The Importance of Value Creation by Private Equity

Nicki Burns

At their very core, private equity firms have one job and that is to generate strong returns for their Limited Partners (LPs). As the industry is maturing, companies are paying higher multiples for businesses and the secondary market rising, all resulting in it becoming more difficult for firms to deliver the outsized returns that LPs are now used to.

The era of financial engineering is now over, and value creation is a common term in private equity houses. It is reported by EY that in the 1980’s 50% of value created by private equity firms came from leverage, and operational improvement only accounted for 15%. However, over the past 15 years there has been a significant shift, with leverage only accounting for 20% of value created and operational value now representing 50% of value created.


How are PE firms creating operational value?

Operational value creation goes far beyond cost reductions and companies are looking to introduce sustainable operating models that will deliver on their corporate strategy, but without compromising on efficiency or flexibility. There are a number of operational contributions, these can include;

•          sales growth

•          direct and indirect costs

•          leveraged sourcing

•          process and performance 

•          technology

•          cash flow

Although there is no single formula that will guarantee success, there are more and more frameworks emerging to deal with the growing complexities including; the general activist model, the maestro model, the advisor-led model and the functional playback model. Although each model is different, there are some common best practices and they all stem from ensuring the portfolio teams have the right talent in place.

Sandy Ogg, former operating partner at Blackstone said that when he stepped into the world of private equity he was amazed at the sheer focus on value creation and that there were only two factors to really achieving value creation, the right asset and the right talent.


Skills to deliver on value creation

Although PE firms attract strong in-house talent, it is almost impossible to ensure you have the full breadth of expertise needed for each requirement and this is where many firms turn to independent consultants to support their in-house talent.

Our Private Equity team engage with PE firms predominately at two stages of an assets life cycle. The first is when an in-house team is creating their value creation plan. It is vital that there is a subject matter expert involved to bring their expertise and experience at that planning stage. Secondly, the skillset required to implement the strategy can be extremely different to developing a strategy, and so firms want to ensure they have the right person to deliver. This is where we also find PE companies engage with Talmix due to the depth of talent in our network.


The benefits of the extended workforce

Specialist market knowledge and expertise – the extended workforce bring years of experience working in the exact area of expertise that you need for any given project rather than a generalist who may have only worked on similar projects.   

Dedicated talent – Independent consultants only take on one project at any given time and they work on site with their client, fully immersed in the business. This allows them to better assess how best to extract value from operations including; sales growth, improving process and performance, freeing up cash flows, and reviewing direct and indirect costs.

Involved throughout the project - When you hire an independent consultant they will develop the strategy and also implement it, seeing the project through from beginning to completion. This allows for greater transparency and accountability.



With a global network of over 60,000 consultants, Talmix helps PE firms unlock value in your portfolio companies by matching you with the best quality business talent.

Click here to learn more about Talmix and our Private Equity team.

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