The future of portfolio company value creation

Leadership and organizational diligence are important to having an informed perspective on how well the team at acquisition can execute a value creation plan. Many industry leaders are working on these management changes in advance of the deal to allow for quick movement on the value creation plan and limit impacts to time to exit. As hold periods get longer, value creation plans can change drastically over the course of the hold period. Industry-leading PE firms are looking for portco management with the ability to help drive operational change while building trust with the workforce.

Example

A PE firm is considering buying a large manufacturer. As part of diligence, the PE firm looked at the prospective portco’s executive leadership team. The company currently has executives who know the industry but aren’t familiar with the kind of global scaling they included in the value creation plan. It’s a tough decision, but the PE firm replaces the executive team with one who may have less specific industry experience but has experience both in global expansion and working with employees through a transition. As a result of the change, they are ready to hit the ground running the second the deal is closed, saving time on execution and providing support to legacy staff through the acquisition.

Many sectors are bringing transformative change through GenAI implementations, with the more digitally mature portcos innovating their operations with the knowledge they have built over time. In addition to the kinds of use cases that PE firms are applying across their portcos (customer service, software development, legal, etc.), firms are developing point solutions for business function specific problems, where it makes sense. But industry leaders are also encouraging their portcos to rethink their processes and systems, centering them around the GenAI technology, rather than trying to apply a GenAI solution to outdated processes.

Example

The manufacturer that decides its approach to sales and marketing isn’t producing the kind of results the company will need to scale globally. Instead of applying the GenAI point solutions to an ineffective sales and marketing organization, leadership is rethinking the strategy of sales and marketing to build it from the ground up using GenAI. For example, GenAI can help sales teams quickly localize language for international markets, reducing workloads on local marketing teams. Further, GenAI content development based off a targeted concept from the marketing team could also help reduce outsourcing costs for small-form content.

PE firms have historically focused on cost containment, where it's easier to predict a direct margin change. With the easy cost cuts already made at more portcos, firms are looking above the line to get a better handle on pricing. Using techniques that have been developed across industries outside of the PE world, industry-leading firms are finding plenty of opportunities to improve revenue growth without impacting other value creation efforts.

Example

The manufacturer decides to overhaul pricing by starting with building a holistic strategy based on a detailed market overview and setting prices across multiple its lines of business. The portco then implements its strategy with its sales teams, by providing specific rubrics based on regional data and its understanding of the customer bases. This gives the sales teams the flexibility they need to adjust pricing, while simultaneously preventing fluctuations that are outside of C-suite expectations. Lastly, the portco uses a lightweight tech solution to monitor pricing live and adjust on the fly as market conditions change.

PE firms have often performed commercial due diligence to seize the market opportunity but may not have assessed whether the company’s revenue engine (sales, marketing, customer success, etc.) can meet the challenge. Industry leading firms are evaluating prospective portcos’ actual go-to-market (GTM) model at diligence and work immediately after the deal closes on improving their commercial function. These leaders take quick action to help increase share of wallet, expand top-of-funnel interest and market visibility, promote cross-selling, improve win rates and boost new customer acquisition.

Example

Previously, our manufacturer had ambitious growth projections but made no major changes to its GTM strategy to support growth. To help address this, the acquiring PE firm adjusted its value creation plan during diligence to cover key commercial effectiveness changes. Some of these moves included prioritizing the customer base for highest revenue potential, better alignment of portco resources to sales opportunities and making targeted investments in commercial capabilities (such as an analytics-based commercial operations function). They also included in the plan a change in sales incentives to align compensation with benchmarks and motivate better performance. As a result, the portco was ready to execute the plan immediately post-close, significantly accelerating the company’s growth potential.

Many firms are moving beyond simple operational changes (e.g., cost-reduction and procurement) to create an operations transformation built around a combination of strategy, tech and analytics — a simple fix can sometimes drive an outsized impact on the business.

Example

Our manufacturer builds products in four separate facilities across the US. Each facility was purchased in a separate acquisition; as such they used different inventory management and production software. The portco had avoided a unified system to save the cost of implementation and training, but the operations team found that the value creation plan couldn’t be executed with accuracy without a basic unified enterprise resource planning (ERP) system. A quick and simple implementation and transition unlocked the ability to create improvements and analysis (e.g., consistent materials pricing across facilities, analysis of margin per product sold by facility, etc.) over the hold period of the portco that were even outside of the scope of the value creation plan.

Throughout the portco life cycle, significant domestic and international tax changes can occur. As a result, the tax liabilities and attributes at close can differ substantially from those at exit. Industry leading PE firms view tax considerations as a value driver, actively monitoring the evolving tax landscape to assess its impact on its portcos. They identify opportunities for cash tax savings, mitigate risks and consider corporate restructuring for an improved tax position. These proactive measures may result in increased liquidity and better post-tax returns on capital.

Example

Our manufacturer originally had no plans to change its tax approach after the deal was executed, which its PE firm noted was a missed opportunity for cash savings. As part of building out the value creation plan, the firm reviewed the portco’s tax structure to identify opportunities for current tax savings. Specifically, the firm found that their research and development studies could provide meaningful tax credits. They also performed a state and local tax apportionment review and determined that there were opportunities to change apportionment from high-tax states to lower-taxes states based on recent changes in each state’s apportionment rules in which they operated. By going through this level of analysis, the portco was able to find unexpected cash flow, which funneled into further aspects of the value creation plan.