Creating value throughout the private equity investment life cycle in the digital era

New approaches to generate appropriate returns

In a fiercely competitive M&A market, private equity firms must seek new approaches in order to generate appropriate returns. While there is much to gain from successful new strategies, a perceived lack of direction can alienate existing or prospective fund investors. It is no longer enough for private equity firms to be the unseen wealthy backers in deals. They need to be involved in the entire portfolio life cycle, ensuring the right skill set, effective collaboration and organizational buy-in at every stage in order to offer competitive bids and justify investor’s demand on IRR.

From the start of the pre-deal target identification and bidding period, which is dominated by the due diligence process, firms are increasingly discovering the benefits of a holistic approach. This approach enables potential buyers to flag risks and to highlight opportunities prior to the signing date. Besides giving a rounded perspective on tax, legal, IT and business aspects, forward-looking due diligence models integrate traditional as well as digital value creation opportunities.

As digital disruption rips through the sector, investment managers are realizing the potential of powerful analytics, self-learning algorithms and other insightful digital tools. Led by the right skill set, especially at the C-suite level, technological innovation has the potential to transform portfolio companies throughout the investment life cycle – from customer-facing innovation in portfolio companies and ecosystem integration to reporting and communication. Collectively, although digital transformation aspects may extend the overall holding time, they deliver real improvements and a higher ultimate deal value.

In most stories, it’s the end that really counts and successful deals are no exception. More than ever, investment managers need to keep their eyes firmly on the exit even before day one of the acquisition. While the mid-phase of the investment cycle has traditionally been the focus of improvement measures, today’s successful private equity firms pursue and monitor aggressive value-creation paths from the outset, synchronizing outcomes for an optimal deal on exit. And they are creating granular exit stories, enriched with proof of concept studies and digital transformation roadmaps to ensure that all of their efforts are reflected in the final deal price.

EY’s study addresses key opportunities, challenges and pitfalls throughout the end-to-end private equity investment life cycle, identifies industry best practices and pinpoints the capabilities that support the efforts of private equity firms to achieve the maximum possible return from their portfolio companies. We hope you enjoy reading our insights.

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