"Operational value creation levers—revenue growth and margin expansion—are poised to become the main determinants of success in the new regime." (Goldman Sachs, 2023)
A Shift in Value Creation Levers
For those tracking macro trends in the private equity industry, a recent article by the Goldman Sachs Alternative Investments team, The New Math of Private Equity Value Creation (gsam.com), provides some prescient insights into how key value creation levers will shift in the coming decade.
In short, the authors believe revenue growth and margin expansion will be the key value creation levers in this new regime. Several factors beyond the current higher-for-longer interest rate environment led to this shift, including expectations of a shrinking labor force and slower economic growth over the coming decade. Together, these factors will limit the effectiveness of traditional financial engineering and leverage strategies.
The Role of Data in Navigating Shifts
For portfolio companies, trustworthy, automated instrumentation is foundational for navigating this shift. Performance improvement, (including better rates of organic growth), requires precise execution and adjustment based on the best version of the truth we have – data.
If organic growth and margin expansion are the key levers for portfolio companies to focus on, a key question is whether companies have enough command of their data. That’s a generalized way of looking at it, so a more focused question becomes: Does the company have an automated system that transforms raw data into valuable insights?
Even more focused: Does the company have automated data visibility that’s aligned with their strategic objectives related to organic growth and margin expansion?
The Reality of Midmarket Data Strategies
In our experience, very few midmarket companies are successful in their data & analytics strategies. In some cases, firms have “automated BI,” but it’s effectively just telling them the news. Consider a company that has automated sales reporting that’s serving to show what’s been sold. While helpful to some extent, does it help the sales team analyze the leading indicators to increase sales? If not, chances are it’s a nice dashboard, but ineffective as a tool to support the team’s efforts in bolstering the top line.
The same tenant applies to margin expansion – business intelligence should highlight the root causes and drivers of margin compression, and dashboards should provide the management team with a daily view of how their team’s actions are either helping, or hurting, the cause.
Initiatives must be defined by key metrics that are used to monitor progress, and business intelligence outputs should provide answers to the key questions that sit directly underneath the key strategic objectives. In continually providing answers to these key questions, business intelligence serves an immediate and critical role – becoming not a report, but a tool to accomplish the most important objectives - whether that be increasing sales by 10% or improving margins by 3%.
The Need for Modern Data Platforms and Analytics
A modern data platform and automated dashboards provide what businesses need to navigate this new regime. Opacity, the manual preparation of data and insights, and imposter analytics platforms (sorry Excel!), simply won’t get the job done.
Instead, companies should invest in modern data analytics platforms, and a working BI system that serves to instantly transform raw data into curated insights – those that are immediately relevant to the objectives of top line growth and margin expansion. The good news for PE sponsors is that once management teams experience how automated BI helps them to achieve a core strategic objective, it’s self-reinforcing and encourages a cultural shift towards a data-driven approach to business.
That’s highly marketable at exit, along with a track record of how data-driven processes have contributed to top (and bottom) line returns throughout the hold.
For Further Reading
Data Strategy: How to Profit from a World of Big Data, Analytics and Artificial Intelligence
