For making the right investment decisions investors can rely on the decade long profound industrial and functional expertise provided by our global transaction team.
Value creation: a competitive imperative for private equity investors
Buyout investors must incorporate operational value creation strategies for revenue growth and margin expansion.
"Private equity investors in Asia need to revisit their Value Creation playbooks and redouble their efforts on creating operational improvements in their portfolio assets."
Since COVID-19, dealmaking has become more complex due to rising interest rates and reduced market liquidity. Valuation multiples have declined, with EBITDA multiples in SEA markets growing at only +1.4% CAGR since 2020, down from +5.0% CAGR in the previous decade. Private equity firms now face challenges managing aging companies' balance sheets, particularly with refinancing debt at higher rates, while also seeking to enhance asset value amid limited exit opportunities. How can private equity investors navigate through these unprecedented times? “Buy and Transform” Value Creation framework requires a new skillset and a holistic approach. Based on our experience working with investment firms in Asia and across the globe, there are a few critical principles to assemble to maximize value creation.
Equip yourself
An operating model that encourages increased engagement between the private equity team and the portfolio companies must be developed, which should be aligned with the overall fund’s strategy and strategic vision for each portfolio company.
Invest early in operations
When seeking to acquire a new asset, Operational Due Diligence (ODD) should be conducted alongside traditional Commercial Due Diligence. ODD insights help investors clearly picture the nature and magnitude of the expected performance of the venture capital plan(VCP).
During this process, they should identify growth and margin, necessary investments and costs, establish a master plan with timelines, and derive the cash flow profile over time.
Get operational, drive the plan
Shifting from a "buy and hold" approach to a "buy and transform" implies the construction and successful delivery of a holistic VCP. Based on our experience across regions, we developed a framework and value creation product suite to deal with every situation faced by private equity investors.
Commercial excellence
Commercial analysis should aim to a rapid audit of sales setup (go-to-market,
management, skills, tools), pipeline analysis, along with customer reviews. The goal is pragmatically to define measures to increase sales while decreasing the cost of the structure.
Pricing excellence
Pricing comes as a preferred lever, given the expected speed to provide tangible financial results. Yet, a structured approach is required to assess pricing maturity, identify the most promising areas and implement track impact.
Cost down
We have mastered cost reduction approaches, and carefully select the appropriate tool depending on: cost savings ambition, nature of cost involved, speed of realization, the ability to invest and ROI constraints.
Procurement
Procurement spend optimization goes well beyond price reduction and supplier negotiation. We optimize procurement costs (both direct and indirect spend) along four dimensions: Needs x Specifications x Quantity x Price.
To overcome major challenges, a holistic perspective must be taken to consider specific business needs, as well as trigger cross-functional alignment.
Prepare exit
Private equity funds and portfolio companies' management are being more proactive than before in exit preparation, with a view to maximizing transaction value in the current tough dealmaking environment.
A careful and well-organized exit preparation initiative should start at least 1 year before the planned exit date. The plan must include the creation of a consistent equity story to protect value, launch of some "quick wins" to secure EBITDA and validate the value perception for potential bidders, as well as a roadmap for the next buyer’s value creation opportunities.
Conclusion
Ongoing macroeconomic uncertainty is creating unprecedented times in the private equity industry. This is an opportunity for investors to redouble their efforts on creating operational improvements in their existing portfolio, as well as new assets, to trigger and capture both top-line growth and bottom-line improvements.
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