Private Equity 4.0: Reinventing Value Creation

3 Value creation in private equity

Executive summary

Private equity firms are choosy shoppers, aggressive value builders and often discreet sellers. So how do they engineer value creation in deals? Is private equity contributing to public wealth or simply transferring money across different owner groups? Are they barons or villains, as the popular press often likes to depict them?

In this chapter, we take a micro perspective and try to understand how private equity firms engineer value creation in their target companies. Principally, they operate jointly four key value levers. First and foremost, private equity investors seek to improve the bottom line, i.e. they create solid operational value. They bring focus to the target firm, a long-term investment approach, a creative asset usage review and clear priorities and goals. Strong incentive schemes are activated, including a strong participation in the equity by the company management team, complemented by very strong performance-linked bonuses to attract and reward talent and operational expertise. Second, private equity investors endeavour to change the growth profile of the target company. By creating higher growth expectations for the firm, they seek to earn a higher valuation multiple from the market. Third, even if the intrinsic growth profile of the firm cannot be affected, by timing purchases to occur during low periods ...