Post Investment Value Creation (Part 1)

CEPRES Market Intelligence data shows that among projects exited between 2011 and 2016, more than half of the investment returns (53%) were contributed by the increase in valuation ratios. This contribution percentage further rose by 5 percentage points between 2017 and 2022, reaching 58%. In these projects, only 40% of the investment returns came from revenue and profit growth, and the contribution percentage continued to decline over the past six years (Figure 1).

The previous continuous increase in valuation ratios benefited from the ongoing interest rate cuts in the United States. However, with interest rates currently at high levels, the valuation ratios face additional pressure to grow. Despite recent signs of stabilization, it still imposes pressure on the short-term growth of valuation ratios.

Against this backdrop, investors urgently need to change their post-investment value creation approach, with the key being to formulate comprehensive value creation plans and successfully implement them. A Bain survey showed that in projects where "high-quality value creation plans were implemented," 70% of the projects led in their respective industries. In contrast, in projects "lacking value creation plans," 60% of them underperformed in their industries.

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There are 3 Paths of Post-Investment Value Creation: strategic repositioning, growth orientation, and orientation. Meanwhile, in this process, investors need to consider creating suitable operational models and seizing acquisition or divestiture opportunities.

Strategic Repositioning: based on market changes, reassess the market and the portfolio company, identify suitable market segment to play (Where to play), and redefine business models and competitive strategy (How to win).

Growth Orientation: identify growth initiatives, enhance commercial operations, investment in channel, branding, sales and marketing to accelerate revenue growth. Furthermore, pricing is a very often neglected key lever to drive revenue growth.

?Cost Orientation: focus on costs and efficiency, drive performance improvement, cashflow and working capital management.

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Strategic orientation is typically employed when the invested company has an incomplete or unclear strategy, or when the industry it operates in is undergoing rapid changes. Growth and cost orientations are usually applied when there are clear opportunities to accelerate business growth or control costs and enhance efficiency, and the company has sufficient confidence in its current strategy.

Regardless of the chosen path, investors need to enhance the support system for the portfolio company. This involves creating a suitable operational model, including refining the organizational structure, reaching consensus on specific ways of working, and establishing an appropriate system for assessing capabilities and talents. On this basis, investors can opportunistically seize acquisition or divestiture opportunities, but they need to focus on how to integrate after acquisitions and operate the business post-spinoff.

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