Private capital managers are manoeuvring through a difficult terrain marked by elevated interest rates and sluggish growth, which are affecting fundraising and deal activities. Further, intensified competition and discerning limited partners (LPs) are making it difficult to secure fresh funding.
Private equity (PE) firms can no longer rely solely on leverage and ever-growing valuation multiples to achieve profitable exits. Additionally, with constrained exit options and growing macroeconomic uncertainty, PE managers are compelled to sustain valuations.
A CRISIL study also suggests that private capital managers continue to double down on inflation - and recession-prone sectors, thereby seeking alternative strategies to deliver returns to the LPs.
Conventional value-creation approaches, such as operational enhancement of the portfolio company, are becoming less effective, necessitating a pivot towards innovative and resilient strategies essential for navigating these uncertain times.
Drawing from our extensive market research and hands-on experience of collaborating with numerous PE managers, we recommend the implementation of the following industry best practices aimed at maximising portfolio value in the short to medium term:
Strategic cash management: Private capital firms can enhance their portfolio companies’ liquidity position by implementing advanced enterprise resource planning (ERP) systems and driving operational optimisation through measures such as streamlining payables, inventories and receivables to bolster cash flows. Additionally, leveraging scale for more favourable negotiations can lead to an improvement in return on invested capital (ROIC)
Deepen ESG integration, and target emerging and sustainable themes: Private capital managers can look to integrate environmental, social and governance (ESG) considerations into portfolio companies to enhance resilience, performance and market appeal, thereby boosting valuations. Portfolio companies can also enhance value by extending their offerings into related domains that offer scalability and long-term earnings potential, ultimately leading to higher valuations
Strategic technological imperatives: Private capital managers should encourage portfolio companies to embrace unified data platforms, generative AI tools, and automation to improve operational efficiency and margins. Additionally, portfolio companies can prioritise the creation of centralised data repositories to improve decision-making
An amalgamation of these strategies will fortify these portfolio companies amidst an uncertain economic landscape, leading to improved margins, higher return on investment (ROI) and, in turn, increased valuation.
This whitepaper covers the current macro environment and examines the incremental sectoral allocation by private capital managers in Section I.
In Section II, it explores the renewed imperative for portfolio value creation and the evolution of private market value-creation practices. Additionally, it discusses the key drivers of value enhancement, providing actionable insights and real-world use cases based on CRISIL’s market engagement and experience.
This whitepaper also extends our series of publications within the realm of value creation. Please see the relevant links on pages 6, 7 and 10 for references to our previous research. To know more please download our full report.
