How do PE firms increase the value of portfolio companies?

In preparation for a summer internship interview, I've been doing some research on portfolio company value creation and I've come across the following strategies:


Buy-and-build - exploiting multiple arbitrage by using the portfolio company to acquire more firms

Operational engineering - cutting costs, changing pricing strategy etc.

Governance engineering - implementing PE operating executives / bringing in new management

Is the above accurate? Are there other strategies that I should be aware of?


Any help you can give would be greatly appreciated :)


 
Most Helpful

Yes, that's a pretty good summary.

Not sure you want to mention it but also through multiple expansion. As the portcos grow, they capture greater % of market share. So in short, if you buy a company doing 100mm in sales and scale it 300mm in scale, it will command a higher premium. Therefore, prospective buyers will assign a higher multiple to a company's EBITDA in their valuation, which is really how most PE funds hit their returns. 

PE funds want to act as though they revolutionize the companies they acquire, but the truth is they rarely do. In the latest PE report (I think Pitchbook published it) examining 250+ funds of all sizes, roughly 10% of MOIC was driven by sales growth (scaling the business through capex investments and new customer sourcing), 5% through margin improvement (cost cutting and pricing strategy optimization that you mentioned), and the remaining 85% was through multiple expansion. 

With that said, PE funds dont want to hear this, because it to some extent implies they didnt really transform the business. 

I think the points you listed are perfect. I guess you could add the following too: 

1. Cost Synergies - as you buy a platform acquisition and acquire smaller companies (rollups) you can leverage the platform's SG&A staff (IT / sales / engineering) to reduce Opex costs for the newly acquired rollups. Therefore, as the platform company grows rollups you realize operating leverage. 

2. Revenue Synergies - as you acquire different rollups for a platform, you are able to realize revenue synergies through cross-selling to the different customers each individual company has access to. Additionally, if you are in say manufacturing, you would potentially be able to develop new products and increase your portfolio of products, further juicing sales for future periods. 

Note: I may sound salty by saying PE funds dont meaningfully transform the companies they acquire, but I mean no disrespect. Corp Dev is the same way, rarely do buyers truly revolutionize the companies they acquire. It does happen, but it is not the norm. 

 

Reprehenderit rerum architecto expedita iure sunt distinctio fugit soluta. Odit quos sunt et nulla.

Corporis fugit fuga eaque aut dolorem. Voluptate quam sequi temporibus officia. Nisi incidunt voluptatum nobis labore.

Molestias culpa labore dolores tempora modi. Aperiam reiciendis consequatur autem doloribus dignissimos quas. Enim impedit est quo debitis voluptas. Autem illum ut ea sunt. Id dignissimos porro magni.

Et ullam aut deleniti amet ullam repellat ipsum. Qui perferendis exercitationem qui qui nemo. Beatae voluptas voluptatum temporibus est quas ab totam. Mollitia et ut temporibus. Excepturi voluptatem veritatis quia libero sit eveniet.

Career Advancement Opportunities

March 2024 Private Equity

  • The Riverside Company 99.5%
  • Warburg Pincus 99.0%
  • Blackstone Group 98.4%
  • KKR (Kohlberg Kravis Roberts) 97.9%
  • Bain Capital 97.4%

Overall Employee Satisfaction

March 2024 Private Equity

  • The Riverside Company 99.5%
  • Blackstone Group 98.9%
  • KKR (Kohlberg Kravis Roberts) 98.4%
  • Ardian 97.9%
  • Bain Capital 97.4%

Professional Growth Opportunities

March 2024 Private Equity

  • The Riverside Company 99.5%
  • Bain Capital 99.0%
  • Blackstone Group 98.4%
  • Warburg Pincus 97.9%
  • Starwood Capital Group 97.4%

Total Avg Compensation

March 2024 Private Equity

  • Principal (9) $653
  • Director/MD (21) $586
  • Vice President (92) $362
  • 3rd+ Year Associate (89) $280
  • 2nd Year Associate (204) $268
  • 1st Year Associate (386) $229
  • 3rd+ Year Analyst (28) $157
  • 2nd Year Analyst (83) $134
  • 1st Year Analyst (246) $122
  • Intern/Summer Associate (32) $82
  • Intern/Summer Analyst (313) $59
notes
16 IB Interviews Notes

“... there’s no excuse to not take advantage of the resources out there available to you. Best value for your $ are the...”

Leaderboard

1
redever's picture
redever
99.2
2
BankonBanking's picture
BankonBanking
99.0
3
Betsy Massar's picture
Betsy Massar
99.0
4
Secyh62's picture
Secyh62
99.0
5
GameTheory's picture
GameTheory
98.9
6
dosk17's picture
dosk17
98.9
7
DrApeman's picture
DrApeman
98.9
8
CompBanker's picture
CompBanker
98.9
9
kanon's picture
kanon
98.9
10
numi's picture
numi
98.8
success
From 10 rejections to 1 dream investment banking internship

“... I believe it was the single biggest reason why I ended up with an offer...”