A new approach to maximise return on investment in growth initiatives for private equity portfolio companies 

Over the past decade, private equity (PE) firms have significantly strengthened their capabilities to guide and support the management teams of their portfolio companies to drive growth and value creation through more active participation on boards or the deployment of operating partners or functional specialists. As a result, expensive consultant-led interventions, aimed at developing comprehensive value-creation plans, are now less necessary and do not justify the required investment. 

In line with these evolving requirements, L.E.K. Consulting’s philosophy on growth enablement for PE portfolio companies entails targeted interventions focused on the highest-impact levers of growth, delivering strong management buy-in and a clear plan for delivery. More specifically, our approach entails the following: 

  • Focus management on a few key priorities without distracting them with exercises to ‘boil the ocean’ and explore marginal opportunities 

  • Ensure interventions deliver highly practical, actionable plans that the business can implement rapidly 

  • Engage at the right time in the investment life cycle to maximise value delivery 

  • Co-create these plans with management in order to generate a real commitment to deliver and leverage their market and business knowledge 

  • Strengthen management execution capabilities, and establish mechanisms to track and evidence results delivery 

These interventions enable businesses to move quickly towards the realisation of opportunities with the highest impact, with management remaining fully empowered and in the driving seat while the external advisors provide technical capabilities or resources that the business lacks. This approach ultimately enables PE firms and their portfolio companies to manage carefully the budget for consulting services, investing in interventions that generate demonstrably high returns. 

Based on our experience, timing across the investment period influences both the objectives of those interventions and the impact that they can generate. We believe that interventions early in the investment period or mid-cycle generate the highest positive impact on the exit valuation (see Figure 1). Late-cycle interventions are less impactful but can help strengthen the equity story. 

Typical areas of intervention to enable growth of PE portfolio companies 

Of course, every business is in a different situation, and the priority growth drivers that a business should pursue depend on (a) the customer and its competitive context and (b) the customer’s unique strategy, business model and organisational capabilities.  

We find, however, that growth enablement work with PE portfolio companies typically focuses on six key growth and profit improvement levers (see Figure 2). 

Although every intervention is different, the typical outcomes targeted in each area are outlined below. 

1. Customer targeting and value proposition 

The foundation of any intervention in this area is often the development of a new segmentation of the business’s customers, with new, in-depth insight into the characteristics, needs and purchasing processes of each segment. The work often aims to also deliver a reliable estimation of the ‘total addressable market’ in each segment and across segments to inform decisions targeting specific segments and to set appropriate growth targets.  

Beyond these ‘where to play’ questions, interventions typically include initiatives to strengthen the business’s value proposition to different segments in line with customer needs in order to improve sales conversion. This could include the development, on the basis of the insight that the intervention has generated, of new propositions for underserved segments and/or segments newly emerging in the market. 

Ultimately, these interventions aim to deliver actionable plans to:  

  • Reinvigorate new customer acquisition based on clear plans to target high-value prospects  

  • Increase share of wallet and revenue with existing customers through effective cross-selling and upselling 

  • Facilitate customer retention by understanding and addressing reasons for customer churn 

2. Offer architecture and pricing 

Interventions in this area are focused on redefining the offer and pricing strategy of a business, combining relevant services and products, in line with (a) the competitive environment and (b) the requirements and the willingness-to-pay of different customer segments. On this basis, the work often comprises quantitative research with customers to understand their requirements and to robustly assess price elasticity of demand. 

Strategies in this area ultimately aim to serve a range of commercial objectives, including:  

  • Launching new offers to enable profitable acquisition of value-orientated new customers 

  • Aligning offers and their prices to the opportunity across different customer segments to maximise value capture 

  • Developing new product architecture or service ‘bundles’ to facilitate cross-selling and upselling to existing customers 

  • Implementing tactical price increases to drive margin improvement in the short term 

  • Reducing ‘value leakage’ in undisciplined discounting through new policy for customer terms or rebates 

Successful interventions help businesses build the right capabilities to implement the new pricing strategies on an ongoing basis, including the right roles, processes, controls, skills and tools. The implementation support can also include establishing a reliable plan to rapidly and safely migrate customers to a new pricing model or commercial policy, appropriately managing the inherent commercial risks.  

3. ‘Beyond-core’ expansion 

An intervention in this area typically aims to enable businesses to develop effective organic or inorganic strategies to pursue growth in new areas beyond their established business activities, including in new geographic markets, in adjacent product categories or services, or through the development and deployment of new business models. 

The key starting point of these interventions is a robust evaluation of new opportunities based on (a) their attractiveness and (b) an objective assessment of the business’s ‘ability to win’ in each opportunity.  

