The pandemic-driven economic crisis has increased uncertainty in the market. For current holdings, the pandemic introduced liquidity concerns; during the second quarter of 2020, it was not uncommon for month-to-month variance to have exceeded 75 percent. For future investments, increased doubt into topline projections, the future state of the market landscape, and overall asset health delayed capital deployment, with evidence of green shoots emerging in Q3 and Q4 2020 and continuing into 2021.
A positive outcome for investors has been an increasing number of quality assets coming to market through divestitures as companies focus on core operations and search for liquidity. Despite high valuation multiples, this evolved landscape has created opportunities for growth-oriented investors. With the right value creation plan, deployment of capital for control or minority positions through private investment in public equities can lead to outsized returns. Examples of successful value creation levers to emerge post-pandemic include:
Buy depressed assets as platforms
Some of our clients are buying platform assets with depressed valuations. This allows them to gain a toehold in markets that may capture the post-covid return and be well positioned with an offering in markets they may not have had access to pre-pandemic.
These acquisitions do not come without challenges and risks. There is an upfront investment to support key elements of the value-creation plan, which include: revitalising the asset with focused investment; improved product innovation and strategic repositioning; and standing up a scalable business that can support tuck-in acquisitions and the anticipated growth.
Invest to support scale
Another investor is partnering with the management team of a public company undergoing a geographic expansion with enhanced last-mile delivery. The private equity firm has added depth of insight to management’s thinking and focused their energy on topline improvement. The PE firm is now shifting its resourcing to build scalability in the firm’s revenue generating processes (lead-to-cash) by improving their operating model, leveraging value-added reseller partnerships, and reducing administrative burdens on higher value addition product management and sales teams, improving the product and growing the business. By increasing management’s capacity, the investors have unlocked millions of dollars of trapped capital and cleared key roadblocks for the company to improve operating margins.
Leverage changing patterns for growth and cost advantage
The pandemic has changed buying patterns. One such change is the accelerated adoption of digital channels. The increased reliance of the consumer on digital can help grow the topline through tailored investment in digital marketing and enhancements to the customer’s digital journey, improving digital return on advertising spend. With the shift to digital channels, there is also opportunity to reduce the heavier fixed-cost structures required for physical presence with increased variable cost go-to-market structures.
Enhanced and continued use of virtual platforms enable EBITDA expansion through virtual operating models, increasing staff productivity and reducing the need for physical locations. Effective elements of value-creation plans have seen EBITDA expansion of between approximately 300-500 basis points, leveraging these fundamentals.