Bridging the Gap in Private Equity

UK Private Equity Landscape: Value creation

In today’s market, PE firms are becoming much more sophisticated in their value creation strategies. But are they actually converting their strategies into realised value? Building on data presented in KPMG’s Private Equity Landscape report, this article looks at the evolution of value creation in the UK.

Value creation has become much more sophisticated over the last decade. Whereas in the past, fund managers could rely on financial leverage and multiple expansion to deliver value uplift through the holding period, today’s market environment – characterised by high interest rates, low growth and low valuations – has prompted PE firms to become much more innovative in their strategies.

Many PE firms – both large and mid-market – are now rapidly improving their operational capabilities in order to unlock value through the optimisation of supply chains, capital management, inventories, procurement and human resources, for example. And that is being driven by much deeper due diligence (particularly related to technology) and much greater use of data and analytics in the targeting and pre-deal process.

Now the focus is shifting to post-deal value realisation. Finding and calculating value creation upside in the pre-deal phase is one thing. Actually delivering on the value identified is often much more challenging.

Luke Anderson

Partner, Private Equity Value Creation

KPMG in the UK

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From ambition to action

What can PE firms do to bridge the gap between the investment case and value realisation? At KPMG, our Deal Advisory professionals work with a wide range of PE firms and portfolio company managers to identify, quantify and deliver on value creation opportunities. Based on our experience, here are five things PE firms can start doing today to drive value from their investments tomorrow.

Improve coordination between your deal teams and your value creation.

The earlier you bring in the team, the earlier you can align value creation expectations with reality. Yet a recent survey by KPMG International found that only around half of all PE firms feel they have strong coordination between these groups.[1]
Enhance your data and analytics capabilities to monitor value creation.

Data and analytics can help improve value creation at every phase of the deal – from pre-deal through to operations and exit. Perhaps most importantly, it is key to monitoring progress against value creation hypotheses and investment cases.
Lean towards technology and digital transformation.

Technology is central to unlocking value in virtually every aspect of an operation. It doesn’t just reduce costs and increase efficiency; it also allows for the rapid scaling of the business and provides agility to take advantage of new opportunities as they arise.
Build an effective finance function.

The finance function is the beating heart of operational value creation and monitoring, providing decision-makers with the information and insights they need to quantify and address their value creation opportunities. A modern and efficient finance function is essential to executing on value creation opportunities.
Put the right people and the right incentives at the top.

Make sure management has the right capabilities, capacity and incentives to achieve their value creation objectives. Finding the right model to ensure great collaboration between management and operating partners is critically important.

Bridge the gap

In our Private Equity Landscape report, we forecast that 2025 will bring more robust planning around value creation, both from a buy-side and a sell-side perspective. We believe that will involve greater focus on bridging the gap between value creation theses and value realisation post-deal.

Greater value realised leads to higher valuations, better exits and stronger returns. Expect to see continued competition around value creation going forward.