Operational value enhancement in private equity portfolios — a practical report

The challenges for private equity funds are increasing. Available liquidity has developed very positively over the past six years, averaging 19 percent per year (see Fig. 1). This contrasts with a rather stagnating number of actual transactions. In view of this high liquidity in the market ("dry powder") and the fact that the number of available target companies has not increased, competition in transactions is intensifying and multiples are rising. For investors, this means either overpaying for a transaction today or not doing it.

High liquidity in the market changes portfolio strategy

When Siemens Audiology was sold to the financial investor EQT, the company achieved an EBITDA multiple of 14.8. This is well above the multiples that have been common in recent years. While multiples like the Siemens example are not uncommon today, they do raise the question of how such deals still generate returns. Classic measures aimed at revenue growth and financial leverage are unlikely to be sufficient in most cases. Operational performance is therefore necessarily gaining in importance, even if it is currently often neglected, particularly on the cost side, because it is easier to plan and initiate revenue enhancement measures "from outside". Cost and value creation structures, on the other hand, are usually very company-specific, which is why standardized outside-in approaches are not very effective.

Expert knowledge is needed - not only about the industry, but especially about functional topics along the entire supply chain, i.e. production, logistics, purchasing, as well as cross-functional optimization topics in terms of business modeling, strategy and M&A, organizational and dimensioning topics.

The advantage of operational measures lies in the comparatively rapid, positive effects on profits, which can generally be achieved by optimizing costs.