Private equity (PE) firms are focused on one key goal: accelerating value growth. By improving margins, enhancing cash flow, and reducing risk, they seek to transform businesses into high-performing, high-value assets. There’s no one size fits all playbook on how they do this but there are several common and dependable strategies that are deployed time after time. Below, we break down how PE-backed businesses deliver this transformation and what business owners can learn from their approach.
- Management team incentivisation
A motivated and effective leadership team is at the heart of value creation. PE firms know that all shareholders benefit when a strong leadership team is in place and fully committed to growth.
To keep management focused and driven, PE uses tools like Sweet Equity – an equity structure designed to reward leaders for delivering exceptional results – as well as performance-based bonuses and option schemes. This creates a direct link between management performance and financial rewards.
Senior management plays a crucial role in ensuring that each member of the leadership team has clear, measurable objectives. These individual goals must align with and support the business’s overall growth targets. When aggregated, these objectives ensure the company moves forward in a coordinated, purposeful way, maximizing efficiency and results.
- Exploring New Markets
Expanding into new markets is another critical strategy for accelerating growth. PE firms encourage businesses to think beyond their current operations by evaluating:
- Adjacent Products or Services
- New Territories (domestic or international)
- New Customer Areas or Sectors
However, entering new markets isn’t without challenges. The decision must be carefully assessed against factors like the cost of capital, available expertise, management bandwidth, and expected timeframes for success.
One major hurdle is human capital – finding the right leadership or team, especially in international markets, can determine success or failure. While expanding into new markets can be extremely lucrative, success requires planning, patience, and the right people to execute the strategy.
- Business model assessment
Private equity investors continuously evaluate business models to unlock new value opportunities. They look for ways to improve margins, enhance processes, and reduce risk in subtle but impactful ways.
- Process Automation & Tech-Enablement: Investing in technology and streamlining processes helps reduce costs and improve productivity.
- Margin Tweaks: Investors often reorganize operations, optimize pricing strategies, or cut inefficiencies to boost profitability.
- Risk Reduction: Diluting fixed costs, improving working capital management, and enhancing cash conversion are proven ways to make the business more resilient.
These improvements may seem incremental, but when compounded over time, they can produce profound and sustainable results that drive value growth.
- Mergers & Acquisitions (M&A)
“Buy & build” has become an increasingly popular strategy among PE firms. This approach involves funding acquisitions to expand scale, reduce competition, and unlock synergies. When executed well, M&A can deliver significant value growth with reduced risk.
Key drivers of M&A success include:
- Cross-Selling Opportunities: Acquiring complementary businesses allows you to offer existing customers new products or services.
- Operational Synergies: Combining operations can deliver cost savings and efficiency gains.
- New Market Entry: Acquiring a business in a new sector or region can provide immediate access to new markets.
- Multiple Arbitrage: Buying smaller businesses at lower valuations and consolidating them to create a larger, more valuable entity can result in a premium for scale.
PE firms put their capital behind proven management teams in familiar industries, which reduces perceived risk and increases confidence in achieving strong returns.
Conclusion
Private equity’s approach to value creation is methodical, strategic, and focused on measurable results. By building strong leadership teams, refining business models, exploring new markets, and using M&A as a growth tool, PE firms unlock opportunities for substantial value growth.
Business owners preparing for a sale or seeking growth can learn a lot from these strategies. Ensuring your leadership team is incentivized, refining your operations for efficiency, and exploring growth opportunities – whether organically or through acquisitions – can significantly enhance your business’s value. By adopting these principles, you’ll position your business for accelerated growth and a higher valuation.