Historically, Private Equity (PE) firms looked to add value to their portfolio companies in the following ways:
- Financial engineering
- Strategic initiatives
- Operational improvements
Over the years, financial engineering was no longer as impactful on value creation as it was in the 80’s and 90’s so PE firms started adding value with Portfolio Operations / Portfolio Suppor groups operational improvements :
- Improve the business
- Make add-on acquisitions to the “platform company”
And when it comes to improving the business, the majority of the value creation initiatives were:
- cost-cutting initiatives
- improving processes such as in IT or HR
- hire new talent
- implementing new technology
- international expansion
- strategic alliances
- offshore manufacturing
- product development or improved service
These are all very important. But I’d posit that there is one important initiative missing here…probably the most important one of all.
So what is the most important operating drivers that has been missing as the focal point of value creation initiatives at many PE funds? It’s the focus on driving top-line growth.
After all, if a PE firm can position the investment for long-term success by accelerating revenue growth in a profitable way (i.e. doing it cost-effectively) then that will not only increase the valuation linearly but will also potentially increase the revenue or EBITDA multiple at the exit.
Sales Excellence / Revenue Acceleration
The key Operating / Portfolio Support role (especially in Growth Equity PE) will focus on profitable revenue acceleration.
- Sales Excellence: work with management teams of mid-market PE-backed companies to improve their profitable sales growth (and thus valuation) by bringing expertise with successful best practices of modern and profitable revenue growth & lead generation strategies (btw – a lot of the best ideas at the vanguard of Revenue Acceleration come from the SaaS industry)
- Accelerate Growth: help steer companies through a transition from average growth to rapid sales performance improvement (through better sales effectiveness as well as an improved marketing & demand generation strategy) – this will, in turn, lead to dramatically increasing the value of portfolio investments
- Execution: roll up the sleeves and help execute some of the sales & marketing strategies directly
- Due Diligence: add value in the due diligence process by providing unique guidance and identifying hidden upside (and critical strategic levers) in sales strategy and execution where we can unlock value and enable faster yet profitable revenue growth
- Scale the Lead Flow Funnel: enable the PE fund to increase deal flow by applying best-in-class inbound lead generation strategies (i.e. inbound funnel) to attract more quality deals
The consistently highest money multiple uplift (see the PE Operational Improvements study) will come as a result of the “Revenue Acceleration” initiative, which includes:
- Sales Excellence
- Channel Strategy
- Marketing Strategy
- and Pricing initiatives