The prolonged downturn in the private equity (PE) deal market has heightened the industry’s focus on the urgency to create value. In 2023, U.S. deal value and volume fell by 45% and 29% year over year respectively. Many PE firms today realize that they can’t just cut costs, repackage, and retrade their assets in the market. Longer holding periods which may rise from a 12-year high of 4.2 years to an average 4.4 years by the end of 2024, according to PitchBook and higher costs of debt should turn deal makers’ attention to something they may have overlooked performance improvement initiatives to grow the business of their portfolio companies for a profitable outcome. Indeed, many PE executives tell KPMG that this is a top priority for portfolio companies.
At the same time, PE firms are sitting on plenty of capital. Global PE dry powder stood at a record $2.59 trillion as of December 2023 and watching for signs of a thaw in the deal market. Deal-making activity could pick up rapidly whenever the conditions become ripe again. PE deal makers, however, know that money is no longer cheap. In a high-interest-rate environment, they will need to lean more into value creation to match the level of returns the ultra-accommodative interest rates of the past used to deliver. Prices of some potential targets may have fallen. Still, the deal market remains competitive, and the high cost of capital has heightened the importance of buyers having a clear roadmap to achieve the ultimate value realization they envision.
Value creation efforts in PE deals will pack more punch the earlier you implement them. Deeper diligence processes, particularly in the pre-deal phase, can help you identify and test key growth and cost consideration that underpin an investment thesis to make a go/no decision. In KPMG 2024 M&A Survey, 52% of PE respondents said the current economic landscape has heightened the importance of diligence and risk assessment. And if the transaction is on, then sophisticated, value creation plans with not just the deal partner but also the operating partner behind the strategy will allow you to implement granular action from the moment you pencil the deal. By starting the clock faster and bringing the value question to the fore early, everyone will be aligned on what to deliver and implementation can begin on Day 1. Early identification of value drivers allows PE firms to prioritize and plan for immediate action during the post-sign phase by crafting an overall roadmap with specific initiatives and detailed timelines.
