To maximize returns, private equity groups should choose the right improvements for portfolio companies.
The right value creation strategies can transform even underperforming portfolio companies into high-growth winners. In particular, operational improvements offer tremendous potential for earnings before interest, taxes, depreciation, and amortization (EBITDA) gains, delivered through cost-saving and efficiency measures. But private equity group (PEG) managing directors and their deal teams should first overcome two challenges:
- Identifying the right improvements and not overlooking hidden opportunities
- Selecting and prioritizing improvements to balance timing, impact, risk, and resources
Those challenges call for a rigorous and data-driven approach to identify and assess operational improvements. PEG teams can enhance their existing process by incorporating these checklist steps and questions.
Primary steps to identify and select operational improvements
- Assess potential operational improvements early – ideally before a deal closes, during the due diligence phase.
- Review a portfolio company’s profit and loss (P&L) statements to identify the highest-priority areas of opportunity.
- Invest time to analyze the processes and technology that drive major costs.
- List potential operational improvements in a decision matrix.
- Evaluate individual improvements by answering questions on timing, impact, risk, and required resources.
- Score each improvement in the decision matrix, based on the answers to the guiding questions.
- Select and implement the highest scoring operational improvements.
