Four ways how the crisis is impacting private equity value creation

25 March 2021 Consultancy.uk 4 min. read
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Alejandro Alvarez, a partner at Ayming, explains how value creation processes by private equity firms are being impacted by the Covid-19-induced downturn, and outlines a number of strategic and operational trends that are emerging from the disruption. 

In our experience at Ayming, when working with private equity firms and their portfolio businesses, robust value creation processes that address multiple areas of the business to deliver sustainable improvements are the foundation for success. But what happens when, across the world, several facts and underlying assumptions that were taken into consideration to build value creation processes drastically change due to a pandemic?

The answer depends on many different parameters, such as the business sector, capability to adapt and innovate, and supply chain resilience, among others.

Four ways how the crisis is impacting private equity value creation

Four impacts on value creation

While there is a long list of impacts and effects that the pandemic can have on value creation in private equity, in different ways and depths for every business, I’d like to highlight the following four:

Changes in business models
The pandemic has not only turbocharged specific trends (e.g. acceleration of online retail and digitalisation), but it also fundamentally transformed many business models (e.g. from in-person medical retail to telemedicine). These shifts, driven by forced customer behavioural changes that may endure beyond the pandemic, will continue to have a critical impact across supply chains, cost structures and human resources.

Increased focus in sector-specific expertise
To address these significant challenges, sector-specific knowledge and expertise will be invaluable to adapt, evolve, innovate, manage risks and capitalise on potential opportunities. 

Momentum in ESG investing
A JP Morgan survey published mid-2020 suggests that the pandemic could have a positive impact in ESG investing, with 71% of participants responding that it is “rather likely”, “likely” or “very likely” that awareness will increase. Moreover, there appears to be increased momentum across geographies and asset classes. Whilst the “E” and “G” were probably more visible, it is the “S” that will likely move up in the agenda as the awareness of the impact that the pandemic had, and will continue to have, on communities around the world is evident.

Redrawing value creation processes
All of the above suggest that many value creation plans and investment theses will have to be fully reassessed, to challenge and validate each underwritten assumption and determine if and how the value sources have changed. These, and many other repercussions, will continue to have a substantial impact on post-deal and performance improvement processes.

Common themes

From conversations with our clients, there are three common themes to point out: 

Rebalancing of priorities
Whilst cost effectiveness and savings continue to be a key priority for most organisations, the relative importance of other factors such as risk management, supply chain resilience, strategic procurement and innovation have considerably increased.  

Supply chain resilience and ESG
The pandemic has shown how fragile certain value chains are or could be. Businesses are conducting detailed reviews across the value chain that may involve restructuring elements or entire supply chains. Strategies that were once considered low risk (e.g. offshoring, supplier consolidation) may be challenged. In doing so, ESG considerations are likely to gain further momentum and impact the outcome of such reviews. 

Business strategy, people skills and emotional intelligence
At a recent Ayming roundtable with private equity operating partners, there was broad agreement with the need to prioritise business strategy, critical thinking and emotional intelligence over anything else. We believe this trend will accelerate further. 

Private equity houses and their portfolio businesses are likely to leverage the existing alignment of interests across all stakeholders to rapidly adapt, evolve and ultimately capitalise on potential market opportunities.