Scaling revenue, along with improving margins and driving profitability, sits at the heart of value creation.
Powering top-line growth requires a hands-on approach to address a range of topics from pricing to sales effectiveness, to product and services mix to research and development, as well as business development: finding new customers, marketing and brand enhancement.
It is a meaty task and the benefits may take a while to surface, posing the risk that these initiatives are abandoned in favour of more immediate gains. Yet the rewards can be hefty. “We break the revenue process into its individual components, addressing existing clients and prospective ones,” says Andrew Ferguson, partner at Baird Capital. “If you can improve all of that by 5 percent, that accumulates to a significant improvement in revenues.”
It requires multi-tasking. “Revenue enhancement is most powerful when undertaken on a multi-dimensional basis, consistent with the unique and fundamental qualities of the business,” says Martin Calderbank, managing partner at Agilitas Private Equity. He cites the example of portfolio company Recover Nordic, which operates across the Nordic region to provide emergency response services to help mitigate the impact of water and fire damage.
“We helped management with multiple avenues of business transformation, including organic geographic and service range expansion, the use of information systems to improve efficiency and service quality, and strategic acquisitions to enter new markets,” Calderbank says.
The result? “These initiatives saw Recover Nordic average 9 percent organic growth per year under our stewardship, with profits more than quadrupling,” he says.
Supply chain optimisation
Streamlining a supply chain means juggling many moving parts.
This includes cost savings and spend, sourcing and outsourcing, market disruption and business continuity, analytics and digitisation, regulation and globalisation, to name a few. Increasingly, GPs are concerned with an additional set of complex considerations: environmental, social and governance risks.
James Bousher, senior manager, operations performance at consultancy firm Ayming, sees a number of GPs and chief procurement officers at private equity-owned businesses grappling with integrating ESG into a supply chain strategy. To retain control of risks and grasp the opportunity requires resources, time and effort, he notes.
For CPOs often focused on savings targets, recognising the value of ESG requires a shift from short-term decision making to longer-term procurement planning, Bousher says. “Some [initiatives] go hand in hand,” he adds, pointing to using slimline packaging that cuts costs and benefits the environment.
For others, the benefit is not as obvious as the additional cost. “GPs need to encourage their portfolio companies to make conscious decisions based on ESG,” says Bousher. This includes introducing sustainability targets throughout the supply chain, in addition to conventional commercial milestones.
The issue of ESG is particularly pertinent “if you’re in consumer goods where it’s absolutely essential that you maintain very high ESG standards”, says Olof Faxander, head of the operational team at Nordic Capital. “If you don’t, it can cause enormous damage to that investment.” On the flip side, if ESG issues are managed well across all industries, businesses can accrue significant benefits, Faxander says, which include customer appreciation and product differentiation.
With a self-imposed investment horizon of three to five years dictated by a fund’s life cycle, time pressure is literally part of the deal. And it begins way before signing.
“The time constraints in a deal process are huge,” says David Olsson, partner at advisors Beyond the Deal. As GPs look to acquire, the risk to value creation is that they do not spend sufficient time pre-deal looking at synergies and the business’s operating model and how to change it, he says. “Proper pre-deal planning means you can be more effective post-deal.”
“Time is our most precious resource and something that we always need to treat as a scarcity,” notes Olof Faxander, head of the operational team at Nordic Capital. “A key thing that ensures that you use time in the best way is preparation.”
This means doing your homework so post-deal you can prioritise and focus to make the most of the time available. “For me, management is key, because you can have a great plan but if you don’t connect that to great management you aren’t going to get great results and it always takes a while [to find the best people],” he says.
Not only is consistent reporting that tells the full story a central element of effective governance, it is fundamental to accurate data collection and performance measurement.
“We want to have complete transparency around performance because that is how you make the right decisions on what to do next from a strategy and execution point of view,” says David Kirby, partner at Livingbridge.
“Transparency is absolutely key,” adds Alain Vourch, partner at Charterhouse Capital Partners. “Ultimately, what gets measured gets done.” This applies to financial and operational performance KPIs, he says.
“We often find that improving the financial transparency and operating cadence/management processes of smaller-mid-market companies is a significant value creation lever,” says Andi Klein, investment advisory professional at Triton, responsible for the firm’s Smaller Mid-Cap Fund. To do that the team works with “management to develop rigorous management, accounting and financial analysis practices to improve transparency and efficient and effective processes to influence business developments,” he notes.