As a private equity (PE) professional, your goal isn’t just to acquire assets; you must also execute transformation and value creation action plans effectively and consistently to improve each portfolio company’s value.

As a seasoned PE professional, you understand the multifaceted challenges and opportunities of transforming portfolio companies to generate positive outcomes for your firm and the companies’ stakeholders, including founders, employees, and other investors.

Even when experienced PE professionals come in with significant sector-specific experience and a strong value creation thesis, transformation successes are far from certain. Further, BCG research suggests that even successful transformations often leave value on the table.

Some degree of complexity and risk is present whenever someone is looking to shake up a company’s strategic direction or make structural changes to its operations and finances. Acquiree company founders/owners and employees may also be anxious about the pending changes and unwilling to embrace them. Uncertain market conditions add further complexity to the mix. Research from large consulting firms suggests that the success rate of business transformations is relatively low, around 30%.

Common Challenges in PE-Led Business Transformation and Value Creation Initiatives

Optimizing Portfolio Value with SPM

Business value creation is a complex path involving layers of intricate work. PE professionals often run into issues when working to transform the companies they’ve acquired:

  • Execution risk: Selecting a suitable set of strategies and initiatives to improve operational efficiencies and drive growth in portfolio companies remains critical to success. Even well-planned interventions may falter due to various factors, including lack of expertise, poor management, and operational setbacks. External factors such as fluctuating market and economic conditions may make execution more difficult.
  • Integration issues: Consolidating companies have inherent challenges, such as cultural clashes, systems incompatibility, and operational disruptions. These factors can hinder performance improvements.
  • Exit challenges: Identifying the “right” moment to exit an investment can be difficult, especially if market conditions are unfavorable or the company has not met the anticipated performance benchmarks. These issues impact the overall investment returns.

Critical Success Factors and Enablers in PE-Led Value Creation Initiatives

Optimizing Portfolio Value with SPM

The most successful PE firms in the world have implemented specific strategies to improve their odds of success. Let’s examine them below.

1. Align incentives and select initiatives focused on value creation  

In an average company, there may be dozens or hundreds of competing projects and initiatives with no tie to an overarching goal. Many of the PE firms we’ve worked with come into their portfolio company with a prioritized set of initiatives that can be launched quickly and generate measurable results within three to twelve months. These include measures to grow sales, boost revenue, and optimize spending levels and costs. Successful PE professionals know that a well-defined, time-bound action plan is essential for aligning portfolio company leaders and employees to work towards a defined set of objectives.

Effective PE operators take time to ensure that the incentives are aligned with the desired outcomes – meaning that the transformation delivers benefits to investors, management, and employees.

This combination of focus, urgency and alignment of incentives ensures that all efforts are coordinated and directed towards achieving the set objectives and execution risks are mitigated.

2. Leverage technology to improve operational efficiencies

PE firms often acquire a stake in a company because they see opportunities to use technology to improve the company’s operational efficiency and drive differentiation. Savvy PE professionals know which tech systems should be deployed within their portfolio companies to streamline operations and drive meaningful efficiency gains. They help their portfolio companies deploy modern tools, data, and foundational technologies such as automation, AI, and ML to enhance operational efficiency, improve customer satisfaction, and unlock innovation.

3. Focus Value Creation Plans, Implement With Precision and Urgency – Supported by Technology

High-performing PE firms are highly selective about the types of investments they make. They become experts in certain kinds of companies and know the critical levers of value creation for the businesses they work with.

Once they’ve acquired a stake in the company, they create a detailed value creation plan and assign roles and responsibilities for implementation. They select a minimum set of initiatives that can help the company reach a goal (e.g., $100 million in EBITDA growth in two years). Only projects that contribute to the overall goal are approved, and projects that don’t add tangible value are eliminated.

But they don’t stop there. They use a solid software system (like Shibumi) to implement their plans with precision. Knowing that visibility and real-time data are necessary for accountability and successful outcomes, they rely on purpose-built business transformation management apps to orchestrate and track their value-creation initiatives from idea to benefit realization. By creating a single source of truth for transformation, connecting work to results, and facilitating real-time updates and collaboration between the different roles within a transformation process (e.g., the head of transformation / PE operator and portfolio company-side leaders and employees), Shibumi empowers PE firms to overcome many of the execution challenges associated with PE-led value creation initiatives.

4. Cultivate a Culture of Empowerment

At the heart of most successful transformations is a culture that empowers individuals across the organization. It’s not just the investors dictating from above. The portfolio company’s C-suite views the investors as strategic advisors and communicates the why of transformation and its benefits to leaders and employees.

The organization’s employees view the investment/change in ownership positively; they understand and believe that the transformation will benefit them as individuals and are willing to do the work aligned with the transformation vision. Great PE professionals understand the importance of bringing the people from the acquiree organizations along in the transformation journey.

People working together

Leverage Private Equity Value Creation Tools for Success

At Shibumi, we know that creating portfolio company value is intricate and challenging. That’s why we’ve built an intuitive business transformation software application to help PE professionals navigate their journey more effectively.

With Shibumi, PE professionals can quickly launch value-creation initiatives for each portfolio company, assign ownership, track progress, and keep leaders accountable. Leaders from the portfolio company will come into Shibumi to add details about their initiatives, manage them, and provide progress updates. Everyone from the head of transformation to portfolio company leaders to PE firm leaders gets real-time visibility into progress, issues, risks, and how initiatives generate value.

Each stakeholder can access the information they need through automated reports and dashboards, so transformation leaders no longer have to spend their precious time collecting data and collating reports for various stakeholders.

With Shibumi as a transformation partner, PE firms can set their value-creation initiatives up for success, ensuring long-term growth and sustainability for their portfolio companies and generating impressive returns upon their exits.