PE Committing Greater Resources to Drive Portfolio Growth
March 20, 2015
PitchBook Dealmakers Column
PE firms are continuing to invest more resources to "professionalize" their portfolio companies and prepare them for growth and an eventual exit. While it is difficult to quantify the time, effort and capital invested in operational improvements, PE firms are undertaking activities indicative of this trend, including an increased use of and focus on operating partners, entrepreneurs-in-residence and highly specialized third party service providers. Fund managers are increasingly pursuing add-on strategies to grow their existing portfolio companies through the acquisition of, in many cases, smaller, but also larger players in their markets. In fact, add-on investments, much of which are targeted toward financing for add-on acquisitions, have been steadily rising as a share of overall buyout activity over the last decade, jumping from 36% of all buyouts in 2004 to more than 50% in recent years, according to PitchBook. Add-on strategies, however, have resulted in companies that are now running numerous disparate financial, human resources, manufacturing and technology platforms. PE firms have an unprecedented opportunity to integrate these platforms within portfolio companies in order to achieve a higher level of efficiency and cost savings.
By investing in modernized, more efficient business systems and processes, PE firms have greater assurance that their portfolio companies have reliable financials, streamlined inventory and more automated operations. Further investment in corporate governance and compliance can make certain that nothing is amiss from a regulatory standpoint. Ultimately, investments in systems and processes can result in a more professional organization ready for the next level of growth or even for a liquidity transaction. Efforts to make an organization more efficient and professional will undoubtedly increase valuations when it comes time to sell.