June 2022 | Point of View

4 ways to drive private equity value creation across portfolios

Operational value creation should be at the heart of all private equity firms and their portfolio companies

4 ways to drive private equity value creation across portfolios

Private equity firms create value by identifying underperforming companies that can benefit from additional assistance, focusing on new revenue growth opportunities, and analyzing new markets.  

But approaches differ when it comes to the cost side of a business. While some firms provide industry specialist resources that provide functional experience and expertise (e.g., “operations executives”) for some portfolio company investments, there may often be gaps in opportunities to unlock value related to operational and cost-center improvement activities that are applicable to all companies. 

This can be a blind spot for some private equity firms. There’s typically significant value available to portfolio companies from a combination of purchasing leverage and shared knowledge.   

This type of combined or cross-portfolio approach can drive EBITDA improvements during the hold period—and beyond. Determining how to best support this need can translate to greater returns for the firm—both during the hold and at exit. But it requires a combination of factors to be as successful as possible. To develop a holistic approach to operational value creation, we’ve outlined four key areas to address:  

1. Leveraging buying power 

The simple act of combining PortCo volume (e.g., bringing together the demand of multiple portfolio companies)—or developing the impression of combined PortCo volume—can translate to greater leverage with key suppliers. This, in turn, can result in lower costs and enhanced or increased levels of engagement and support—typically above and beyond what individual portfolio companies may qualify for. 

Private equity firms can approach this lever through the use of group purchasing organizations (GPOs) that have pre-negotiated, volume-based supplier arrangements for typical back-office functional products and services. In one example, a major private equity firm’s portfolio companies were able to realize more than $10 million in cost savings by leveraging GPO contracts across multiple indirect categories. 

Alternatively, private equity firms can also consider developing standalone arrangements with suppliers directly for the benefit of their portfolio company investments. This more direct approach tends to make sense where service levels and supplier governance are of greater importance (for technology solutions or key services providers). 

Visibility to spend is critical for attempting to leverage buying power, meaning the ability to aggregate individual portfolio company spend data into a single digital spend cube’ is a must-have when taking this approach. 

2. Developing centers of excellence 

Private equity firms can develop internal centers of excellence, which focus on specific areas that are common to their industry alignment and in areas that may be highly customized to individual portfolio companies such as real estate or electricity needs and requirements. Developing centers of excellence provides reliable, trusted expertise that can collaborate with individual portfolio companies on their specific needs, both in developing a strategy for value creation and in providing oversight and guidance throughout the value capture period. We witnessed a major private equity firm use the center of Excellence approach to realize both cost savings and value delivery to the tune of more than $50 million dollars via sale-leasebacks on a number of portfolio company properties. 

3. Fostering inclusion and shared knowledge 

Regardless of the approach that provides value-creation tools to the portfolio, the development and nurturing of community and trust across the portfolio is necessary. By developing communities of C-suite leaders across the portfolio—and encouraging those communities to share experiences—a private equity firm can establish a rapport and trust that will be critical to fostering interest and excitement in the value creation tools offered. 

What’s more, firms can curate a digital experience library that adds new and different perspectives as the portfolio changes over time—it also makes access to these insights easy for portfolio company leaders. 

A global alternative asset firm and client of ours has seen accelerated implementation of a number of key back-office platforms and processes (often two to three times faster than typically experienced) across portfolio companies that have taken advantage of such digital shared knowledge platforms. This approach relies heavily on the culture of the private equity firm and requires more effort and energy in cases where firms are traditionally hands off. 

Where effort is made to develop and support this community approach, private equity firms see greater dividends, both on the individual portfolio level and in developing greater cross-portfolio supplier programs and capabilities. 

4. Building and maintaining satellite expertise 

Private equity firms should consider how they can identify and qualify ancillary expertise. No firm will be able to bring onboard and sustain all the expertise it may need to address all operational challenges and issues its bound to face. Through the collaboration with key preferred advisory partners, a private equity firm can be confident that the right team can be referred in when additional or specific knowledge and bandwidth may be necessary. Finding and supporting relationships with the right advisors is no small task, but the impact is significant when those advisors can be relied upon as trusted and recommended experts for the portfolio—eventually leading to value creation through platform implementation or operations improvement.  

Private equity firms have a host of challenges to manage as they seek to maximize their investments. While top-line growth is always important, the ability for private equity firms to assist their portfolio companies with operational improvements is one of the quickest ways to improve EBITDA. 

By taking a multi-faceted approach to operational value creation, private equity firms can position themselves to provide meaningful tools to their portfolio companies. 

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