Portfolio companies experienced a significant increase in value in the first five years after being acquired.
Costs down, profit up
The disproportionate growth in EBITDA relative to revenue identified at portfolio companies – 42 versus 28 percent – demonstrates that gains are being achieved not only through accelerated revenue growth, but also through improved cost efficiency. In contrast, profitability in companies without a private equity stake falls as sales rise: while the rise in sales is 13%, the growth in EBITDA is just 9%.
A closer look at costs reveals that private equity firms start optimizing costs soon after they acquire a company. The focus here is specifically on other operating expenses, relating to indirect demands such as facility management, IT and marketing expenditure, and so on. A significant reduction in other operating expenses is already visible from the second year (T2) after the acquisition of a portfolio company. Within five years, other operating expenses fall by an average of nine percent. This optimization is a significant factor in the disproportionate growth in EBITDA.
from short-term supplier savings to holistic strategies for the various product categories
and bundling global demand across locations
or re-specifying requirements
at product level to continuously track price trends
for products with a high proportion of raw materials
The most successful almost double their operating profit
We can see notable differences within portfolio companies when it comes to material costs. On average, the material costs per unit produced remain stable, while the most successful portfolio companies achieve a growth in EBITDA of 94% by also reducing their material costs on an ongoing basis – by up to 8% within five years.
Private equity firms drive cost optimization to create a sustained increase in value across their portfolio companies. The most successful ones take innovative and complex approaches to Procurement, while also investing in digital solutions such as spend analytics tools and process automation.