High valuations and competition for good deals pushes private equity houses to emphasise operational improvements in portfolio companies as their investment thesis.
A prolonged period of expansionary monetary policy and historically low interest rates has produced a situation where large amounts of money are seeking returns. This has caused institutional investors, such as pension funds, to shift their focus to alternatives, like private equity. The allocation of capital to PE is thus at an all-time high, according to Forbes, and the same has been visible in Nordic fundraising as well. The money in search of good targets has led to higher valuation multiples, so that private equity houses are facing a challenge as they seek to continue to outperform other asset classes in even more demanding circumstances.
Tracing, finding and exploiting levers before and during an ownership period
The tough competition means that PE houses must, to an ever-increasing extent, be quicker to find and execute potential deals where they can unlock value. If any PE house underestimates the potential of an investment case, there will always be another that will value the opportunity more highly and acquire the asset. On the other hand, overestimating a potential deal will erode the value of the investment right from the beginning. Solving this dilemma may require co-operation with advisors, such as KPMG, that can provide support in creating a comprehensive strategy for the entire holding period of a portfolio company.
An integrated Due Diligence is a good way to quantify the opportunities in a holistic manner. Financial Due Diligence secures a reliable baseline for operations, Commercial Due Diligence describes the available market opportunities and risks, while Operational Due Diligence demonstrates the operational efficiency-enhancement opportunities, together with the implementation requirements.
KPMG’s Target Value Platform (TVP) tool quantifies operational improvement opportunities at deal speed
KPMG has developed a set of new agile tools for the more systematic identification of value creation possibilities in transactions. One of them, that could be described as an express version of a traditional Operational Due Diligence can, for instance, be delivered in a week.
The TVP is an interactive tool that identifies unleashed operational potential in a target and quantifies its value. A rapid TVP scan leverages benchmarks across several opportunity areas within cash improvement, revenue upside, cost reduction and the maturity of operations. The benchmarks are based on publically available data inputs, combined with proprietary knowledge that KPMG has collected through years of conducting engagements. The visual and adjustable deliveries facilitate discussion and can serve as a template for a 1,000-day ownership plan, including an implementation roadmap. The awareness of operational upsides should be raised, along with red flags, at an early stage of the due diligence process. With the TVP, that can be done cost-efficiently, and at deal speed.