To overcome increasing economic headwinds, and geopolitical and market uncertainties, Private Equity firms should look to collaborate with trusted partners to drive efficiencies, productivity, customer experience and revenue growth.
Having enjoyed many years of robust growth with record amounts of dry powder and a healthy deal flow, private equity firms and their portfolio companies have been hit with various headwinds arising from the pandemic, the Russia-Ukraine war and general international political instability. Inflation is constantly on the rise and supply chains have been ruptured. Valuations are uncertain and costs are rising rapidly and often unpredictably. Alongside these developments, interest rates are at levels not witnessed for a generation.
To further complicate matters, rapid growth in the PE sector over the last few years has created a talent war and a shortage of skilled, experienced professionals. PE firms and their portfolio companies have to re-think their processes and explore opportunities to reduce costs, develop synergies and optimize their businesses.
Challenges notwithstanding, the digital era offers PE firms a chance to achieve efficiencies and cost savings while improving productivity by deploying automation and advanced analytics. More importantly, contrary to popular notions, this step change doesn't involve huge capital investments.
Today, forging alliances with nimble and proven partners can enable PE firms to lay their hands on the latest digital technology and the underlying engine of domain expertise. These partners – on the back of their proximity to the industry and past experiences – can bring in the right operating models, requisite practices, and overall approach to accelerate implementation, reduce ownership (for PE houses) and focus on eventual outcomes.
Economic uncertainty demands improved metrics to enable businesses to thrive. Creating value, implementing pricing strategies and managing costs at a time of rising inflation are clearly the priorities for PE firms. Not surprisingly, a growing number of PE firms are striking up strategic collaborations to co-create intelligent solutions that deliver more accurate, timely metrics. This can ensure that PE firms become leaner and more efficient while their portfolio companies enjoy greater profitability and increased valuations.
Improved customer experience – as measured through client retention, surveys and social media sentiment, among other metrics – is a key part of driving value in portfolio companies. Strategic partners can co-create customer experience solutions based on technologies such as hyper-personalization, BOTs, artificial intelligence and machine learning.
While most PE firms have focused their attention on cost reduction to create value, not many have exhibited the same level of urgency when it comes to pricing. McKinsey reports that addressing pricing in portfolio companies can help PE firms witness a margin expansion of anywhere between 3 to 7 percent within a year. Business process management partners – given their expertise in advanced analytics, operating models and digital technologies – can help companies leverage pricing to unlock substantial value.
Business process management companies can harness their know-how of systems and processes to help PE firms with integration during the merger of portfolio companies. A strategy that is intended to deliver synergies and reduce costs can end up being expensive and counterproductive. When business is booming, these increased costs and timescales can be absorbed. However, in a difficult economic landscape, this integration must be rapid, seamless and cost-effective.
PE firms that can execute these strategies seamlessly will be well-positioned for the future. Their improved performance will attract new talent and investors, while their more efficiently and effectively managed portfolios will also draw in new dry powder and boost valuations at the time of sale. With cutting-edge technologies and improved metrics offering PE firms new opportunities, the future looks bright for the industry.
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