Submitted by: Submitted by mjubber
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Pages: 20
Category: Business and Industry
Date Submitted: 06/21/2016 02:08 AM
Operational Improvement:
The Key to Value Creation in Private Equity
by Gary Matthews, Mark Bye, and James Howland, Morgan Stanley
B
T
he financial crisis sweeping global markets is
reshaping the landscape of private equity investing. While credit tightening has curtailed the
availability of leverage and intensified competition for new deals, the economic recession has caused many
companies already in the portfolios of private equity firms to
underperform. These changes are prompting investors to revisit
a long-held key tenet of value creation in private equity: operational improvement.
Although the ability to raise debt will remain an important component of private equity investing, the sharp decline
of leverage in the global financial system has reduced private
equity firms’ ability to create value through financial engineering. By making it more difficult to acquire large companies,
the credit contraction has also intensified competition for
smaller deals and thus made it more difficult to find bargains.
At the same time, a diminished supply of leverage has also
limited opportunities for private equity “home-run” deals
capable of offsetting underperforming investments.
As a result, private equity firms have become even more
dependent on their ability to improve operational performance in every transaction to achieve their investment goals
and generate attractive returns. Few firms, however, have
proven themselves capable of achieving operational improvements in portfolio companies consistently over time.
In this paper, we discuss the anatomy of value-adding
operational change. Specifically, we examine several approaches
private equity firms use to deploy operational expertise to drive
value in portfolio companies. We also examine the analytical
framework used by some firms for assessing and prioritizing the
many operational initiatives that could be undertaken within
a newly acquired company. Included in that examination is a...