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5 Steps to Improve Value Creation in Private Equity Portfolio Companies

Optimizing operational efficiency in the fast-paced world of private equity is a strategic imperative, especially in the current exit environment. By fine-tuning processes, minimizing costs, and fostering a culture of continuous improvement, portfolio companies can position themselves for growth and outsized investment returns. Here are some actionable steps private equity companies can take to unlock the full potential of their portfolio companies.

1. A Holistic Operational Assessment

Begin with a comprehensive operational assessment of the current state of people, processes, and technology. Dive into critical areas such as:

• Organizational Structure: Review reporting lines and decision-making hierarchies to improve communication and implementation of strategic and tactical initiatives. Optimize legal entities of subsidiaries; consolidate or liquidate if no longer required from a tax or legal protection perspective.
• Workforce Dynamics: Evaluate workforce efficiency, document and address skill gaps, and invest in training and development.
• Supply/Demand Chain Effectiveness: Scrutinize supply and demand chain processes, identify bottlenecks and areas of inefficiency, and explore avenues for streamlining and contingency planning. This should also be analyzed and implemented from a tax efficiency standpoint.
• Workflow Practices: Apply lean principles to eliminate waste and enhance productivity while balancing operational and structural risks. Assess material accounting and tax policies as well as workflows, such as order-to-cash,  procure-to-pay, and financial close and reporting using process narratives, flowcharts, and scorecards for each.

2. Execute Process Enhancements

Identify specific opportunities for improvement to enhance efficiency and mitigate risks like internal controls:

• Value Chain Analysis: Map end-to-end workflows, automate manual and recurring tasks, and eliminate redundancies.
• Technology Implementation/Integration: Private equity firms should encourage their portfolio companies to leverage or upgrade ERP, CRM, and other systems, analytics, and data-driven insights to create seamless processes as well as increase data integrity and transparency so that leadership can make better business decisions.
• Establish and Manage KPIs: Key performance indicators (KPIs) should align operational goals that fit into the company’s strategic plans. Appropriate KPI selection will yield maximum impact on productivity and margin enhancement if properly monitored and managed.

3. Cultivate a Culture of Excellence

Operational excellence requires a certain mindset, both individually and organizationally. It starts with the tone of top management but must perpetuate throughout the organization to create a competitive advantage:

• Employee Engagement: Encourage employees to actively ask questions and contribute ideas for how to get better, make tasks easier, and complete work quicker, which will lead to enhanced productivity and innovation to drive long-term success.
• Teamwork: Foster collaborative and responsive communication to promote transparency and knowledge-sharing across formal and informal channels.
• Feedback Loops: Regularly assess progress, address issues quickly, and adapt different tactics as needed to achieve desired outcomes.

4. Empower the Workforce

A skilled workforce drives operational success:

• Skills Alignment: Ensure employee capabilities align with strategic goals and reskill or upskill as needed to synchronize with future state change initiatives.
• Performance Management: Assess and implement effective performance evaluation systems and ensure incentives are congruent with desired behavior. Developed HR/talent programs should foster better employee engagement and retention.
• Continuous Learning: Invest in ongoing training, development, and career-pathing.

5. Embrace Add-Ons

Making strategic acquisitions to increase revenue and EBITDA to capitalize on synergies and create multiples arbitrage through increased size and scale:

• Development of Acquisition Strategy: Develop a thesis for how an acquisition will be value accretive, such as complementary product/service diversification, geographical expansion, or acquiring a skilled and sophisticated workforce.
• Execution: Assemble a team of internal and external advisors that will provide deal support/management, including accounting, finance, legal, insurance, etc.
• Post-Close Integration: People, processes, and systems all require careful and timely integration for expected synergies  and value creation to be realized. 

Remember, creating value that is transferable in an exit isn’t a one-time fix; it’s an ongoing journey. At Centri, we’re committed to helping private equity firms and their portfolio companies achieve their growth goals and investment objectives. Our tailored advisory services encompass both transactions as well as value creation services, including M&A advisory, accounting transformation, HR advisory, tax advisory, outsourced accounting, and valuation. Let us be your trusted partner throughout the investment lifecycle. Contact us to learn more.

Curtis Farrow

Partner | Private Equity & Venture Capital Practice Leader | CPA, ASA

Curtis is a Partner at Centri Business Consulting and the leader of the firm’s Private Equity & Venture Capital Practice. He has more than 11 years of experience and has supported many clients in achieving their growth initiatives in connection with M&A, capital raising, reorganizations, and carve-outs, as well as successful liquidity events for stakeholders via IPOs, de-SPACs, reverse mergers, and other M&A transactions. Curtis joined Centri in November 2019, where he combines his strong expertise in business and intangible valuation with his knowledge of accounting to identify, address, and resolve business issues for investors and entrepreneurs.. View Curtis Farrow's Full Bio