For private equity firms today, competition for deals is intense. Add that to steadily rising valuations, and it has become increasingly necessary to focus on creating value and improving returns for investors. Many firms are taking steps in that direction, including through digitalization. In the process, five key benefits are generated.
3 Types of Value Creation
PE firms use three main methods to create value. Leverage, which was the primary approach in the 1980s, has lost favor. The emphasis has also shifted away from multiple expansion.
Instead, firms now focus on value creation. One of the crucial strategies in that area is digitalization, which can help portfolio companies improve cash flow and increase profitability. Industry observers believe that investments in digital transformation and the technology that enables it will likely increase significantly in the next three to five years.
Digitalization (or digitization) increases value in multiple ways, including by:
- Streamlining processes
- Reducing operational costs
- Shifting resources to activities with greater value
Not surprisingly, these activities can have an immediate and significant impact on an organization’s valuation. Every dollar of cost savings goes immediately to a portfolio company’s bottom line, ultimately boosting its value.
But, of course, companies don’t start operating more efficiently by chance. It takes a conscious effort, so it’s vital that they develop a value creation strategy, document it in a thorough value creation plan, and then stick to that blueprint.
5 Proven Benefits of Value Creation Plans
When a value creation plan is developed early in the deal lifecycle, five proven benefits are realized:
- Focusing on value creation results in an investment thesis that helps stakeholders understand a company’s value-creation drivers, as they are different for every organization.
- A value creation plan creates a foundation for effective working relationships. With everyone “on the same page,” there are fewer hurdles to creating value.
- The goal of producing a detailed value creation strategy heightens awareness during the due diligence process.
- A value creation plan provides strong forward momentum toward completing necessary short-term actions. And in today’s competitive environment, delays of any kind can be costly.
- Comprehensive value creation plans include realistic exit strategies. Too often, the way to achieve a profitable exit isn’t considered until later. Developing a plan “with the end in mind” can be very effective.
Properly Prioritizing Value Creation
It’s readily apparent today that value creation is necessary for success for PE firms. However, it’s understandable that changes in the competitive landscape had previously caused firms to lose sight of that goal.
Fortunately, it seems firms are pushing that objective higher on their priority list, with digitization as an essential tactic in those initiatives. Having the right technology in place helps any organization work more efficiently and execute its business strategy more effectively. And implementing a value creation strategy early in the conversation can make an important difference in the outcome.The Altvia platform has features and functions that help PE firms connect and engage with stakeholders in a streamlined and secure way. Contact us today to request an informative demo.