May 11, 2015
Interviewed by: David Snow
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Identifying Value-Creation Categories

From business operations to product expansion, private equity managers are more and more focused on value creation to help offset the high prices in today’s competitive economic cycle, says EY’s Michael Rogers.

From business operations to product expansion, private equity managers are more and more focused on value creation to help offset the high prices in today’s competitive economic cycle, says EY’s Michael Rogers.

Identifying Value Creation Categories
With EY’s Michael Rogers

What are some of the most important valuecreation categories?

Rogers: Value creation is more important than ever. In fact, if you look at what’s happening in the marketplace today—if you think about the fact that valuations are exceedingly high, competition for assets is very high, the strategics are playing very aggressively and can frankly outpay if they want to for some of these assets—it makes it very difficult in these auction situations to come away a winner by paying the highest price. So, value creation is the absolute key to making these investments return what we think, and what the investors ultimately will require, to make this business very viable.

I think the first strategic move that private equity firms make, after they develop their investment thesis, is a focus on management. And what we’re seeing these days is that it has become a critical component to the business, even more so than in the past. Oftentimes there are management changes at the time of the ownership change, but it’s not just around changing the management. It’s finding the right visionary who can take this business to the next level. We’ve chatted briefly about the competition and the fact that very high prices are being paid; high multiples are being paid these days. Unless you can have a management team that hits the ground running and develops their business model very quickly, you can’t afford to be wrong in that because if you are wrong and you have to replace management after two or three years, you’re already halfway through your ownership cycle from a private equity perspective.

So we see a renewed focus on the human capital component; new ways of deploying human capital around bankable talent, if you will, taking folks that have a proven track record and funding them and allowing them to build out platforms. Some new ways of thinking in terms of how management’s deployed and we see that as an emerging trend in the private equity industry.

The other aspect of value creation is, of course, not just the geographical diversification, but also productmix diversification. Many times, the private equity funds had the opportunity to bring in specialists and experts around product expansion and to go into horizontal markets and add new products that possibly the entity was not in before. Oftentimes there’s a cost reduction component to value creation in the developed markets contrasted with a growth vehicle model in the emerging markets.

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