No Match Found
How to compete and win in a rapidly changing game
Private equity has never been under more pressure, seen more competition and been more motivated to do things differently. Firms and portfolio companies (portcos) that cling to their traditional playbooks will likely find themselves falling further behind in a world that values speed, digital prowess and greater attention to ESG issues. Nontraditional players are moving faster, paying more for investments and competing for talent and expertise that was once the sole domain of private equity. Portcos, meanwhile, are trying to find a way to thrive in a down economy, while simultaneously meeting the demands of their stakeholders and regulators.1
Over the past year, portfolio companies have heard from investors, customers and employees on the importance of having an environmental, social and governance (ESG) strategy and adapting to mounting societal and business challenges. Further, we’ve heard from many who are concerned about finding a way to effectively meet both the US and worldwide ESG related disclosure requirements and mounting regulations. Those companies that are succeeding in this space are finding ways that ESG can drive the financial health of the business. It doesn’t have to be an all-or-nothing exercise. We suggest building an ESG strategy that focuses on adaptability of your business to mitigate risks, identify opportunities and drive competitive advantage in its industry.
Get the big picture right. Know what aspects of ESG are most important in your portco’s industry and how peers in your portco’s industry are investing and implementing ESG commitments. Whether it’s an emissions focus or improving DE&I to attract and retain top talent, knowing the areas to where an ESG commitment can have both a substantial impact in the market and on your ROI.
Keep the long-term in mind. In tough times, it can be tempting to see ESG as a cost driver and simply a “nice to have.” The market, regulators and employees will remember the ESG commitments you made previously. A company’s ESG journey is a long road, and the macro forces behind it continue to accelerate. The current environment requires investors to maintain a long-run view on values and value creation to find success. Companies that can’t demonstrate enough care on these topics may find themselves unable to find future support.
Monitor and update ESG reporting based on changes from the regulators and the broader market. Improving your ESG data and analytic capabilities can help you build reports and disclosures that have insight and meaning, while simultaneously complying with regulatory requirements and market practices.
During the pandemic, companies did everything in their power to continue fulfilling demand. Cost considerations, while never out of sight, often took a back seat to the importance of filling orders and winning customers. Many companies were rewarded handsomely by record sales from a grateful consumer base.
Today’s economic environment with inflationary pressures, continued supply uncertainty in certain industries and a generally softer demand outlook, presents a new set of challenges. Companies are looking to become more efficient, reduce costs and drive leanness throughout their organizations. Winners in this space often follow a set of value creation techniques with a modern spin, enabling them to plan efficiently on a digital platform, reduce waste and maintain a focus on serving customers and clients profitably.
Start with the basics and planning. Is your organization aligned around and focused on only the activities that can increase value provided to customers? Or are you “winning ugly?” As you dig into the basics of operational excellence, the areas of opportunity and potential over-spending can stand out — and the essence of your go-forward plan can become clear.
Advance digital transformation programs and build out capabilities. With costs for cloud infrastructure dropping and accessibility of data analytics tools increasing, companies have more options for digital enablement than ever before. But do you have the right skills in management to be able to take advantage of the data and tools that you already have? Upskilling and hiring for the right capabilities can activate your digital and data capabilities, and may create efficiencies inside your operations and across the organization.
PE firms should keep tax implications in mind when considering big strategic and operational decisions on portfolio strategy development — from due diligence through post-deal value capture. How you organize your supply chain and demand chain — where you set up your procurement hub, your distribution, your R&D center, even your headquarters — has tax implications. Be sure to consider tariffs, trade taxes, income tax and special incentives as well. You may also need to factor in tax implications depending on whether employees work from home, at offices or go hybrid. Many companies are developing new technologies to automate more processes, another move that could have significant staffing and tax implications.
Go holistic. Every step of the value chain contains its own operational, reputational and tax considerations, and these can interact positively or negatively.
Expect volatility, so build in flexibility. Develop alternate supply chains and routing options that incorporate tax and tariff impacts to create a total cost view of your supply chain.
Watch for legislative updates. In October 2021, more than 130 countries agreed to implement a minimum tax regime for multinationals (global turnover over €750 million). Pillar Two aims to confirm that applicable multinationals pay a minimum effective corporate tax rate of 15% with a potential effective date on January 1, 2024. System readiness is key to enabling tax compliance. Additionally, Pillar Two tax impact should be considered for tax modeling in deals.
We’ve seen portfolio companies talk about building a digital strategy, but many get lost in the details. They may lack the capability to lead an initiative, or the necessary tech platforms, or leadership buy-in — or all of the above. And now, with the economy losing steam, they’re having trouble finding the room to go digital among their value creation projects. Many, however, are starting to see that the intelligent use of data and cloud is becoming the main way companies stay competitive no matter what the market’s issues. PE firms that exploit the immense advantages of the cloud and a digital transformation can find themselves on the winning end of more deals. Further, we see digital transformation as underpinning how you can improve your results around all of the PE trends, including ESG, value creation and tax. But where to begin? We suggest a rethink of how you go digital.
Value first, second and third. Assess your portcos in light of the industry they operate in. Then find those areas that can help bring in immediate success. Build those wins into a culture of transformation.
Get into the cloud. To embrace data wrangling and start collecting as much data as possible across all portfolio assets. That starts with figuring out what capabilities you already have and improving on those.
Build the culture you need for change. Through a combination of targeted upskilling and incentives, you may find that you are not so far off in the capabilities you need for change.
Focus on companies that need real-time insights to improve their value proposition. Use monitoring tools and sophisticated value analytics to backstop execution of a strategic plan.
How digital transformation can generate profit and create value
Despite uncertainty, PE deal activity is expected to prove resilient
Limited partners are not settling for superficial answers