Growth first is the new private equity mantra

Collaboration with portfolio companies drives growth

During a recent discussion with operating partners at several leading private equity funds, something unusual happened. EBITDA was only mentioned once. That would not have happened just a few years ago. What were the operating partners talking about instead? Growth.

“Of course private equity funds still care about EBITDA and financial results,” says Carlos Ferreira, Grant Thornton’s national managing partner for private equity, “but today, whether they are looking at new deals or working with their existing portfolio companies, they’re even more focused on maximizing potential for growth.”

That focus starts with reimagining the valuation process. While due diligence to confirm the financials around the transaction is obviously still vital, private equity companies are also now looking more closely at the opportunities for growth. “You have to be focused on accelerating revenue, not just cost takeout,” says Chris Smith, Grant Thornton’s strategy practice leader. “You’re seeing real attention to growth earlier in the hold period. Previously the focus was on driving out cost first, but they’re focusing on gross margin closer to the sale now. There’s far more attention to achieving return through top-line growth.”


 

Strategic alignment between fund and company is vital

The focus on growth has also intensified attention to the consultative relationship between the private equity fund and its portfolio companies. “Strategic alignment between the fund’s vision and management’s vision for the company is vital,” says Ferreira. That isn’t always easy—some management teams and organizational cultures are more adept at engaging and collaboration around new ideas that investors may have. “The due diligence the fund did leading up to the transaction can provide a good way to start those discussions,” Ferreira continues. “It provides an opportunity for data-driven discussions on specific growth opportunities and provides the fund a solid basis for laying out their vision, any weakness in the plan and other concerns.”

Data analytics is a key capability to help identify and validate growth opportunities for all companies, but both private equity funds and their portfolio companies want even more data insights to back up the promises. “They’re tired of blank-check data requests, where a consultant essentially says, ‘Just give us all your data and let us find something,’” says Smith.

Organizations can’t have a conversation about growth without talking about digital. Smith is seeing comprehensive digital assessments of a target companies happening earlier, either as part of due diligence or immediately after an acquisition. “Take a holistic look at where the company is at in terms of employing technology, where technology can make the biggest impact, where it can really drive growth at a lower cost and then invest accordingly.”

Automation is one key investment funds look at to drive down costs. But many companies, especially the small- to mid-sized companies targeted by private equity funds, find that automation leaves them with a jigsaw employee problem. “A large company may have many employees who perform the same function, so when you are able to automate that function, you realize significant savings,” says Smith. “But at smaller organizations, when you automate a function, you automate part of a person’s job. This can complicate return on investment on some RPA solutions.”