Private equity focusing on organic value creation, BDO survey finds

03 August 2023 2 min. read
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In response to rising asset prices and challenging financial conditions, private equity (PE) fund managers are focusing on current portfolio companies (portcos) to drive organic value creation, according to a BDO USA survey. The accounting firm in March polled 405 US private equity fund managers and operating partners, 200 portco CFOs, and 50 portco board members.

Over three quarters (79%) of fund managers and operating partners expect assets to trade higher in the next six months. Dealing with the realities of high interest rates, inflation, and high valuations, new deals are a lower priority (14%), with equity relief (17%) remaining the top capital deployment strategy in 2023.

“With continued economic uncertainty following more than a year of rising interest rates and the increased cost of capital, fund managers remain focused on prioritizing their companies hit hardest by the soaring cost of debt and operations,” said Matt Segal, national partner – PE assurance, BDO USA. “Funds that strike deals in today’s environment are making sure they have a clear path to creating value that isn’t dependent on rising equity markets.”

The majority of portco CFOs are dealing with high inflation and interest rates for the first time in their careers, with 60% starting in their current roles less than 10 years ago.

Private equity focusing on organic value creation, BDO survey finds

Portcos are also dealing with labor shortages, with 47% of CFOs saying they are understaffed in critical roles – including those that require advanced financial skillsets to execute value creation plans.

Top-line growth remains a key focus of value creation, with 46% of overall respondents saying top-line growth is most important to them over the next year. Revenue growth was the preferred top-line growth strategy for fund managers (40%), with CFOs opting for operational expenditures and increasing capital (44%).

“Doubling down on value creation over the next several months will be critical for funds and portfolio companies in resilient growth mode,” said Jim Clayton, PE national advisory leader, BDO USA. “The margins for success are slim. Decisions made today could mean the difference between effectively executing a transaction that generates returns for limited partners a year from now or pushes a portfolio company closer to default.”

Fund managers said financial sponsors remained the top exit path in 2023 at 41%, though that figure was down 14 points from the 2022 survey. Carveouts, meanwhile, jumped 16 points to 38%. The option of selling to a strategic buyer fell 19 points to 33% in 2023.