Exit Strategy Value Creation Opportunities Exist as Economic Pressures Persist

September 29, 2023 8 mins

Exit Strategy Value Creation Opportunities Exist as Economic Pressures Persist

With a robust exit strategy, financial sponsors can create value from day one and enable a strong long-term outlook.

Key Takeaways

Macroeconomic pressures are driving financial sponsors to retain assets for extended timelines.
Navigating longer holding periods creates new opportunities for value.
Due diligence before a deal closes enables financial sponsors to design and implement value-creation strategies to drive growth.

Better Informed

As the global market continues to see inflationary pressures and a mismatch on valuations that bring volatility among dealmakers, financial sponsors remain focused on value creation across their entire portfolio.

While value creation has slowed and significant buyer-seller valuation gaps are emerging, financial sponsors may need to hold onto assets longer to realize value. Amid rapidly evolving macroeconomic pressures, building a robust value-creation strategy must begin on day one.

Capital Availability Propels Dealmaking Opportunities

Whether through operational improvement, talent management, geographic expansion, or technological innovation — retaining assets for longer gives financial sponsors more opportunities to actively contribute to the growth and success of their portfolio companies.

“Value creation starts on day one. Exploring the growing and frequently overlooked levers that can be pulled by the operating partners is the foundation for future success,” says Elissa Etheridge, Global Co-Head of Financial Sponsors.

To enhance outcomes in the current economic environment, financial sponsors should adapt their strategies and deploy more structure and innovation in the way they procure opportunities and manage their portfolios.

Better Advised

Adding Value to the Ownership Period

“There has been a notable shift across the private equity (PE) landscape,” says Jake Tobin, Global Co-Head of Financial Sponsors. “Financial sponsors are increasingly devoting more time and internal resources to the creation of dedicated functions solely focused on portfolio or post-closing value creation.”

By adopting a structured procurement process, portfolio managers can identify synergies and actively pursue opportunities to create value. Despite the longer hold period for financial sponsors in the market, extended timelines enable value to be extracted from maturing businesses in new ways.

The following phased timeline can help extract value during the ownership phase through the first four years.

Better Decisions

First 100 Days: Extracting Value from Day One

From the first day of ownership, undertaking a wider and deeper suite of due diligence not only ensures that value has been identified, but material risks are addressed. The breadth and depth of diligence set the tone for the first 100 days of ownership as part of the portfolio.

“There continues to be a suite of procurement and value workstreams frequently overlooked — most notably a robust portfolio-wide approach to cyber hygiene and that of core insurance procurement, where through leveraging available data, low-hanging value can be extracted,” says Tobin.

Outside of the core commercial and strategic rationale for buying the business, focusing on ways to quickly cut costs, grow earnings before interest, taxes, depreciation and amortization (EBITDA) will set the tone for success.

The pressures on portfolio businesses are rapidly evolving — from digitalization and cyber threats, to environmental, social and governance (ESG) and diversity, equity and inclusion (DE&I) strategies. Without proper management, these risks can threaten the resilience of operations and have a material impact on cash flow:

Cyber Risk Hygiene: As pressure from limited partners and the market more generally looks at the cyber and digital risk landscape, there is an opportunity for financial sponsors to undertake a broader suite of digitally focused due diligence. This does not involve breaking a deal but enhancing the cyber and digital risk hygiene of a business to ensure commercial continuity and balance sheet protection.

Next Steps:

Develop a proactive approach to reviewing and assessing the cyber posture of portfolio companies with data-driven assessments.
Develop a technology strategy aligned with business resilience and review future technology investments against that objective.
Create an M&A target list based on capability, associated IP gaps, and the IP landscape. Unlock deal value through an active approach to credit risk.
Protect future investment through M&A cyber due diligence assessment.
Understand financial exposures and assess cyber security controls and capabilities.
Educate employees on evolving cyber risks.

ESG: Heightened scrutiny and evolving regulatory requirements around social obligations, climate-related disclosures, governance and reporting demand a more diligent approach to ESG. Today, financial sponsors must prioritize integrating ESG risks with business strategy to minimize exposure to risks and optimize investment performance. A continued focus on bolt-on and platform-styled deals may help enhance portfolio companies’ market position and create future growth.

Next Steps

Assess the increased exposure portfolio companies and their supply chains face from chronic and acute physical risks, such as sea level rises and hurricanes.
Understand how the increased demand to transition to net-zero impacts portfolio companies — from the pressure of asset owners to consider climate risk in the investment lifecycle to meeting regulatory and industry disclosure requirements for the fund and portfolio companies.
Assess and mitigate the litigation and reputational climate-related risks related to carbon emissions or the failure to meet climate targets.
Develop credible decarbonization strategies, including climate data and risk information systems, that demonstrate meaningful progress in the journey toward climate resilience.
Consider off-take risk, technology risk and supply chain risk when exploring investment opportunities in emerging climate technologies. Embrace IP and counterparty risk solutions to help accelerate and, in some cases, unlock investment in green technologies.
Explore reputation risk analytics to understand any potential exposures and understand where aspects of social responsibility can be reinforced.
Build an engaging story and reporting tools to communicate proactively with stakeholders and ensure governance obligations are being fulfilled.

Ownership Phase: From First 100 Days to Year Four

In the ownership phase, portfolio managers can take deeper dives into issues to add value, including insurance, data and people issues.

Insurance Capital: Insurance can be a powerful growth enabler with a critical role to play in facilitating transactions, helping financial sponsors to ring-fence a risk, solve an unknown risk, or transfer a risk off the balance sheet. In focusing on growth, particularly in an environment where preserving or optimizing liquidity is a priority, capitalizing on solutions available in the credit and surety markets can introduce flexibility and efficiency to create value — both in structuring the M&A deal and in the operational phase post-acquisition.

Next Steps

Deploy transactional insurances, such as Warranties and Indemnities (W&I)/Representations and Warranties (R&W) insurance, contingent risk and litigation and tax insurance to de-risk acquisitions and offer the seller an attractive exit package.
Use insights across risk, people, pensions, working capital, IP, ESG and digital to better understand critical deal scenarios and opportunities to extract value post-closing.

Prioritization on People: Human resource considerations are critical to both a successful transaction and strategically integrating people into the business. Actively addressing human capital challenges will strengthen the company’s biggest asset — its people — helping to drive value within and across the talent and people profiles of a fund and its portfolio.

Next Steps

Thoroughly assess a target’s talent, benefit and reward programs, and HR operations to quantify liabilities and risks. This helps negotiate more competitive pricing.
Optimize the approach to human capital integration strategy by identifying synergies or dis-synergies during early integration planning.
Rationalize and forecast HR spend and conduct detailed, real-time organizational and talent planning to drive immediate and long-term results.
Develop holistic total rewards strategies that attract, motivate and retain talent, helping to maximize the return on total rewards investment.
Consider employees’ financial well-being alongside the financial strategy and consider collective retirement plans, such as Pooled Employer Plans (PEPs) in the U.S. and Master Trusts in the UK and Europe, to create an efficient and cost-effective retirement strategy.
Uncover communication and change management needs early to support the growth of a resilient and engaged workforce.

Long-term value creation begins with due diligence before the close of a deal. This then enables financial sponsors to design an effective value-creation strategy to implement from day one. In addressing key considerations at each stage of the ownership period, portfolio managers will be well-positioned to achieve a competitive advantage and deliver growth in the short- and long-term.

Find out more: M&A Transaction Solutions

Aon’s Thought Leaders

Jake Tobin

Global Co-Head of Financial Sponsors, Aon
Elissa Etheridge

Global Co-Head of Financial Sponsors, North America

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