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EMH Insights

Adding Value to Private Equity Portfolio Companies

Given the current economic environment, optimizing operations of portfolio companies is increasingly important for private equity managers seeking to create value in portfolio companies. Low interest rates have translated into high valuations, making it all the more challenging for PE funds to continue to generate sizeable returns in this seller’s market; this dynamic has been highlighted in Bain’s most recent private equity report. As a result of the current climate, PE funds need to devote more resources to improving the future operations of portfolio companies as a means of adding value. Developing a sound growth strategy is essential to the success of the portfolio company, yet not all portfolio companies are equipped to develop the plans necessary to allow them to grow. As a result, PE funds, through involvement in the growth strategy development process, as well as execution and ongoing evaluation, can improve the likelihood that a robust growth strategy is in place to generate improved valuations by the time PE funds are looking to sell, making investments worthwhile.

Because portfolio companies are focusing on their daily operations, they  often don’t devote enough attention to developing a long-term growth strategy. Further, company management, close to the issues at hand, often struggles to take a step back and evaluate their progress in a way incorporates objective analysis that is not colored by biases. Here, an outside party can add value to growth strategy development process. PE firms, through their board involvement, can influence some of the development of a growth strategy, but a more hands-on approach is necessary to truly shape the future strategy and ensure that portfolio companies are making optimal decisions. Many large PE firms have dedicated staff for assisting portfolio companies with developing a growth strategy and overseeing its execution. Yet, for smaller PE funds without these in-house resources, a consulting firm can be a beneficial resource.

Where a consulting firm can add value is threefold: the development of a process road map, implementation of the growth strategy, and measuring the company’s success. The first step of creating a growth strategy is identifying (and challenging) the portfolio company’s goals and targets. With the goals identified, the growth strategy can be developed in a collaborative fashion between the portfolio company’s management team, the PE fund, and the third party consultant. In the next step, the consulting firm can support the implementation of the program, helping to position the portfolio company for success. Once the growth plan is in place, regular measurement of key performance indicators will be necessary to ensure the portfolio company is on track for success.

In particular, during both the strategy development and measurement phase, a data-driven approach can be extremely useful in understanding operations and identifying issues within a portfolio company, and also in ensuring that all ensuing initiatives positively and optimally impact the company’s bottom-line performance. PE firms are already encouraging their portfolio companies to employ big data solutions in order to better understand customer behavior and how to control costs, as well as make informed decisions, as reported by CohnReznik in their latest report on middle market PE funds. Consulting firms can assist PE funds in collecting and analyzing data for portfolio companies, thereby enabling the management of portfolio companies’ to be equipped to understand their firm’s strengths and weaknesses in terms of performance, and then use this information to develop the priorities that will become the objectives of sound growth strategy. Moreover, once the plan has been implemented, a review of progress can be assessed through data analysis, and further adjustments to the growth strategy can be made.

A sound long-term growth strategy is imperative for any company’s continued success, and, in particular, for companies seeking to generate value for their investors. Thus, for PE firms, consultants with particular expertise in the fields of VC, PE, and startup advisory can add significant value by assisting with improving future operations of portfolio companies. Through support throughout the growth strategy development, implementation phase, and ongoing evaluation of the company, consulting firms can support portfolio companies’ management teams and the PE fund. The role of the consulting firm is all the more important given the current economic climate where PE funds must largely generate value through improving their portfolio companies’ future growth. EMH Strategy, having a combined expertise in finance and strategy, will be able to provide this support to smaller PE funds who don’t have the resources in-house to guide their portfolio companies through the outlined processes. If you are interested in learning more about our work, check out our case studies or contact us.

-Malavika Balachandran, EMH Senior Consultant