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Private Equity Value Creation- Building Top line Capabilities

A big part of whether portfolio business goals are missed or exceeded comes down to execution, and by having the right capabilities in the portfolio companies, makes all the difference.

When the PE house is looking to invest or acquire a portfolio company, they do tend to recognise capability gaps in the commercial functional areas such as pricing, sales/marketing and digitalisation. However, post deal the focus tends to shift around operation/financials/cost control and capital expenditure.

Portfolio companies are often aware of these commercial capability gaps themselves. In my experience, bringing in a specialist at the pre deal due diligence (DD) stage can be an asset for Private Equity firms and can specifically pin point the areas where they should focus on.

Due diligence (DD) carried out by a sales/marketing expert will focus on top line growth delivery areas such as:

Upon completing due diligence (DD), requests to re-design pricing and sales structure, as well as developing tools, processes, roles and responsibilities, and even run the function on an interim basis are becoming increasingly common. As pricing and sales initiatives can have the highest potential of improving ROI/EBITDA.

Typically, a *1% improvement in price, results in a 11% improvement in the operating profit.

However, *1% improvement in variable cost will boost operating profit by 7%

Undoubtedly, delivering top line growth can add more value post-acquisition than most cost or capital initiatives. Hence, Private Equity firms which are able to spot and address these opportunities early on can generate significant growth and positively impact their exit multiples.

Therefore, when developing a value creation plan, pricing and sales initiatives are often the best areas on which to focus on as this will have major impact on exit multiples.

*Source: Price Advantage, global 1200 economics

About Author

Rakesh Shah RVR Management has over 20 years’ experience of delivering sales growth in large corporate companies as well as SME companies, in UK/Europe, USA and Asia. Has also been engaged by number of PE houses to carry our Sales/Marketing due diligence, as well as supporting portfolio companies to drive top line growth. He is technically, MBA and CIM qualified with a background of delivering sales growth within a range of B2B sectors.