Gone are the days when Private Equity firms relied solely on financial leverage to
enhance the internal rate of return (IRR) on their portfolio companies. As the landscape
of value creation has evolved, operational improvement has emerged as the primary lever
in their arsenal. In particular, a growing number of PE firms are leveraging add-on
acquisitions to enhance the value of their portfolios. According to a study conducted by
The Boston Consulting Group, Mergers & Acquisitions (M&A) has become the most
prevalent approach, with 91% of surveyed firms utilising it to improve the operational
value of their portfolio companies.

Historically, Private Equity firms predominantly employed financial engineering
techniques to drive returns. However, recognising the limitations of this approach, they
have shifted their focus towards Operational Excellence. By implementing strategic
initiatives aimed at improving the core operations of their portfolio companies, Private
Equity firms are now able to achieve sustainable and long-term value creation.

Among the various strategies employed, add-on acquisitions have gained significant
prominence. These acquisitions involve purchasing complementary businesses to expand
the capabilities, customer base, and market reach of portfolio companies. By integrating
these acquisitions with existing operations, Private Equity firms can achieve synergies,
unlock new revenue streams, and enhance overall performance.

The study by The Boston Consulting Group highlights the widespread adoption of this
approach within the Private Equity industry. The statistics reveal that a staggering 91% of
surveyed firms have embraced add-on acquisitions as a means of driving operational
value. This strategy allows them to tap into new markets, diversify offerings, and
leverage economies of scale, ultimately leading to improved profitability and
competitiveness.

Through add-on acquisitions, Private Equity firms bring not only additional resources and
expertise but also access to new customers, distribution channels, and technologies. By
carefully selecting and integrating these acquisitions, they can propel their portfolio
companies to higher levels of growth and success.

However, it’s important to note that add-on acquisitions are just one aspect of the broader
operational improvement strategies employed by Private Equity firms. These firms also
prioritize initiatives such as optimizing supply chains, implementing efficient processes,
enhancing organizational capabilities, and embracing technology-driven transformations.
By combining these efforts, Private Equity firms create a comprehensive framework for
driving operational value and maximizing the potential of their investments.

We at Streamliners support Private Equity Firms during Transaction, Integration,
Transition, and Transformation Phases, typically resulting in cost reductions or output
improvements of 15 – 30%. If you are looking for tailored operational value creation
solutions for your portfolio companies, get in touch with us

In conclusion, Private Equity firms have transitioned from relying solely on financial
leverage to focusing on operational improvement as the primary driver of value creation.
The prevalence of add-on acquisitions as a strategy highlights the industry’s shift towards
leveraging M&A to enhance the operational value of portfolio companies. By employing
a holistic approach that encompasses various operational improvement initiatives, Private
Equity firms are poised to deliver sustained growth and superior returns in today’s
competitive business world.