While interest rates, inflation and economic uncertainty continue to constrain dealmaking, the M&A landscape continues to show signs of life. As private equity firms further enhance their focus on building operationally efficient and resilient businesses, many of their portfolio companies are poised to lead in a resurgence of activity in the current risk-averse environment. Adding to the optimism: the valuation gap between buyers and sellers is narrowing, more robust financial data and analytics have improved decision-making, and PE firms are under mounting pressure to deploy capital that has been sitting on the sidelines. Talk of “green shoots” is increasingly appearing to be more than just speculative.
Operational Improvement Is Driving Value Creation
Driving value creation through operational improvement has become an increasingly necessary competitive advantage in a rapidly evolving market. Private equity firms’ in-house portfolio support and operations teams are providing direct support to companies to help them execute people, process and technology initiatives needed to scale rapidly. In fact, a recent survey of several of WilliamsMarston’s private equity clients indicated that many sponsors not only have heightened their focus on portfolio operations, but also increased their investment to drive operational improvements more quickly.
At the same time, the number and quality of third-party advisors supporting PE-backed companies has expanded. These firms bring on-demand resources and niche expertise in key specialties such as finance effectiveness, interim management, data analytics, organizational design, sales enablement, pricing strategy, procurement, cost rationalization, and post-merger integration, among others. The mix of in-house and third-party support has proven to be a powerful combination to accelerate and amplify value creation. It has also helped companies pivot quickly in response to changing economic conditions when necessary.
Finance Functions Have Become a Critical Lever
While human capital strategies and technology roadmaps historically have dominated the focus of value creation plans, the finance function has emerged as a critical lever across the investment lifecycle in an environment with little margin for error in investment decisions. Finance functions are being called upon to provide more robust data and business intelligence, as well as drive process improvement strategies to identify trends, forecast demand, gain insights into key performance metrics and manage risk.
For example, several middle market, PE-backed businesses recently partnered with WilliamsMarston to prepare for anticipated exits. In partnership with the companies’ finance teams, the firm focused on helping the organizations achieve greater insight into cash flows and critical KPIs, with highly tailored solutions that automated routine processes, enhanced internal controls, and improved the accuracy and timeliness of financial reporting.
In one notable instance, WilliamsMarston’s deep dive into the data identified disparities in how a highly acquisitive company accounted for operational and direct expenses across their many divisions. Through improved clarity and consistency into business drivers across the divisional and functional landscape, the client was able to drive an immediate and sustainable increase to EBITDA and cash flows, successfully recapitalizing the business and increasing the future likelihood of future M&A initiatives’ success.
Other Drivers of Optimism
The last few years have seen a persistent disconnect between buyers’ and sellers’ expectations of valuation. Both sides have taken a “wait and see” approach. However, that strategy is becoming increasingly untenable as sponsors weigh how long they can extend hold periods when limited partners are pressuring them to deliver returns. This dynamic, combined with ample amounts of dry powder that needs to be invested, is beginning to force firms to transact even if at slightly lower-than-hoped valuations.
Another driver is the vexing political landscape in a Presidential election year, with potentially substantial policy shifts on the horizon. Changes in taxes, immigration and tariffs all stand to impact the economic calculus for corporate investment, growth and profitability. Both buyers and sellers are weighing these risks and opportunities carefully and considering whether to accelerate their planned transactions.
While headwinds persist, the frozen M&A landscape is finally starting to thaw, with the highest quality companies leading the charge and demonstrating the value of private investment to the economy and society as a whole.
