Outlook 2016: Value creation goes digital

A focus on value creation will be more important than ever next year as GPs seek to maximise value for their investors in a world of frothy valuations, says Apax’s Marcelo Gigliani.

Value creation – making fundamental changes within a portfolio company to both maximise returns for investors and future-proof the company itself – has been a key theme within the private equity industry in 2015. The combination of a low-growth environment and high entry multiples means GPs no longer have the option of relying purely on clever financial engineering to drive returns.

Going into 2016, most industry insiders agree that frothy market valuations are showing no sign of abating. Investing in such an environment, said Marcelo Gigliani, partner at Apax Partners, “will require a significantly larger focus on rolling up your sleeves and driving value in investments post-ownership”.

“There’s no doubt the market is acutely competitive, valuations are high,” he said.

“The main way for private equity investors to make the level of returns that we aim to deliver for our investors is to identify opportunities for value creation which others may not find. You can’t do that unless you have very specific skill sets in-house to identify levers that can be pulled but then also work alongside management teams to implement the concrete initiatives to capture that value in ways which wouldn’t normally be available to a private equity investor.”

Part of Apax’s in-house capabilities is its digital group, which works in collaboration with its operational excellence practice to ensure digital is a key aspect of the firm’s value creation plan for a portfolio company.

“There’s no question in our minds that digital companies will become more prevalent in the future and digital technologies will become more pervasive,” Gigliani said.

“The growth in pure digital business models and the increasing pervasiveness of digital technologies and services across traditional businesses will continue to be among the most transformational developments in 2016 and beyond. The future winners and losers across all industries will be heavily influenced by a company’s ability to embrace these changes and compete in what is an increasingly digital world.”

Apax invests across four sectors: consumer, healthcare, services, and tech and telco. Investments in the tech and telco space this year include the acquisition of a 23.2 percent stake in global technology services provider Zensar Technologies from Electra Partners. Examples of acquisitions this year that will seek to take advantage of Apax’s in-house digital capabilities are online real estate marketplace idealista and plus-size apparel retailer Fullbeauty Brands.

Within the digital group, Apax is scaling both its team and “the way we think about the space”, Gigliani says.

“We’re very committed to and optimistic on the theme of digital acceleration.”

Regarding investments in the technology sector, Gigliani anticipates private market valuations levelling off.

“In 2015, private markets were very hot for investments in digital businesses, with valuations often surpassing those achievable in IPO markets,” he said. “While we expect digital businesses to continue to pick up steam in public markets in 2016, we anticipate a reversal of private market valuation premiums, which will create some interesting dynamics.”