As uncontrollable market forces like climbing interest rates and increased volatility place downward pressure on valuation, achieving a strong exit requires an even stronger strategy. Private equity firms are seeing the longest holding periods in two decades, according to the S&P, and while this can be a risk, we see it as an opportunity to unlock value.
We’re noticing a trend where a lot of focus is given to value creation opportunities toward the exit time frame. However, building your strategy around driving value creation starting from the post-close period provides much more opportunity to generate greater multiples when you finally exit.
To make the most of extended holding periods, create momentum for your long-term strategies by taking advantage of these three key levers: growing revenue, reducing costs, and improving your working capital management. Don’t overlook these actions — you may be leaving value and opportunity unturned. Here’s where to start.
1. Revenue growth
Are there opportunities to expand revenue and market share? Explore your options for growing sales to your existing customer base by anticipating customer needs, expanding the company’s offerings, or even filling some gaps through add-on acquisitions.
Expand your offerings and audience
Identifying opportunities to expand into adjacent product categories and win business with new customers can help reposition your business to grow top-line revenue. Due diligence activities conducted prior to the close of a transaction typically focus on financial diligence and quality of earnings. Expanding these activities to include commercial due diligence can help identify new commercial opportunities and support the development of the investment thesis.
Fill gaps through acquisitions
Are there product or manufacturing gaps that could be filled by acquiring another company? Add-on acquisitions can help you round out your offerings as well as reach new geographies and markets.
Strategize for organic growth
Look for opportunities to grow sales to existing customers within existing product categories. Start by evaluating your customer base and order book to understand their current operations, product strategy, and launch cadence. Opportunities to grow revenue may appear that the previous owners missed or didn’t have the resources to go after.
2. Cost reduction
As private equity firms continue to seek value creation and operational improvements within their portfolio companies, focusing on cost reduction is a powerful lever. By addressing key areas such as product and customer rationalization, manufacturing efficiency, and supply chain optimization, private equity firms can help their portfolio companies reduce waste, increase margins, and create more resilient operations. These strategies can lead to significant cost savings and operational improvements, positioning portfolio companies for long-term success:
Rationalize your products and customers
Is your current mix of products and customer base optimal? It may make financial sense to reduce your offerings or cut out some of your customers to focus on those that generate the most profit.
One caveat: You can’t make solid, data-driven decisions if your data is inaccurate. Take care to ensure your costing methodology accurately captures your cost and margin data with regard to your products and customers.
Improve manufacturing operations
To effectively reduce costs through improving manufacturing operations, it’s essential to first gain a clear understanding of your current performance. Start by assessing key metrics like equipment utilization.
Next, examine your production lead times. Are you able to meet customer demands in a timely manner, or is your process slowed by bottlenecks, delays, or inefficiencies?
Lastly, focus on throughput improvement by looking for opportunities to maximize the volume of products produced without sacrificing quality.
Optimize your supply chain
Recent disruptive events such as the COVID-19 pandemic, 2021 Suez Canal blockage, 2022 West Coast port congestion, and 2024 East and Gulf Coast port strikes have continued to highlight vulnerabilities that exist in North American supply chains. It’s essential for organizations to adopt a more resilient approach to supply chain management to optimize their supply chain risk profile and cost.
Evaluate sourcing strategy
Organizations must develop a detailed understanding of their suppliers that provide critical raw materials, components, and equipment to determine if their current sourcing strategy is resulting in unnecessary risk and cost.
Reducing dependency on single suppliers and single regions of the world minimizes the risk of supply chain disruptions due to supplier failures, geopolitical issues, natural disasters, and other disruptions.
Optimize distribution footprint
While your distribution footprint may have made sense at one time, it’s very possible that the location of your manufacturing and distribution centers may not be optimized based on where your current suppliers and customers are located. You may be able to significantly reduce your overall transportation miles and spend by adjusting and optimizing the ship-from locations of key products.
Strengthen logistics/transportation partnerships
Once you’ve determined your optimal distribution footprint, you can begin working on strengthening your logistics and transportation partnerships. If you find that your current warehousing and distribution facilities aren’t optimal based on your customer locations, consider hiring a third-party logistics provider (3PL) to provide warehousing services.
It’s easy to stick with the transportation providers you’ve been using for years even as your business has changed and you’re serving new customers in new geographies. Conduct regular reviews and competitive bids of transportation carriers to ensure you’re receiving the best service levels possible and paying competitive rates.
3. Working capital management
Effective working capital management is about striking the right balance between the cash you have available and the inventory you hold. Reducing your on-hand inventory increases your short-term liquidity and frees up non-income-generating capital that can be reinvested in the business to further generate value.
Many companies are experiencing bloated inventory levels as a result of trying to mitigate supply chain disruption over the last several years. Inventory levels should be critically analyzed to determine what can be reduced without impacting customer service. Not only will unloading extra inventory generate some capital, but it will also help you save on storage costs.
Inventory optimization should be high on the priority list. Consider implementing an ongoing inventory-level maintenance program to ensure proper inventory levels are well-maintained in the future and beyond.
Turn risk into an opportunity to unlock value
Achieving investment objectives is becoming increasingly difficult for private equity firms. Longer holding periods and fewer exits decrease returns to investors. But unfortunately, market factors can’t be controlled, so focus on what you can do to drive value into your portfolio companies. Focus on levers for value creation from the get-go so you can hit the ground running and drive as much value as possible for your stakeholders and investors.
Looking for more?
Are you looking for more insights to help you navigate today’s fiercely competitive investment landscape? Subscribe to our Private Equity Perspectives to get the information you need, delivered right to your inbox.
