PE-Backed Companies are Making Up Lost Ground in Value Creation

The wise saying is that private equity investment money goes where it is wanted and stays where it is treated well. One essential measurement of an investment’s success is a positive trend in value creation achieved by cost efficiencies and operational improvements.

Private equity investors expect the following:

1. Timely Exit: To exit an investment on time (with an IPO or sale of the company) at the highest possible value.
2. Profitable Initiatives: Executives who discover and execute profitable initiatives that make the largest impact in the shortest amount of time.
3. Value Creation: A constant reprioritization of initiatives in response to changing conditions (including the pandemic) with a focus on value-added projects and value engineering.
4. Operational Excellence: Project implementation happens at an accelerated pace by attracting and hiring highly-skilled people, pursuing processing rigor in operations, and implementing technological solutions wherever possible.

Why the Pandemic is NOT an Excuse for Poor Performance

Contained within every crisis is an opportunity. On the macro-economic scale, Amazon had to nearly triple its operating capacity in less than one year, which was expected to take another decade. On the microeconomic scale, a small restaurant owner prevented from serving clients inside the restaurant can focus on non-contact home-delivery and embrace a new marketing opportunity.

MarketWatch reports that the delivery-apps business doubled during the pandemic.

In this general category of delivery services, four companies include DoorDash, UBER, Grubhub, and Postmates, pulled in $5.5 billion in combined revenue from the early part of the pandemic in April 2020 until September 2020. These revenues were more than double the combined revenues from the same period during the previous year.

DoorDash has a 50% market share in home-delivery services. DoorDash reported that it had 435 million orders during the first nine months of the pandemic in 2020 compared to 181 million orders for the same period during the previous year. DoorDash took advantage of this surge in revenues to schedule its IPO on December 9, 2020.

Forbes reports that the IPO debuted at 12:45 p.m. (Eastern) and quickly rose by 86% from the offering price of $102 to $188 on the first trading day. This valuation made the private equity investors in DoorDash very happy, and those who exited at those prices were well-rewarded.

If any organization suffered an earnings loss in 2020 due to the pandemic, now is the time to consider strategies to make up for those losses. It is time to get back on track for positive value creation that private equity investors appreciate. The predicted, widely-deployed, mass vaccinations of most Americans, if completed by summer 2021, should make the balance of 2021 a banner year.

Here are some strategies to consider for making up lost ground.

Value-Creation Acceleration

Four strategies can be utilized to improve the creation of value, which are: 1) reprioritization; 2) focusing on high-impact projects; 3) reducing costs, and 4) project implementation improvements.

1. Reprioritization

Project reprioritization in the face of challenges is accomplished by creating a comparison matrix showing the impact on earnings versus each project’s difficulty level. Create a simple timeline diagram showing the impact on the EBITDA starting from zero on the vertical (X) axis and rising. Then, show the project placement on the horizontal (Y) axis timeline, from zero time going out to the right by monthly increments into the future.

The highest priority project initiatives are those that make the greatest positive impact on the EBITDA in the shortest possible time. On the matrix, the priority projects are high on the X-axis while also being low on the Y-axis. By charting each project on such a matrix, it is easier to see which projects take priority over others.

2. Focus on High-Impact Projects

Take a second look at the matrix developed in step 1. Draw a red vertical line on the Y-axis to represent the month when the equity investors expect to exit. To the left of this line are projects that can be done in time for the exit. To the right are projects that are estimated to take longer.

If there are attractive projects with a highly positive projected impact on the EBITDA that fall outside of the exit deadline, make an effort to re-evaluate them.

Determine if a greater allocation of resources can advance the initiative more quickly to meet the exit deadline or if there are any ways to reduce the difficulties and still accrue as much benefit as possible. Perhaps, a project can be broken down into stages that allow benefits to accrue prior to completing the full implementation.

3. Cost Reduction

Cost reduction initiatives are essential. It is vitally important to the survival of an enterprise when the organization is under a severe market challenge, such as a pandemic. The best practice for cost control is to use value-added/value engineering (VA-VE) to reduce cost and eliminate waste to achieve operational excellence.

For most manufactured products, material costs represent the majority of the cost of the goods sold. The VA-VE method is more impactful than only improving purchasing strategies to reduce costs. An analysis is made of product and packaging design, along with transportation costs. A product or packaging design might be changed to adjust the materials, components used to make it, and transportation logistics.

The goals of a VA-VE strategy is to take a hard look at how things are done and not be restricted to doing things the same way that they always have been done when improvements can be made in the design or processes.

A few ways to analyze VA-VE opportunities are:

• Make an analysis of the parts count for each manufactured product to see what can be eliminated, consolidated, and standardized across an entire production line.
• Conduct a thorough margin analysis to discover insights into products with low margins that can be eliminated.
• Liquidate non-performing inventory.
• Extend any discovered VA-VE savings for a specific product across an entire product line or the entire enterprise.
• Outsource processes that are not done efficiently to more efficient production partners.
• Re-evaluate all transportation logistics.

4. Project Implementation Improvements

Project initiatives that make a positive impact and can be implemented quickly should be done as fast as possible. Smaller returns from quickly implemented project improvements add up to a larger positive impact on the EBITDA.

Here are some helpful strategies to consider when making project implementation improvements:

• Initiate more projects in parallel to make up for the lost time.
• Focus on the points that create the maximum positive impact with the engagement of the front-line workers.
• Stay focused on the big picture and do not get bogged down with the minor details.
• Track progress with high visibility for all constituents and stakeholders.
• Leverage all synergies possible by driving success with a leader who serves as a powerful change agent with the full support of upper management and actively-engaged employees.
• Use proven process improvements and deploy the most helpful support technology.

Summary

A major challenge, such as the pandemic, is rife with an opportunity too. The powerful motivator of responding to an emergency can be focused on project initiatives to make up for the lost time. Companies, who experienced a loss of momentum, have to adjust rapidly and become reinvigorated to move forward on the most valuable project initiatives right now. Focus on cost reduction, earnings generation, and continue to strive for operational excellence.

The superb news is the stock market is prepared to overly-reward excellent performers with high valuations. Yahoo Finance called the DoorDash IPO amount of $32.4 billion at the IPO price of $102 per share the “most ridiculous” valuation in 2020. Private equity investors in DoorDash, of course, disagree with Yahoo’s opinion. The stock market thought DoorDash was worth almost double that amount ($188 per share) on the first trading day!