adding value to your mergers and acquisitions.