Interventions in this area ultimately aim to deliver an integrated roadmap to drive beyond-core expansion, often including: 

  • New market entry strategy to drive geographic expansion 

  • Organic development of new services or products to drive cross-selling or new customer acquisition 

  • Alternative business models to serve existing or new customer segments  

  • New digital propositions to disrupt the market in order to protect or enhance a business’s competitive position 

  • Specific acquisition targets to pursue in order to consolidate market position, extend a product or service portfolio, or acquire new capabilities  

4. Go-to-market and commercial effectiveness 

Interventions in this area aim to strengthen a business’s go-to-market model and commercial performance, which includes both direct-to-customer capabilities (consumers or business-to-business customers) and the effective management of third-party channels (distributors, wholesalers, resellers, and retailers or e-tailers). 

Interventions in this area often require specialist functional expertise, particularly in digital technology and salesforce effectiveness, and typically cover the following: 

  • Optimal channel strategy in existing or new markets across third-party and proprietary channels 

  • New or enhanced direct-to-customer proposition to drive growth or profitability 

  • Enhanced customer journey and sales conversion across traditional and online channels 

  • Participation strategy for online marketplaces to balance brand objectives and revenue growth 

  • New commercial organisation and roles, with a tiered approach for different customer segments 

  • Enhanced key-account management model and strategy for large accounts 

  • Reduced cost of the commercial organisation, in particular the cost to serve smaller accounts  

  • Improved salesforce effectiveness (including employees, distributors or agents) through new roles, tools, skills and incentives 

5. Organisational effectiveness and efficiency 

Interventions in this area aim to design and implement organisational change in order to strengthen a business’s capability to execute strategy, increase efficiency through reduced operating costs and/or improve ways of working by resolving existing organisational fault lines. Work in this area often begins with an interview- or survey-based diagnostic to generate insight into the current strategic and cost performance of the organisation and to define priority improvement opportunities. These opportunities are typically substantiated through appropriate benchmarks. 

Engagements in this area ultimately aim to deliver a new organisational strategy and a clear roadmap for its execution to pursue opportunities such as: 

  • Evolving or transforming a business’s operating model to build new capabilities that will enable strategy implementation 

  • Improving leadership effectiveness through new roles, people, skill sets and behaviours  

  • Reducing personnel and non-personnel costs across overhead functions through increased technology adoption, shared services or outsourcing  

  • Adopting new ways of working to address and improve organisational agility and the effectiveness of cross-functional collaboration 

  • Developing industry-leading capabilities in data and analytics to generate new insight and build competitive advantage 

  • Embedding a performance-orientated culture across the organisation to drive continuous improvement 

6. Operational optimisation 

Interventions in this area aim to optimise a business’s operational strategy, footprint, and performance and typically focus on reducing opex, capex, or working capital while protecting or improving the business’s capability to implement its strategy. 

Typical areas of focus of the work include: 

  • Enhanced R&D and new product development capabilities to drive innovation, improve speed to market and increase return on investment from innovation 

  • Effective sales and operations planning to align commercial, operational, and financial processes, including capabilities for reliable demand forecasting  

  • New manufacturing strategy, including changes to footprint and production planning to increase efficiency or to support growth strategy  

  • Optimal warehousing and logistics models to reduce costs or to improve customer service levels  

  • New sourcing strategy to secure appropriate supply at the right level of cost 

Typical structure and key outcomes of PE growth enablement interventions 

A typical engagement to define new growth initiatives for a PE portfolio company would focus on two or three of the six areas of intervention outlined above in order to ensure appropriate focus on the highest-priority opportunities and to maximise return on investment. 

Highly targeted interventions focused on one specific area, however, can help a business effectively capture a particular high-priority growth opportunity — e.g. to pursue international expansion or to develop a new direct-to-customer proposition. In other cases, broader interventions, covering all or most of the growth levers, can enable a business to efficiently assess and prioritise a broad range of growth opportunities or to develop a comprehensive transformation programme. 

Irrespective of scope, these interventions consistently deliver highly impactful and actionable initiatives for PE portfolio companies, including a range of specific, tangible benefits (see Figure 3).

How can L.E.K. help?

L.E.K. offers deep sector expertise with industry-leading capabilities across M&A and strategy and experience throughout the PE investment life cycle, from investment to value creation to exit.

We bring a relentless focus on tangible value delivery, including on the establishment of effective mechanisms to track implementation progress and value delivery.

Our teams seamlessly combine functional specialists and industry experts who work efficiently, rapidly and flexibly to achieve a client’s objectives. Our senior team is committed to the success of the interventions and is directly involved in the work to guide and support decision-making.

Our approach focuses on developing bespoke solutions to support a business’s unique market context, strategy position and sources of competitive advantage, while our working model is highly collaborative, involving close work with our client’s management teams to co-create a plan and ensure the business is ready to execute.

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