Value creation lessons from the private equity industry
Four takeaways to apply to cost takeout in any industry
Across industries, C-suite executives have made progress in increasing cost efficiencies. As margin pressures keep mounting, they continue seeking opportunities to make smart cuts so they can reinvest the savings in innovation and/or resilience. With a sound approach, cost takeout can position an enterprise to create more value today and in the future.
Value creation is also top of mind for private equity (PE) firms. While there are some nuances to the PE industry, there’s also plenty of common ground.
The 2022 KPMG Market Insights Report shares findings and analysis on how PE firms are approaching value creation. The report points to a sharper focus on value creation planning, which requires a more comprehensive approach to enterprise-wide transformation. Like peers in other industries, PE firms are leveraging an ever-increasing set of value levers and employing a more disciplined and transparent approach to execution.
In short, PE firms are accelerating the value creation process. They are crossing more disciplines. And they are integrating more unique data than ever before.
What follows are additional key takeaways that C-suite leaders in other industries may want to consider for their cost transformation programs.
Start value creation planning sooner
In the PE industry, it used to be common to create and implement a value creation plan after a deal closes. In the latest survey, half of PE firms with assets under management (AUM) of US$10 billion or greater said that compared to three years ago, they’re initiating value creation planning earlier in the deal cycle.
What’s driving the shift is the desire for more room to maneuver. The sooner planning starts, the better positioned firms are to seize opportunities and adjust tactics. Likewise, enterprises in other industries benefit from earlier access to a repository of value levers, data sources, and analytical techniques, such as those available through KPMG Elevate.
Balance costs and revenues
The research found that nearly half of PE firms take a balanced view on revenues and costs, with only a minority focused on costs. As all enterprises continue to grapple with costs, CEOs remain mindful of revenues. In fact, smart cost takeout can free up resources to reinvest into greater operational resilience and agility. That, in turn, can help an enterprise pivot quickly to pursue new market opportunities and thwart emerging competitive threats.
Evolve your value creation levers
For PE firms, the top levers of value creation are still A) buy and build and B) people and talent investment. Interestingly, however, the KPMG study found growing focus on tech investment and digital transformation—two areas where other industries are also placing calculated bets.
As the report notes:
“Successful value creation strategies are now combining technology and digital transformation with data insight. These strategies build a scalable platform for organic growth and merger and acquisition integration, they drive better experiences for customers, and they reduce duplication, inefficiency, and cost. This potent blend of tech, digital, and data is having a large and compounding impact on EBITDA.”
Lean into advanced analytics
The KPMG study affirmed that data and advanced analytics are vital to helping investors understand the intrinsic nature of the business they are investing in. They also are essential to creating effective value creation strategies. In fact, the analysis found that over 80 percent of the time, quantitative analytics had an impact on the price paid for an asset. Data and analytics are equally important for leaders across industries as they transform cost structures to optimize profitability and operational agility.
The full report provides additional findings and analysis—along with nine fundamental principles for PE firms to deliver on the promise of value creation. For CEOs, many of these fundamentals still apply, and when used in conjunction with KPMG Elevate, can support successful cost takeout.
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