Unlocking value

In the ever-evolving landscape of private equity (PE) in Ireland, the traditional reliance on financial engineering and leverage is giving way to a more holistic approach. Today, a focus on value creation is becoming the hallmark of successful PE investments. Byron Smith of our Strategy team explains several different approaches below.

Value creation prioritises operational improvements, targeted growth, and sustainable practices to enhance the intrinsic value of portfolio companies. While each Irish portfolio company (portco) benefits from a tailored approach to value creation, common tools include peer benchmarking, vision setting, and ensuring robust governance, financial, and risk management practices are in place.

Many Irish portcos have benefited from value creation strategies. For example, in the last two years, KPMG has assisted companies across software, homecare, hospitality, construction and manufacturing to identify value creation opportunities leading to significant increases in EBITDA valuations. Value creation is now recognised as a crucial tool in the Irish investor’s toolkit.

The familiar: enhanced operational efficiency

A value creation strategy centres on operational excellence and innovation. By identifying inefficiencies and implementing best practices, PE firms can significantly enhance the performance of their portfolio companies. This might involve streamlining processes, adopting advanced technologies, or optimising supply chains. The end result aims for a leaner, more agile organisation capable of delivering higher margins and better returns.

While these actions are familiar to investors, the key difference with a value creation-oriented approach is that the goal is long-term growth and commercial sustainability. This approach considers the possibility of holding the asset longer if market conditions require it, or to capitalise on longer-term M&A or bolt-on opportunities within Ireland or overseas.

Irish private equity firms, along with mid-tier UK and European PE firms, are achieving operating cost reductions of up to 12% through value creation measures.1

Strategic growth and market expansion

Traditionally, private equity has been associated with financial engineering and cost-cutting to enhance valuations. However, a value creation-focused approach positions private equity investors as crucial drivers of sustainable growth. PE firms can stimulate growth by aiding portcos in entering new markets, launching innovative products, or acquiring complementary businesses.

This support often goes beyond financial backing. The most successful PE firms facilitate networking and partnerships for portcos, both within their portfolio and with external firms that can mutually enhance long-term valuations. Achieving this often requires significant time and management effort from PE firms to help portcos “think bigger.”

While some PE firms invest heavily in developing skills, many smaller firms benefit from outsourcing to strategy and value creation experts. Recent value creation strategies in Ireland have shown an average revenue increase of 13% by identifying thoughtful, low-investment growth opportunities.2

Improved governance and leadership

Increasingly, portcos are seeking private equity that can provide seasoned executives and board members to support their growth. This enhanced governance framework ensures adherence to best practices in management, compliance, and risk management.

Interestingly, many portcos are now prioritising value creation-oriented support over purely financial offers. They recognise the long-term benefits of robust management and professional services support. This preference underscores the importance of strategic leadership and comprehensive support in driving sustainable growth and success.

A notable example of this trend is MML’s investment in H&MV, helping them to transition from a subcontractor to a prime contractor, establishing a robust finance function and board structure resulting in revenue growth of 425%.3

Long-term value creation

A value creation focused approach aligns the interests of Irish PE firms with those of their portfolio companies, prioritising long-term value over short-term gains.

A value creation focused approach to investing offers numerous benefits for private equity firms. From enhanced operational efficiency and strategic growth to improved governance and sustainable practices, this strategy provides a comprehensive framework for driving superior returns.

By adopting value creation strategies, private equity can achieve financial success while also contributing to the broader objective of building more resilient and sustainable businesses.