- November 16, 2020
- Posted by: avaltos
- Category: Thought Leadership
Active portfolio management beats the restructuring process, internally consensual or not. According to successful fund operators, value-added strategies tend to offset relatively painful solutions implemented according to the lack of stability. But, what does that look like when the future is uncertain?
Fund backers continue to glean data from portfolio company stress tests. Run a magnifying glass over a Private Equity firm, and you’ll likely see analysts busy tinkering with a range of predictive problem solving, forecasting ups and downs in sales, revenue, and after-tax earnings. What if sales were to rise by 50%? Or drop by 30%? What happens when we play around with cost optimization principles? Good questions yield great intel, especially among limited financial models in which to base future action.
Main portfolio company approaches help mitigate obstacles to the equity fund’s functional progression, but on a smaller scale. By no means are they any less vital than gathering, cleansing, and extracting stories from the data analytics. Firms, must ensure the availability of liquidity and have the ability to measure the impact of supply chain conditions at a moment’s notice.
The bright side is that PE fund managers can use productivity and process enhancements and other value creation sources to drive returns irrespective of the macroeconomic environment. Here are four guaranteed ways of achieving exponential growth and profitability in portfolio companies.
1. Operational Enhancement: Top Down
Previously, quantitative engineering played a significant role in strategic development. High leverage defined organizational direction. Somewhere along the line, operational excellence took precedence for top-line performance optimization and efficiency. Enhanced structural operations with a concentration on human capital guide exponential growth.
Systemically and consistently generating double-digit percentages remains closely tied to the tactical arrangement within executive leadership. PE strategists could increase the equity stake and improve incentives based on the profile of each team member. The ability to attract, retain, and motivate top talent in the field with exit proceeds pre-planned keeps you competitive. The rapid change brought on by new incentives and new management strengthens board-level leadership. These managers must prioritize democratized communication among portfolio company hierarchies.
Bear in mind, quality management retains quality metrics. Root cause analysis – a handy methodology that identifies areas of improvement – can serve as a springboard to accumulate a comprehensive set of tools and resources that break down obstacles to internal proficiency.
2. Pricing Optimization
Investment friendly indicators should point to the need for an increase in margins, meaning significantly higher EBITDA and returns as a net result. Effective pricing protocols, call attention to the relationships between customer value, volume, and price negotiation power within the framework of each portfolio company.
It may be wise to ask some questions like: is there a pricing strategy in place? Are hidden costs and discounts causing losses? What does cash flow enhancement look like?
Arranging a beneficial cost-plus model under the supervision of Finance seems like a good first step. A capable sales team will give you an in-depth tour of the opportunities afforded to you when sales models closely match stated objectives.
To achieve sales effectiveness, they conduct a review of the following:
- Market opportunity segments
- Process mapping
- Resource deployment
- Productivity measures
However, the paradigm shift occurs when the pricing team is able to extract and utilize rich sources of information to build a pricing strategy based on customer research, cost optimization and micro-segmentation.
The simple, yet effective move in price showcases the power of market perception. And it shows in the numbers. While a reduction in business related costs yields a 2-5 times return depending on the company, EBITDA leverage improvement pushes those numbers up to 10-12 times respectively. Investment in a pricing program is hereby deemed critical for portfolio success.
3. Maximize Portfolio Value By Outsourcing
Support operational cost reduction could mean going outside the bounds of the organization to construct new partnerships with talent ready to tackle the legal as well as financial complexities of each company in the portfolio.
Maintaining skilled third party solutions teams has been shown to reduce expenses, but frees up human capital so more attention is placed on fund performance. Stand-by finance and accounting teams reveal new value creation pathways. In addition, they solve a number of issues related to portfolio company value:
- Lack of adequate staffing
- Bad reporting/inadequate communication
- Outdated system processes
In-house staffing serves its purposes, but for the sake of the topline, and given that efficiency is top priority, and considering regulatory frameworks such as the Alternative Investment Fund Managers Directive (AIFMD) & the Foreign Account Tax Compliance Act (FATCA), the case for outsourcing tasks to service providers grows ever so larger. The use of available technologies is quickly becoming a sign of operational excellence in the face of the portfolio company and its competitive effectiveness.
4. Marginal Expansion
Growth by merger and acquisition isn’t only condoned but encouraged when on a path toward revenue enhancement. There’s a downside to this kind of model – revenue leakage, and it is of the highest priority for analytical engagement. Putting a stop to this functionally debilitating processes in business is a great way to ensure sustainability; that growth and profitability are long-term.
Before recovery and assurance are achieved, the source of the revenue leakage must be determined…and there are many, unfortunately:
- Sub-par pricing
- Insufficient sales
- Inefficient billing
- Sub-optimized discounting
- Lead time mismanagement
Prevention is key, but there is a process for identifying and mitigating the leaks:
- Identify underlying issues
- Collect the data
- Run Root Cause analysis
- Implement improvements
- Measure impact
PE fund managers can go about increasing portfolio value and make their contributions by cash flow enhancement..keeping in mind revenue leakage; improving profit through efficiency or product repositioning; and a heavy reliance on the strength of corporate governance.