Private Equity (PE) firms looking to return liquidity back to investors have been challenged by low transaction values and volumes in recent years. The knock-on effects include historically high holding periods for portfolio companies, stretching beyond six years in many cases, versus the more typical four-to-five-year cycles1.
In turn, these challenges have placed more emphasis on active management and operational performance improvements in portfolio companies, as explored in another recent article. Furthermore, PE funds are increasingly stretched in actively managing portfolios of companies that have grown substantially in the past decade.
As deal volumes pick up, it will be paramount for PE firms looking to exit their portfolio companies to prepare their assets for sale effectively, and successfully position the value-driving impact of their improvement programmes to potential buyers.
So, what can be done to help maximise a portfolio company's valuation?
Our experience on buy- and sell-sides has provided many valuable insights. In particular, a deep understanding of buyer dynamics and the mindset of investment committees.
Done in the right way, this is not about marginal
gains by adding 'gloss'. In our experience, getting the
transformation story and exit process right can have a significant
impact on buyer valuations.
Here are five key lessons learned that can help build a powerful
transformational narrative and help build credibility to maximise
the valuation.
1. Root any transformation story in fact
The future must be built on a bulletproof fact base and showing is, therefore, better than telling. For example, completing transformation pilots will help prove projections are not built on pillars of sand, but solid foundations that evidence future benefit assertions.
2. Prove transformation muscle memory
Potential investors will struggle to believe future transformation projections if they think that a business will be executing from a standing start. It is therefore crucial to articulate the back story, highlighting transformation milestones to date and the structural shifts that have been put in place. For example, evidencing an effective Transformation Management Office (TMO) and showing the strength of active sponsorship in transformation from the executive team. These provide tangible markers for maturity in transformation that builds confidence in investors.
3. Alignment of the management team
An aligned management team is non-negotiable. The alignment of what is said and what is written is a key part of buyer due diligence, so it's important to follow a single version of the truth for the future transformation story. This inevitably needs careful planning and choreography. Aligning the right skills in the organisation to explain and bring the transformation efforts to life can add tremendous confidence. Providing evidence of that alignment can also play a key role in corroborating – for example, showing approved budgets that are aligned to the transformation benefits.
4. Show me the money
Demonstrating strong transformational attributes within an organisation tells only half the historical story. The narrative must be backed up by financial results that can be linked directly to the bottom- or top-line impact. We've seen many ambitious transformation plans, but some have failed to show the correlating impact to the previous financial statements. Ultimately, the qualitative narrative must align to the quantitative results.
5. Minimise risk for the buyer
Nothing can scare a buyer quite like the prospect of long-term and potentially high-risk transformation, such as an ERP implementation. It's important to be very clear on the business case, and challenge where the cost and degree of risk outweighs the potential benefit. Is each planned transformation effort truly required to deliver the business case, or are there projects that present additional risk and complication with limited upside from the buyer's perspective? Remove what is not necessary.
The pressure to realise value from investment exits after lengthy hold periods is building. However, by taking lessons learned from the buyer's side of the table, the prospects of achieving the true value of transformation in a sale becomes a surmountable task, despite a persistently challenging environment for Private Equity.
Footnote
1. S&P
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.