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4 Ways to Fast-track Private Equity Value Creation with Portfolio Companies

3 Min Read

To thrive in today’s market, private equity firms must implement successful strategies to boost portfolio company performance. This includes identifying ways to implement an effective management team, drive value during the holding period and sell at the most profitable opportunity. Following proven portfolio value creation strategies can propel private equity firms to more significant margins and better profits. 

#1: Utilize In-depth Evaluation Tactics Before Investing

The first step to profitability begins before the investment. PE firms should evaluate any potential investments with adequate due diligence, which requires time, money and resources. This research process allows firms to understand industry complexities, regulatory shifts and new technologies that could impact a portfolio company’s potential growth. 

Firms should consider the maturity and stability of potential investments. Portfolio companies with a proven track record of growth indicate a better trajectory for long-term success. If a portfolio company poses substantial risk, your firm should dedicate additional due diligence resources to determine whether growth goals are realistic within your ideal timeline. 

It is integral to determine whether a portfolio company’s characteristics align with your firm’s investment strategy, such as geographic region and business size. These factors may influence your approach or the amount of upfront capital required to execute a successful growth plan. 

If your PE firm developed particular expertise in a specific sector, it may be wise to leverage that knowledge for other competitive acquisitions. However, Make sure not to overlook due diligence since company-specific factors can differ within the same industry.

#2: Integrate Portfolio Companies for Added Value and Cost Savings

Firms can scale investments quickly with mergers and add-on acquisitions. These deals can maximize efficiency across your firm’s investments with shared expertise, labor and expenses. 

An important first step is identifying where potential overlap exists between portfolio companies, including services, processes, operations, products and labor. Combining these resources across your investments can cut inefficient overlap and drive significant cost savings, in turn bolstering your firm’s profits. 

These considerations apply to your firm’s existing and future portfolio company investments, acquisitions and mergers. Successful integration of portfolio companies allows firms to extract a deal’s full potential rather than leaving money on the table. 

Consider cost savings in these areas: 

  • Technology infrastructure 
  • Management team 
  • Performance requirements 
  • Organizational structure 
  • Cultural initiatives 

#3: Explore Economic and Employee Incentives for Long-term Payoff

Many PE firms consider incentives for their portfolio companies—both government-provided incentives to cut costs, and company-provided incentives for employees to reward and encourage profitable efforts. 

Economic development incentives—such as cash grants, tax abatements, below-market-rate loans, reduced rent and utility savings—can be gleaned from governing bodies and other organizations. These incentives are usually available for companies that are expanding, consolidating facilities or relocating to a new area to grow business.  

There are federal, state, local and non-governmental opportunities that PE firms should explore for their portfolio companies. Economic development opportunities can improve financials by: 

  • Supporting capital investment 
  • Lessening expenses 
  • Offsetting revenue 

Another tactic PE firms utilize is providing incentives directly to management teammebers or other key players in portfolio growth. These incentives are sometimes linked to financial incentives, other times they involve providing managers with more autonomy than before. 

When executed effectively, incentives for employees can motivate them to work productively toward your PE firm’s growth goals.

#4: Analyze Effective Exit Strategies for Private Equity Firms

Robust exit strategies are essential to maximizing ROI. Determining a profitable exit strategy should be at the top of the to-do list for firms upon acquisition. 

The most bountiful exit strategies involve rapidly improving portfolio company performance, increasing their valuations and selling them at their most profitable. This approach requires impeccable execution and timing to ensure the best returns. 

Successful exit strategies also require PE firms to dedicate resources toward identifying willing buyers who will pay the company’s worth. Investing the time and energy to network with other firms and build industry connections will pay off in the long run. 

Likewise, investing upfront resources into developing your exit strategy is worth the effort. PE firms who do not implement strong strategies can hold onto portfolio companies too long, causing them to lose potential value. 

Your firm must guard against complacency. It can be easy to stall on your growth plans, stop innovating and slow your pace, but those tendencies can have large effects on your firm’s ability to generate additional value. Slacking can also leave investors and managers uneasy about your portfolio company’s future.

Move Faster with Private Equity Value Creation Advisors from Apex Leaders

Upgrade your firm’s private equity value creation strategies with help from our expert team. When you partner with us, our services extend to your portfolio companies at no additional cost. Connect with us to learn more.