Private Equity firms euphemistically talk about value creation when they talk to people like me. When they do so, they are not talking about real value, they're talking about investor value. The two aren't mutually exclusive, but in certain circumstances they can be.
As a marketing business, we're in the business of finding and unlocking hidden value in brands. PE forms and marketers like us both talk about value, but we mean different things. Let me explain.
What it takes
If you haven't yet read Stephen Schwarzman's book, What It Takes, give yourself a good talking to, then go to your favourite bookshop, buy it and read it. The book tells the tale of the founding and building of Blackstone and it's full of wisdom, insight and understanding.
In the book, Schwarzman comments that, for PE funds, value is getting harder and harder to create. Debt, leverage, M&A, cost rationalisation and operational improvements used to be the prime tools in the PE toolkit. These days, ordinary businesses like ours are already all over every aspect of this 'value creation', so a standard PE 100 day plan won't yield any gains.
To investment managers, value creation is about using financial instruments and playbook business processes to cut cost and increase investor return. The toolkit is about investor return, not long term value. Yes, you could argue that value is being created for investors, but the last few decades are littered with the legacy of 'value creation' through over-leverage. It's generally creating value by playing a zero sum game. For every winner, there's a loser.
Real value creation isn't all zero sum.
Due diligence is a good place to start
This article on the Kearney website highlights that prices in the M&A market are getting frothy, particularly where the buyers are PE, so Kearney advocates an integrated approach to due diligence in order to identify where value resides or can be created. It's an excellent article by the way, please read it.
Due diligence is an excellent place to find hidden value if you know what you're looking for. PE investment managers are generally super-bright financial and business brains, but even according to their Godfather, Stephen Schwarzman, the old tools, the old ways aren't so valuable any more. There's only so far you can go with re-engineering and it tends towards zero sum. So what's the answer?
If in doubt, follow the Blackstone
The Godfather's firm knows where value is today. In April, Forbes announced that Blackstone had hired Droga5's Chief Strategy Officer Jonny Bauer as head of brand transformation for its portfolio group of more than 200 companies.
Real value is generative, not engineered. PE houses should be partnering with leading marketing brains to assess, plan and create value in the magic stuff only marketers really understand: brands. If it's good enough for Blackstone, it's good enough for others too.
With the M&A market getting frothy, buyers need to focus more than ever on value creation potential across a target business