The use of private equity to fund corporate strategies is rapidly morphing into a new era characterized by reduced exit opportunities for investors, lower predictability of investee companies’ cash-flows increasing risk profile, and need to focus more on two operational levers, operating margin and capital intensity, to create sustainable shareholders’ value.
A New Era for Private Equity-Funded Corporate Strategies
Private equity is entering a new phase. Exit opportunities are shrinking. Cash-flow visibility is weaker, which increases risk. As a result, value creation relies more on two operational levers: operating margin and capital intensity.
Exit Opportunities Have Tightened
Over the past two years, exits have become harder. IPO markets have cooled, largely because public investors challenge the valuation ranges expected by funds. Moreover, those valuations often lack support from predictable cash-flows.
Meanwhile, the two other monetization routes have also weakened. Trade sales are slowing, because many strategic buyers reassess external growth. They often prioritize deleveraging. They also build cash buffers ahead of uncertain times. In addition, leveraged recapitalizations have lost traction. They are rarely viable when portfolio companies already carry unsustainable debt.
The Traditional LBO Playbook Has Changed
The old equation no longer holds. High leverage, low interest rates, and multiple expansion drove returns in the LBO heyday. However, that combination has ended abruptly.
Consequently, many funds now hold stranded assets. Debt servicing stifles growth. Capital structures also look inadequate. They cannot fund rising working capital. They also limit capex upgrades and R&D investment.
Two Strategic Options for Funds
Given this reality, funds face two main paths.
Option 1 — Extend Holding Periods and Rework Capital Structures
First, funds can extend holding periods. They do so via continuation funds. They also rework equity and debt funding structures.
The goal is clear: reduce the debt burden. Then, more operating cash-flow can support operations rather than debt service. In turn, the company may rebound more sustainably.
Option 2 — Launch Performance Improvement Programs
Alternatively, funds can invest in operational change. They can design and implement Performance Improvement Programs. These programs target gross margin and EBITDA. They also optimize capital employed, meaning fixed assets, intangibles, and working capital requirements.
What Option 2 Requires in Practice
Option 1 is mainly financial. It depends on capital markets skills. It also requires access to new investors, such as special situations funds. These players can inject money across the capital structure.
By contrast, Option 2 is execution-heavy. It requires shareholders and management to commit time and cash. It also often requires hands-on consultants acting as Project Managers. They dissect Sales, Purchasing, Manufacturing, and R&D processes. Then, they identify improvement opportunities. Finally, they recommend an actionable program and co-lead execution with management.
Why the Project Manager Role Is Critical
Execution happens under tight deadlines. Therefore, the Project Manager must align all stakeholders quickly. Credibility matters from Day 1.
Two capabilities are essential. On the one hand, the Project Manager needs industry knowledge. That knowledge enables immediate operational traction. On the other hand, the Project Manager must understand private capital expectations. This is especially important if the company must raise new money. It also matters in Commercial Court-supervised processes.
From Quick Wins to Structural Value Creation
The Project Manager must deliver quick wins fast. Free cash-flow breakeven often becomes the first milestone. Otherwise, the company may run out of cash.
At the same time, structural improvements must follow. They rebuild value creation over the medium term. Too many restructurings focus only on over-indebtedness. They rely on debt rescheduling and haircuts. However, value creation requires more than a repaired balance sheet.
In fact, value is created when return on capital employed exceeds the weighted average cost of capital. Put differently, operating profit after tax must outperform the blended cost of debt and equity. Equity, in particular, demands its own return.
What This Means for Funds Seeking Strategic Alternatives
In this environment, funds will increasingly seek operational turnarounds. They will also need access to private capital pools. Special situations funds and family offices will remain relevant. For that reason, they may turn to consultants who combine industry expertise, operational experience, and capital markets fluency.
Bruno Rigal – Senior AdvisorExecutive Partners Group