Mark McTigue, EVP Private Equity, North America & Europe and Jamie Loder, VP Private Equity, Europe, discuss why an innovative approach to value creation is now more important than ever.
Having entered 2020 with a record level of capital to spend (1.5T according to Prequin Data), private equity investors are chasing a limited supply of attractive targets in a highly-competitive environment. With firms poised and ready to pounce, private equity ownership is undoubtedly becoming more mainstream, yet the fact remains that over 60% of acquisitions are still being made by corporations.
A shifting landscape presents an opportunity for private equity
In addition to robust buy-side activity, a range of global risk factors outside of private equity control have increased the volatility of expected returns. At the end of 2019, Mergermarket conducted a Global Private Equity Outlook Survey which pointed to ongoing Brexit uncertainties, China-US trade talks and the upcoming US elections was among the most significant challenges facing the sector. However, since that report was written, global economies and fragile supply chains have been hit hard by the rapid global spread of coronavirus. In its March interim economic assessment, the Organization for Economic Cooperation and Development (OECD) projected the global economic growth outlook could be halved as the virus hits a global economy already suffering from weakened by trade and political tensions.
 OECD Interim Economic Outlook (March 02, 2020)
At the time of writing, plunging stock markets have done little to dampen the mood of private equity. While many conference and public events are being cancelled, private equity’s annual SuperReturn conference took place in Berlin at the end of last month as planned with reports of a buoyant mood among attendees. While it is true that private equity often thrives in volatile times, it also pays to be cautious. Firms may be readying themselves to make use of some of their dry powder to snap up bargains if conditions worsen but at the same time, they need to keep a watchful eye on their portfolio companies and build resilience into the supply chain in preparation for a downturn.
An innovative approach to value creation
In volatile times, preparation is more important than ever. As the overabundance of capital combined with increased geopolitical and economic risk threatens to push down investment returns, private equity firms are becoming more involved in operational concerns and adopting innovative strategies to drive growth, operational effectiveness & efficiency and reduce risk in their portfolio companies. With valuations high, firms that over-pay to win deals risk multiple contraction and competitive disadvantage unless they can find ways to add incremental value beyond the traditional PE playbook of debt, cost cutting and installing new management. Integrated end-to-end supply chain optimization has the power to unlock significant shareholder value (cost, cash, growth) to improve competitiveness.
From a digital perspective, many companies are planning to invest up to 5% of annual revenue on digitization over the next five years. However, according to the Global Supply Chain Institute, many executives still remain uncertain of the benefits given only one in 50 transformation digital programs have a measurable ROI business case. Executives need to develop a clear business case, articulate a pragmatic digital roadmap and spearhead cultural change. These are critical success factors in driving the implementation journey. With many industries facing a period of rapid adjustment, private equity owners need to ask themselves: “How many of my portfolio companies have integrated and optimized supply chains and operations with enough optionality and resilience built in to drive value across the different stages of the deal lifecycle?”
Maine Pointe’s recent white paper, “Driving Value Creation in an Uncertain World,” addresses the risks PE firms face in a highly competitive and uncertain marketplace and offers practical advice to PE firms and executives who are actively searching for new methods of driving growth, achieving operational effectiveness and efficiency, and reducing risk in their portfolio companies. The report includes real-world case studies showing how Maine Pointe doubled EBITDA for a PE firm taking a publicly-traded audio and technology consumer products company private, and in another success story, achieved a 32 percent EBITDA improvement and reduced global procurement spend by 10.9 percent for a global high-tech solutions provider.
Click here to read the paper.
If you would like to talk about any of the points raised in this article, please contact one of our private equity executives at: firstname.lastname@example.org
Maine Pointe, a member of the SGS Group, is a global supply chain and operations consulting firm trusted by many chief executives and private equity firms to drive compelling economic returns for their companies. We achieve this by delivering accelerated, sustainable improvements in EBITDA, cash and growth across their procurement, logistics, operations and data analytics. Our hands-on implementation experts work with executives and their teams to rapidly break through functional silos and transform the plan-buy-make-move-fulfill digital supply chain to deliver the greatest value to customers and stakeholders at the lowest cost to business. We call this Total Value Optimization (TVO)™.
Maine Pointe’s engagements are results-driven and deliver between 4:1-8:1 ROI. We are so confident in our work and our processes that we provide a unique 100% guarantee of engagement fees based on annualized savings. www.mainepointe.com