According to PitchBook Data Inc., private equity (PE) exits have been slowing since 2021. The trend has continued through the first half of 2024 as the value of PE exits in the U.S. dropped by over 7% year-over-year and fell a massive 44.4% from the same period in 2021.1 This subdued exit environment, on top of the currently longer-than-historical private company holding periods, has increased the need for “modern” value creation strategies in order to drive sustainable company improvements and increased value.
Traditional PE value creation primarily relied on financial engineering and cost reduction. For example, PE firms focused on leveraged buyouts, utilizing financial tools to enhance returns — and reducing operational costs (headcount, for instance) to boost profitability. While the tools were often successful in making companies appear to be improved, many of these benefits/improvements were not enduring.
In contrast, PE firms are dedicating an increasing amount of time and resources to identify and implement comprehensive “modern” value creation strategies that can drive sustainable growth and enhance portfolio company performance. While “modern,” many of these strategies are not necessarily new. These strategies commonly involve a combination of operational efficiency enhancements, product rationalization and talent management, among other things. In the near-term, expenses can increase before the benefits of these actions begin to accrue to the company. This approach involves hands-on engagement, often by dedicated value creation teams that were established within PE firms with the singular goal of improving how the portfolio companies (which were undermanaged prior to their ownership) operate.
The buy-and-build approach has also emerged as a particularly effective value creation strategy. This method involves acquiring a platform company and then making smaller, strategic acquisitions to expand its capabilities, product offerings or geographic reach. By integrating these bolt-on acquisitions at lower multiples, PE firms can create significant value through synergies and economies of scale, ultimately building larger, more competitive businesses that command higher valuations.
Key Takeaway:
As company realizations continue to be slow and holding periods continue to lengthen, the role of “modern” value creation in PE becomes increasingly important. By focusing on tangible, measurable company improvements, PE firms can enhance the value of their portfolio companies regardless of the challenges presented to them by the economic or business climate in which they operate.
Sources:
1PitchBook Data Inc.
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