By Nita Sanger.
There is a Chinese curse which says, 'may you live in interesting times.' I am sure that we all agree that 2020 has been very interesting. The current market conditions have created an inflection point in our society, significantly accelerating the adoption of technologies to meet better meet personal, social, and leisure needs, run a business, and even work remotely. The private equity (PE) industry has continued to make deals, find exits, and raise capital at a historic pace over the last 5 plus years. Some of the biggest challenges that PE General Partners (GPs) are now facing are high deal multiples, a dearth of attractive targets, and stiff competition. As we move into 2021, GPs should consider the "once-in-a-lifetime" opportunity presented by the marketing shifts and the evolving customer needs, to make strategic bets to maximize returns, by identifying opportunities for revenue growth within their existing portfolio. Below are a few steps for the GPs to take to position their portfolio for success in 2021, and beyond.
1. Look Outward, Reexamine - The business environment for the focus business and industry sectors, to identify the shifts in customer needs, competitive landscape, regulatory environment, new technologies, etc., and their impact. Ascertain the opportunities provided by these market shifts and how best to leverage them to your advantage. You can "see the entire forest for the trees". The key is to relentlessly focus on understanding consumer needs and identifying optimal ways to meet them.
2. Look Inward, Reassess - Each company in your portfolio, product/service offerings, go-to-market strategy (customers, sales channels, sales team, products/services), business operations, and leadership talent skills and capabilities for continued revenue growth.
Product/services offerings - Examine the existing products and services being offered, and identify opportunities to expand the customer footprint, increase current customer retention and stickiness, and grow the customer base. Determine approaches for delivering the offerings, i.e. platform, ecosystem play, etc. According to a Bain study, increasing customer retention rates by 5% increases profits by 25% to 95%.
Go-to-market strategy - Traditionally business leaders tend to focus on making their business development and sales force teams more effective to grow revenues, through customer segmentation, setting revenue targets, establishing KPIs for calls/sales ratios, revenue targets, service metrics, etc. At the same targeted marketing efforts, and social media are used to reach customers. It is critical to align and optimize the sales force, customer support, and marketing teams. Today, GPs have additional options for turbocharging the growth of their investments by a "buy-and-build" approach, essentially using an existing investment as an anchor and then acquiring smaller, cheaper firms, to create value out of synergies and combine operational strength, explore adjacent investment strategies to take advantage of existing capabilities, and leverage advanced analytics to identify value and risk. Each approach has been tried and tested by other investors, and each PE firm has to decide what works best for them. The success or failure of the approach will depend on how well it is executed.
Talent: The single most important factor for the success of this strategy is going to be the talent that will drive the growth. PE firms tend to have several experienced investment professionals to identify targets and close deals. However, to execute on the growth strategy will require resources that bring a combination of strategy, operations, and execution experience, and can drive effective merger and post-merger integration. Some PE firms have already built a roster of operating partners, who bring this expertise, while others may need to build it. GPs can examine the talent within their portfolio and see if the firms they identified for growth, have
leaders with the relevant skills that can be leveraged, without negatively impacting business performance. Usually, most start-ups tend to have leaders with strong product/industry, technology, and sales skills, while the more successful ones have leaders who bring critical strategy, operations, and execution skills.
3. Reengineer - the business for success. Usually, business operations and the growth strategy and execution are left to each portfolio company, with guidance and support from the PE firm. GPs will need to determine how to manage the delicate balance between giving autonomy to the leadership in the firm they invested in while driving the growth strategy to achieve the desired returns for their firm and the portfolio. In addition, there are opportunities to reengineer operations of the portfolio companies, as new operating and talent models have emerged. GPs should identify opportunities to improve efficiency and effectiveness of operations across the entire portfolio and share best practices.
The focus of the PE firm should be to take advantage of opportunities in the current environment and have a relentless focus on growing revenues for their entire portfolio while bringing in the right resources to execute on strategy. In conclusion, there is no single approach for a PE firm to take to position its portfolio for success. The approach that the PE firm takes would depend on the companies in its portfolio, their market position, products and services offered, business model, leadership team, growth potential, and the vision that it has for its entire portfolio.
To discuss this article further, or for additional information, please contact me at nsanger@ideainnovate.com. Additional articles on how to transform your business can be found here the role of leadership in a business transformation, transforming business operations, transforming the go-to-market strategy and approach, tried and tested tools, processes, and techniques.
About the Author
Nita Sanger is the Chief Executive Officer of Idea Innovate Consulting, a boutique strategy consulting firm focused on accelerating growth of firms in Professional, Financial and Legal Services.