14 May 2019
Private Equity Value Creation
How Private Asset Managers Create Value
The private equity market has performed strongly for an extended period of time, rising from 487.97 bn in 2010 to 825.77 bn in 2018 (Statista). Globalization has made financial services more competitive, leading to an increase in the price value of deals and secondary offers. The total share of secondary deals increased from 4% in 2014 to 8% in the first six months of 2018, and the percentage of secondary buyers increased from 21% to 27% during the same time period (EY).
The Goal of Value Creation
The goal with private equity holdings is to create value within a certain time period and exit to an investor. Buyers have the benefit of acquiring an asset that already has inherent value based on the underlying company’s track record and potential. A typical private equity acquisition is based on the entry and exit multiple, amount of equity, revenue and profit trend. Let us take a look how private equity value creation takes place.
Value Creation Methods
Traditionally, private equity firms created value through multiple methods, including leverage and arbitrage. Currently, the emphasis is on driving returns through improved management of operations.
Steps of The Value Creation Process
Acquiring the right business: With digitization and increased competition from private equity firms and venture capitalists, companies are looking at more than just past performance of a company. Factors such as the IT infrastructure of a company, for instance, can also help in creating substantial value.
Corporate improvement strategy: After acquisition, the next stage of value creation involves deciding a course of action for the company. At this stage, it is important to establish communication and support functions to support the strategy implementation team in properly performing their duties. Many companies also use external services to manage certain tasks so they can focus on their core business.
Value creation measures during operation: Value chain optimization is one of the leading ways to create value. It usually involves digitization of technologies to automate and modify processes. Value chain optimization can add value by reducing cycle time, delivery time, material costs, labor costs, etc. Besides optimizing the value chain, companies also invest in R&D and improve their products with digital enhancements.
Testing new capabilities: Finally, before selling, companies conduct a proof of concept to show the viability of the company after the value creation measures.
Bear Stearns takes this process to a deeper level by leveraging their extensive network of local expertise though our various sales and analyst teams across the globe. We work closely with our Private Equity clients to identify opportunities and facilitate transactions across every sector and region.
Corporate improvement strategy: After acquisition, the next stage of value creation involves deciding a course of action for the company. At this stage, it is important to establish communication and support functions to support the strategy implementation team in properly performing their duties. Many companies also use external services to manage certain tasks so they can focus on their core business.
Value creation measures during operation: Value chain optimization is one of the leading ways to create value. It usually involves digitization of technologies to automate and modify processes. Value chain optimization can add value by reducing cycle time, delivery time, material costs, labor costs, etc. Besides optimizing the value chain, companies also invest in R&D and improve their products with digital enhancements.
Testing new capabilities: Finally, before selling, companies conduct a proof of concept to show the viability of the company after the value creation measures.
Bear Stearns takes this process to a deeper level by leveraging their extensive network of local expertise though our various sales and analyst teams across the globe. We work closely with our Private Equity clients to identify opportunities and facilitate transactions across every sector and region.
For more information please contact us at: info@bearstearnscompanies.com
References
- https://www.ey.com/Publication/vwLUAssets/ey-private-equity-value-creation-study-2018/$FILE/ey-private-equity-value-creation-study-2018.pdf
- https://www.statista.com/statistics/520839/value-of-global-private-equity-deals/
- https://medium.com/@gautam.gole/operational-excellence-the-key-lever-for-private-equity-value-creation-7d853a04ff2c
