How private equity can explore value creation opportunities

13 June 2022 3 min. read
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Once private equity companies close a deal, the phase of value creation commences. Marc Andre Lein and Simon Andreas Hofmann, both partners at Impulssum, outline how financial investors can set out to identify the most promising value creation opportunities.

As the private equity industry matures, so does its approach on how to create lasting value. The days of entering assets cheaply only to cut costs and sell the business at huge profits are mostly gone. More and more we see leading private equity firms apply a hands-on approach in managing their businesses, with operating teams in place to help identify and drive value becoming the norm.

The question for these private equity shareholders becomes how to pragmatically and effectively identify and drive this value creation.

Marc Andre Lein and Simon Andreas Hofmann - impulssum

Structural maturity assessment helps identify & monitor improvement areas

The pre-deal assessment of potential investments is often limited to a review of high-level performance of the business and its potential. Typical analyses include commercial, financial, sometimes also operational and technological due diligence. These provide a first view of relative strengths and weaknesses, but mostly are not enough to clearly define what needs to be improved and how.

Understanding commercial excellence in detail and improving on it provides substantial upsides. McKinsey & Company performed an assessment to show how companies with superior commercial capabilities consistently deliver revenue growth about 1.9 percentage points higher and margin growth about 4.7 percentage points higher than their peers in the same sector

To fill the gap, several private equity firms started to make a thorough understanding of commercial levers a standard in any first 100 days holding period.

To further professionalize this process, Impulssum developed an approach and a model. Our Commercial Excellence Maturity Model (CEMM) was developed to structurally, effectively, efficiently and holistically assess & identify value creation topics. The CEMM covers all areas of commercial excellence in a 360 degrees view and can be used to varying degree of depth. This allows for both doing a quick scan, as well as creating a deep understanding of the current commercial approach.

Commercial Excellence Maturity Model Assessment

The model provides actionable steps to inform the value creation process, which further aides financial investors in unlocking their operating firms’ maximum potential.

The Commercial Excellence Maturity Model (CEMM) in practice

Five parts play together to drive commercial excellence: know your customer, have the most effective commercial organization and capabilities to serve that customer, as well as the right product and pricing strategy, executed via optimally functioning sales and marketing to maximize commercial effectiveness.

The CEMM looks at each area to understand current performance, but also to define an individual target state. At the highest level, each area is broken down into sub-segments, which in turn can be broken down into detailed value levers.

Knowing the phases of our private equity partners, we can help with a CEMM in any phase, but would typically advise to start as early as possible, to help shape the involvement with an asset from the getgo. Uncovering the right improvement areas also helps drive value creation projects successfully and supports a strong symbiosis between the business, the private equity owner, and specialized advisors to optimally drive a business’s success.

Lastly, monitoring the development of commercial excellence over time will help communicate the created value at exit. The potential buyers not only see the financial value that has been created, but even more importantly understand that it has been achieved by improving the underlying capabilities, which can be proven by the multi-year monitored development along the CEMM.