The proven ability of a private equity firm to generate alpha is core to success across multiple areas of the business – from fundraising and re-ups, success in seeing and winning deals, the ability to attract top talent and, of course, generating returns. Successfully initiating, tracking and supporting value creation initiatives for portfolio companies is therefore crucial – especially in uncertain economic conditions characterized by unpredictability and heightened investor scrutiny.
Therefore, it is no surprise that a growing number of firms are examining their approach to value creation and seeking to adopt best-practice operations and technology to maximize the impact of such initiatives.
How can GPs add value?
While some strategies, such as growth equity, are more geared to proactive and collaborative value creation planning between the GP and portfolio company than others, there are value creation initiatives which apply to all firms. When Holland Mountain works with clients, we identify opportunities to optimize processes and technology to support:
- Maintaining a dynamic playbook of evolving best practices which can be introduced across the portfolio.
- Tracking specific value creation initiatives in play through effective project management.
- Identifying and tracking opportunities to provide valuable introductions, including between portfolio companies.
- Maintaining and sharing intelligence / recommendations for various vendors and service providers.
- Maintaining a network of successful professionals and contractors to drop into portfolio companies as needed.
- Measuring the impact of all the above and leveraging the results to gain an edge in competitive deal processes, supercharge fundraising efforts and enhance the ability of the firm to attract top talent.
Focus on Value Creation
Institutionalise the due diligence workflow
Firms can standardize the due diligence workflow to ensure that investment opportunities are aligned with the value creation process.
Establishing a standardized process that ensures a thorough, consistent, and comprehensive examination of all aspects of potential investments is crucial.
To streamline the decision-making process, this should be complemented by fostering clear communication and alignment among stakeholders, including deal teams and advisors
Additionally, leveraging the data from dead deals analysis early in the due diligence process is essential for identifying deals with a low probability of success, allowing teams to focus resources on more promising opportunities.
Today, GPs can leverage existing tools to standardize these workflows, which are then used by the different teams internally and when communicating with external stakeholders.
Support deal closing with data
In a market with a record level of dry powder and less favorable financing options, securing lucrative deals is highly competitive.
Tracking value creation helps demonstrate historical achievements in value creation to prospective sellers, showcasing initiatives that have yielded substantial returns for all stakeholders. At the same time, utilizing data-driven insights to custom-tailor value propositions to the specific needs of sellers, distinguishing from competitors by offering uniquely targeted solutions.
To excel, GPs must differentiate themselves by showcasing their distinct value creation methods through their proven track record.
Streamline execution during the holding period
During the holding period, streamlining execution involves consolidating data across all teams to generate intellectual property, such as conducting reciprocity analysis for service providers and vendors to secure more favorable commercial terms. Recognizing the complexity of these value-enhancing initiatives, many firms have established specialized divisions solely focused on value creation. These teams are tasked with identifying and implementing strategic improvements that substantially increase company value.
A structured value creation strategy is essential, achieved by standardizing a framework that is consistently applied across different investments and constantly improved as the market evolves. Progress on strategic initiatives across the portfolio should be meticulously tracked by monitoring specific KPIs from portfolio companies and tracking progress against various value creation action items and levers to the PortCo, strategy, and GP level.
It is also vital that firms use technology and best practices to maintain their networks and track their ability to generate value through introductions and recommendations.
Tell the story during exits
For exit planning, it’s essential to develop a narrative that tells PortCo’s past and future growth story based on data-driven evidence. Analytics collected should help tailor this narrative to appeal to potential buyers, showcasing the attractiveness of the investment.
Tracking the value creation process is vital to illustrating how strategic initiatives and operational improvements have contributed to operational improvements and value generation.
At this stage, it is essential to integrate with market data providers to illustrate how the firm’s value creation initiatives have contributed to value generation compared to returns generated by market movement for similar companies.
Attract prospects with your value creation IP
Similar to exit planning, using data to demonstrate how operational expertise, strategic initiatives, and relationships with vendors, advisors and service providers have translated into tangible value is a clear differentiator.
In the current environment, demonstrating a track record of consistent value creation across multiple investment cycles reinforces confidence in your ability to deliver attractive returns to LPs.
At the same time, it is the opportunity to highlight any proprietary tools, approaches, or processes used to enhance investment performance.
Concluding thoughts
Economic uncertainty has resulted in an increased focus on value creation. Longer holding periods have impacted IRR performance while adding additional strain to investment teams, which are now managing more PortCos than before. Having a robust and repeatable value creation framework can only help achieve consistent results and can alleviate the operational challenges facing deal teams.
Fundraising is increasingly difficult, with the top 20 GPs accounting for 50% of invested dollars in 2023. GPs can leverage value creation data along with their track record to demonstrate their IP and attract prospects.
How can Holland Mountain help?
At Holland Mountain, we helped 350+ managers in refining operations and maximizing value. If value creation is one of your priorities for the year, we can help with:
- Process mapping, review, and optimization, guiding from your current state to a desired future state;
- Vendor landscape, selection and implementation in value creation;
- Investor reporting and how to report your value creation progress with potential and existing investors.
