As high valuations and competitive pricing continue to dominate the deals landscape, private equity (PE) firms are looking for more—and more effective—ways to create value. In this climate, the importance of developing a differentiated value creation plan reflecting the full potential of the business early in the deal lifecycle cannot be overstated. A value creation plan is an enterprise-wide look at how the target business can be improved, quantified in terms both of potential value creation upside, as well as over time, and of the cost to realize that value. Value creation plans reflect a holistic view of the specific and prioritized set of initiatives or key actions—the capabilities, gaps, internal and external resources, clearly defined accountabilities, operating and financial metrics, and the governance framework—that will be required to make the necessary improvements to realize the asset’s full potential.
It seems like a simple enough idea. After all, who would construct a building without a blueprint? Whatever the asset size, industry, or sector, there is no substitute for evolving a 360-degree view well before the closing the deal, with Day 1—however close or distant—on the horizon in order to put together a winning bid.
There are at least five key benefits to be derived from developing a value creation plan early in the lifecycle of a deal.
Developing an investment thesis with a clear and comprehensive understanding of the value creation drivers helps PE sponsors arrive with greater confidence at a decision about what they can realistically pay for an asset. A good understanding of how to allocate capital and resources to create sustainable value can be an important factor in determining the upper limit of what an investor can bid. Moreover, basing this figure on a thorough, detailed assessment of what will be required to improve performance may help with financing. Lenders appreciate a thoughtful, meticulous approach to investing, including third-party validation of the potential value drivers of operational performance improvement.
Developed early in the lifecycle of a deal, a value creation plan serves as a strategic blueprint to guide everything from diligence, to Day 1, to exit. A holistic view of the levers, both strategic and operational, with the potential to create value can help set, and maintain, the course for success.
PwC’s private equity practice includes deals, audit, tax and advisory professionals who use a coordinated approach to help clients—managing fund operations, improving portfolio company performance and providing support throughout deal execution. Visit our main webpage for more information about digital upskilling and other private equity issues.