RESEARCH REPORT
Unlocking private equity operational value with managed services
5-MINUTE READ
March 1, 2024
Private equity (PE) firms are increasingly engaging in deals that are more complex, such as carve-outs and add-ons.
14%
increase in average hold period along with rising cost in capital put return on investment under pressure.
These circumstances are challenging PE leaders to delve deeper into operational value creation. They believe financial engineering should account for just 25% of their efforts, according to a study published by Accenture. The remaining 75% should focus on operational value creation.
The good news is that the levers for operational value creation are known. Many are tested and proven. The true complication is in the ability to execute on a wide range of levers in a short timeframe.
The challenge with pursuing value through operations is that most portfolio companies lack the leadership, capabilities and culture to tackle a wide range of levers.
Today, only 8% of mid-sized companies achieve operational maturity. In these companies, talent, data and AI are critical to driving continuous, enterprise-wide reinvention through their operations.
2.3x
higher margins for companies reaching the highest level of operational maturity by 2025.
A massive 92% of mid-sized companies have room for operational improvement. PE firms that move more boldly can build higher levels of maturity and drive significant competitive advantage.
Many portfolio companies fail to hire the required talent at the required pace. They also struggle to develop mature, efficient operating models and processes that are enabled by data and technology. Forget handling complex transformations, like setting up standalone operations after a carve-out, or rolling up acquisitions if the PE sponsor pursues a targeted buy-and-build strategy.
Going at it alone risks missing out on speed, quality and predictability of intended business outcomes.
Such complex initiatives require strong strategic partnerships to drive the desired results. The managed services these partners provide benefit from the innovation developed for Fortune 500 companies, while being tailor made to serve the need of private equity and mid-market companies. They:
Companies working with a managed services partner experience higher top-line growth and capture better operating margins.
Consider our partnership with a European PE-owned telecommunications provider with revenue below $1 billion. Our journey started with order fallout management and since then our partnership has grown through strategic managed services. The company is currently transitioning more than six million households from copper to fiber. Accenture is a key value accelerator in this, supporting their capacity- and order-driven fiber rollout.
Accenture has generated an estimated $40 million in savings for the client since 2013, representing an 89% internal rate of return per annum on an initial investment of $4.4 million to set up the service.
When the PE owner decides to exit the portfolio company, these strategic managed services will help ensure a smooth transition as they provide a vision, visibility and continuity to the new owners.
Strong strategic providers help build resilience in a time of disruption and become true partners in innovation, operating with a “one team” mentality. As you prepare for your next investment, consider the following:
Think about strategic managed services pre-close, rather than several years into the investment. Doing so allows for deeper interventions by providing a longer tail for savings and returns on any initial investments.
Pick a partner that can identify and commit to delivering outcomes commercially, and can look beyond optimizing individual functions. This helps ensure no important opportunities for value are missed.
Working with a large provider means having a trusted partner that can put its balance sheet to work and acts as a “one-stop-shop” to deliver the outcomes at your portfolio company.
Many PE firms are evolving their strategic playbook, turning to a new page focused on operational value beyond financial engineering. Getting there means joining with partners that can deliver new skillsets, resources and cultural orientation and building a competitive advantage that spans geographies and portfolios.