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Accelerating Private Equity Growth in 2017


According to responses from a survey conducted during CohnReznick’s Annual Liquidity and Capital Formation National Forum late last year, business leaders and investors are generally optimistic about the U.S. economy and their ability to grow and achieve their financial goals. In fact, 80% of the middle market company executives and investors surveyed reported that they were “confident” or “very confident” in the business environment. 
 
Optimism Transcends Political Uncertainty
Despite uncertainty surrounding the new administration in Washington, the survey respondents were already thinking ahead with optimism for the 2017 business climate. In line with this, many felt that the time would be right for a company to embark on a transaction.
 
  • Eighty-three percent of respondents said that the next 6-12 months would be a good time to pursue a merger or acquisition. 
  • Seventy-nine percent thought that the next 6-12 months would be an ideal time to consider selling a business.
  • Sixty-eight of those surveyed believed that today’s high market valuations were sustainable for their industry over the next 6-12 months.
  • The vast majority (96%) felt that the next 6-12 months would be a good time to borrow capital, although three out of four respondents did expect borrowing rates to increase.
 
Despite the optimism, there will undoubtedly be some lag time as the business community catches its breath and responds to new direction from the Trump administration. But once the dust settles, investment and acquisition activity is poised to regain momentum in 2017.
 
7 Strategies for 2017
So what should the private equity industry be doing now to help propel this momentum? In our opinion, PE firms should look to embrace new strategies that will help them grow and compete more effectively in what will undoubtedly be a year of significant change. We have identified seven of these strategies as PE firms plot their courses for 2017.
 
1. Put Value Ahead of Valuations
To obtain quality assets, PE firms have become accustomed to paying high valuations. And we expect today’s high valuation marketplace to persist throughout 2017. To make an acquisition work financially, in light of what could be a somewhat inflated purchase price, PE firms need to focus on building value at the portfolio company level. This includes allocating resources to help to drive growth immediately post-close. 
 
A new platform may only be worth 6.5x EBITDA. But a PE buyer may be forced to pay 8x+ cash flow to win the auction. This scenario has become commonplace. But if the PE firm is poised to pay a turn or two higher for the right acquisition, the strategic emphasis needs to shift from a sole focus on risk identification to more concentration on value creation – starting with the diligence process.
 
With improvement opportunities and strategies identified during the due diligence process, private equity investors can more rapidly develop and execute their 100-day plans. A solid strategy that we recommend is to focus on the “low hanging fruit” first – those improvements in operations, technology, sales processes, and other areas that will increase cash flow, and thereby the value of the acquisition, to help offset a higher than expected purchase price. 
 
2. Specialize to Differentiate
Another way for PE firms to accelerate growth is obviously to identify and close more deals. But to do so in today’s market, they must pursue innovative strategies to specialize and differentiate themselves. Specialization typically comes in the form of industry expertise, operational focus, and/or market segmentation. Differentiation, on the other hand, may emanate from company culture, the involvement of true operating partners, functional expertise, and the ability to embrace innovation. When competing against corporate investors, PE firms must demonstrate that they are the right partner.
 
3. Leverage Innovation Across Operations
As the speed of business continues to increase, a culture of innovation can be a key differentiator for private equity firms accelerating growth through their portfolios. Innovative practices can improve acquisition strategies, increase the certainty of close, expose previously hidden opportunities for performance improvement, and drive value creation.
 
A 3 to 4 year plan to complete a project no longer makes sense in today’s digital world. Instead, 12 to 14 months is the new norm with some initiatives demanding shorter completion times.  A culture of innovation breeds efficiencies that can permeate through all functions of a portfolio, giving the private equity parent a clearer, more transparent platform to measure progress and make speedier decisions.
 
4. Empower the CFO
Elevating the role of the CFO beyond bookkeeping and scorekeeping can accelerate growth in the days immediately following the close of a new acquisition, throughout the integration process, and as operations of a newly acquired entity continue through exit.  As forward thinking PE firms place greater emphasis on financial planning and analysis, they should expect their CFOs to contribute meaningful information and strategies to accelerate growth throughout the portfolio.
 
5. Drive Growth with Diligence
Whether acquiring a new platform or an add-on, the diligence process is a tool that can help build value. PE firms should continue using the diligence process to identify any inherent risks in an acquisition and also expand the process of identifying opportunities to drive future value. Doing this can fast-track post-acquisition planning and integration, and accelerate the return on a high purchase price.  
 
6. Embrace Cybersecurity Best Practices
The SEC and other regulatory bodies have made cybersecurity a priority in their examinations. And while many PE firms are now taking cybersecurity more seriously, others still have a long way to go. Moving into 2017, forward thinking PE firms need to be ahead of the game in protecting themselves against a cyber-attack. This means employing cybersecurity best practices that, we believe, regulatory bodies will be expecting from PE firms. These should include an annual cyber risk assessment, well-defined policies and procedures, and strong technical and process-related controls. 
 
7. Employ Robust Data Analytics
PE firms have always used analytics to help them make smarter business decisions. But Excel has been the tool of choice for many of these firms and its ability to provide a truly comprehensive picture of a firm’s operations, financial status, and competitive landscape is limited. Enter data analytics.
 
PE firms should consider making data analytics, including management dashboards, a strategy for 2017 rather than a tactical initiative. Not only can a robust data analytics program help PE firms drive competitive advantage, it can help them make quicker and better go or no-go decisions for potential acquisitions. Data analytics can also help to uncover profit generating opportunities within portfolio companies, accelerate the due diligence process, and leverage market trends that may influence a profitable exit strategy.  
 
Conclusion
Uncertainty can often breed skepticism. And this is certainly understandable. But as the country transitions to new leadership in Washington, and the many changes and challenges that lie ahead, the PE industry seems to be balancing its skepticism with a sense of confidence and hope. Those firms that are willing to invest the time, resources, and energy into driving new growth strategies throughout their portfolios are poised to come out ahead in 2017.
 
Contact
For additional information on strategies to accelerate private equity growth, contact Jeremy Swan, National Director, Private Equity and Venture Capital Industry Practice, CohnReznick, at Jeremy.Swan@CohnReznick.com or 646-625-5716, or Claudine Cohen, head of the Private Equity and Venture Capital Industry Practice in New York, at Claudine.Cohen@Cohnreznick.com or 646-625-5717.
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