With returns hard won, leading private equity firms are rewriting the deal playbook

A decade of rapidly increasing assets under management represents a huge vote of confidence in private equity (PE) firms’ ability to deliver deal value for investors.

Right now, however, PE firms, and financial investors as a whole, find themselves under mounting pressure. There are huge unused cash reserves available (almost $2.5tr in the middle of 2019), which is intensifying the competition for prime investments. And with acquisition prices still exceptionally high and once reliable sources of deal value generation such as structuring and cost-cutting being squeezed, financial investors now have to work much harder to secure the payback on their transactions.

Why some deals succeed and others fail

How then can financial investors realise their return targets in this challenging market? We asked 100 PE dealmakers to identify those drivers had created the most value within their most recent transactions, those that had eroded it and why. We also spoke to some of the leaders within the PE sector about how they are seeking to maximise multiple increases.

What comes through strongly from our new Creating value beyond the deal: private equity report is that meeting return expectations now requires a clear focus on revenue enhancement as well as cost. Financial investors have often been reluctant to build in revenue enhancement as, to some extent, that’s out of their control. But a great deal isn’t one where you reduce costs; it's the one where you enhance the quality and level of revenues. Only 45% of PE dealmakers in our survey have realised deal value through revenue enhancement, highlighting the still largely untapped potential. 

And the opportunities are considerable, including capitalising on tech disruption, changing customer expectations and embracing the new business models this is spurring. There are also opportunities to be at the forefront of consumer and market shifts such as the drive for sustainability.

Four ways to boost value

So, what would the new deal playbook look like? Our report sets out four key priorities:

1. Maximise revenue growth

Financial investors’ key focus is the multiple increases, while that of company management is profit. Clearly, the two overlap, though there may be room for greater alignment between objectives. Encouraging management to focus more closely on multiple expansion, including the growth story and strategic drivers that spur this, would bring the portfolio company onto the same page as the financial investor. 

2. Planning early and tracking rigorously

Ensuring strategic clarity from the outset, which is supported by a comprehensive deals blueprint, has enabled the PE dealmakers in our survey to enhance value from their acquisitions. So, what makes a good plan? All plans aren’t created equal. It’s crucial that the levers for realising the blueprint are comprehensive. 

3. Putting culture and talent at the centre of the agenda

How people drive value should be front and centre of the value creation plan from the outset. Failure to focus on retaining the best people in a target company came through as one of the big, but often overlooked, value destroyers.

4. Boost exit opportunities by thinking about the business from a bidder’s perspective

Good exit planning helps sellers and management teams think about the business from a bidder’s perspective. What could be their key questions and concerns? How clearly have the business plan and value potential under the next period of ownership been articulated? Does this reflect bidders’ value priorities?

Aiming higher

So, while returns can be hard won, there is still significant potential to create value in transactions. More active, revenue-focused deal strategy can increase the number of investment opportunities and maximise value creation. Please download the report to find out more.