Private equity must look beyond traditional value creation levers amid intense competition, warns KPMG report

  • Value creation is being considered earlier in deal cycles as respondents see its use increase in bidding process and is actively pursued at or before due diligence stage
  • ‘Technology & digital transformation’ set to become a ‘top three’ value creation lever in next three years, but ‘buy & build’ and ‘people & talent’ to remain dominant
  • ESG currently lags behind as a value creation lever, but is becoming an important part of investment decision process as 73% of UK firms say they’ve turned down an opportunity due to ESG factors

Private equity firms must look beyond ‘buy and build’ and other traditional value levers or risk being left behind in a rapidly evolving sector, a new report from KPMG UK has warned.

‘Delivering the promise of value creation’ is a new report published by KPMG UK that showcases the firm’s 2022 Market Insights Report. The research surveyed private equity investors and portfolio companies in the UK and US to gauge approaches to value creation across the industry.

According to the survey, nearly two-thirds of respondents (65%) said they pursue value creation planning at or before the due diligence stage of the investment cycle. A similar proportion (63%) said that the use of value creation planning in the bidding process had increased over the past three years.

Overall, just under half (44%) of respondents said they were seeing the timing of value creation shifting to earlier in the deal cycle. It comes as nearly three-quarters of firms (76%) said they were active or very active in creating value within their investments. The research also found that value creation was having an impact on the ability of private equity houses to compete, with four fifths (80%) of large fund respondents recognising that through value creation they achieve a higher ranking in a competitive process.

Naveen Sharma, Partner and Head of Private Equity at KPMG UK, and author of the report, said:

“Private equity (PE) activity and deal valuations are at historically high levels and the returns of these investors have also been impressive, which has drawn even more capital into the sector. But, with higher deal volumes and higher valuations comes higher expectations.

“To justify paying the increased multiples, PE firms are under more pressure to significantly enhance operational value to achieve the desired returns. This has led to a sharper focus on value creation planning, requiring a more comprehensive approach to enterprise-wide transformation by leveraging an ever-increasing set of value levers and a more disciplined and transparent approach to execution.

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“Our research has shown that value creation is more important than ever. The process is now happening earlier, crossing more disciplines, and integrating more unique data than ever before. Now is the perfect time to challenge deal and operating partners on preconceived notions of where value creation sits in the deal lifecycle.”

The rise of technology as a value lever

The survey found that ‘buy and build’ was ranked by respondents most often as the top value creation lever over the past three years (41%), followed by ‘people and talent’ (15%) and ‘geographic and international expansion’ (10%). However, while those strategies are expected to remain dominant, ‘tech investment and digital transformation’ is expected to be the third most important value creation lever over the next three years (12%, up from 6%).

When considering technology investment, respondents were most likely to invest more in ‘digital transformation of customer facing technology’ (77%) than any other strategy, followed by data analytics (75%) and cybersecurity (71%)

Rajesh Sennik, Partner, Value Creation practice lead at KPMG UK and co-author of the report, said: “The days of thinking about value creation only after the transaction closes are long gone.  Value creation should be a key part of the strategy to build conviction and strengthen your position in a bidding process. In today’s competitive market, the winners are engaging in value creation planning and strategies much earlier, digging deeper, and partnering closer with managers and advisors to ensure that plans come to fruition to help each investment reach its highest potential.

“Traditional levers like ‘buy and build’ and ‘people and talent’ remain central to many of those value creation strategies – for now. The availability of additional sources of data enables firms to identify many more potential levers for each opportunity. That’s why technological and digital transformation, data and analytics, and ESG factors are rapidly gaining ground and enabling them to achieve both EBITDA improvement and higher multiples.

“As private equity funds evolve and recruit more operating executives especially with digital and technology skillsets, I expect the technology investment and digital transformation value creation lever will rise in prominence. It’s clearly a higher risk and higher reward lever but the really successful PE funds will manage this risk well with deep internal and external expertise.”

ESG driving decision making, not value creation

The survey found that ESG awareness remains high on the agenda for the private equity industry in terms of deal-making, but much lower in terms of value creation, with only 4% of respondents ranking it in their top levers for value creation over the next three years.

Rajesh Sennik added: “Most firms are looking at ESG factors early in the deal process, and, if that review raises sufficient concerns, investors are more than willing to walk away. In fact, over 90% of the largest firms in our survey have declined an investment due to concerns over ESG performance. When looking just at the UK, almost 73% of private equity firms have stepped away due to ESG factors.

“However, despite the importance, ESG remains relatively underappreciated as a value creation lever for the industry. We expect that to change as the benefits of ESG factors are better understood and become more integrated within valuations.”



Media contact:

Alastair Henry, Citypress (on behalf of KPMG UK) / 0161 235 0320


About the KPMG 2022 Private Equity Value Creation Study

In September and October 2021, KPMG interviewed and surveyed 120 private equity firms and portfolio companies to explore issues around value creation.

About KPMG

KPMG LLP, a UK limited liability partnership, operates from 21 offices across the UK with approximately 16,000 partners and staff.  The UK firm recorded a revenue of £2.3 billion in the year ended 30 September 2020.

KPMG is a global organization of independent professional services firms providing Audit, Legal, Tax and Advisory services. It operates in 147 countries and territories and has more than 219,000 people working in member firms around the world. Each KPMG firm is a legally distinct and separate entity and describes itself as such. KPMG International Limited is a private English company limited by guarantee. KPMG International Limited and its related entities do not provide services to clients.

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