Is private equity about to change course?

Investors look for greater revenue potential

A shift in value creation priorities is changing investment decisions…

Private equity investing is based on majority share ownership of companies where the investor – or general partner – can make active decisions in the company they have invested in.

After years of relying on low interest rates, general partners have often made their strategies based on debt leverage and financial structuring.

But that has been changing to focus more on revenue generation – and will continue to do so for the next decade, according to a report from Goldman Sachs Asset Management.

“Leverage and multiple expansion are unlikely to add as much to value creation as they have previously,” says the report. “Operational initiatives — revenue growth and margin expansion — are poised to become the main determinants of success in the new regime….

“As such, we believe organic growth will become even more important for value creation in the years ahead. This growth could potentially be achieved by fixing broken business models or by super-charging growth in healthy, but slower-growing, businesses and industries.”

Who’d have thunk it – revenue growth becoming a bigger driver of value creation…

This is interesting because the model will push companies and investors to require better understanding of customers and demand – something they often struggle to get to grips with. They’ll also be highly focused on not only transformation projects, but go-to-market and sales strategies, fighting harder from the front and watching micro-metrics to bring margin in line.

This won’t be so easy. The model in the past has relied on there being plenty of fat to trim down. What this suggests is that the fat might be harder to find, so companies will have to hunt for more food.

Have a good weekend

Dan