Maximizing Operational Excellence in 2024-2025: Private Equity Strategies and Market Trends

M&A professionals are seeking signs of recovery to normalize activity levels. The historic surge from late 2020 to early 2022, driven by cheap money, strong consumer demand, and record capital levels, is seen as an outlier. In contrast, 2023 was marked by high inflation, uncertain interest rates, a stagnant IPO market, and tight credit conditions, creating a downturn.

Private Equity International and Pitchbook report a 20% decline in fundraising and a 15% drop in deal volume. Despite this, approximately $1.5 trillion in dry powder remains globally, underscoring the need for strategic planning and operational excellence for successful investments.

Given the current market conditions, now is the time to focus on what you can control. By prioritizing operational efficiencies and value creation, you can position your portfolio companies for long-term success and resilience.

Navigating the Shifting Landscape: Key Trends Impacting Private Equity Investors and Markets

1. Pressure on LP Investments: Investors, particularly Limited Partners (LPs), rely on a steady turnover of their investments to reassess allocations and generate returns. The recent decline in deal activity has interrupted this cycle, causing liquidity issues and reduced returns. Consequently, LPs are more cautious about reinvesting in private equity, especially with new managers. Client feedback indicates that the current fundraising climate is the most challenging in years, posing significant concerns for the future stability of private equity markets.

2. Asset Sales Under Pressure: LPs urge funds to sell assets, even if the returns are suboptimal. Continuation vehicles, which gained traction last year, remain a popular exit strategy.

3. Adaptation to a Higher Interest Rate Environment: There is a growing acceptance that higher interest rates will likely stay for an extended period. While there is weekly speculation about potential rate cuts, any rate reduction is unlikely to impact investment returns significantly. 2025 will not see a return to the interest rate levels of 2015-2018 or the pandemic period.

4. Improving Access to Credit Markets: Access to credit is improving, especially in the critical middle and upper middle markets. Many private credit funds are now facing fierce competition, and with ample capital available, high-quality deals are becoming quite competitive.

5. Deployment of Dry Powder: Despite the challenges, record amounts of uninvested capital (dry powder) remain. Private equity investors are under pressure to deploy this capital as their fund life spans are ticking down, having already lost up to 18 – 24 months. Returning unused capital to LPs is undesirable, and doing so could realistically impede future fundraising efforts.

6. Narrowing Valuation Gaps: The valuation gap between buyers and sellers is narrowing, although it has not yet reached an ideal equilibrium. As market forces converge, sellers are more likely to engage bankers and enter the market. High-quality assets are still fetching strong valuations, and sellers, influenced by competitors’ successful transactions, are motivated to launch their processes.

7. Shift from Financial Re-engineering to Operational Efficiency: Reliance solely on financial re-engineering to drive M&A returns diminishes. Instead, private equity managers focus on operational efficiencies, performance improvements, and value-creation initiatives, including cost optimization, innovation, and revenue growth.

8. Robust Investment Bank Pipelines: Investment banks maintain strong pipelines and are gradually moving towards launching new offerings. Although there is a lag in transitioning deals from “pipeline” to “active” status, a pickup in overall activity is anticipated as deals start to move more consistently.

9. Stock Market Resilience and Corporate Earnings: The stock market is robust, with all indices achieving record levels. Strong consumer spending is driving high corporate earnings that surpass expectations. Innovations, particularly in AI, are enhancing efficiencies and creating favorable market conditions.

As we look ahead to 2025, cautious optimism is halfway through Q2. Indicators suggest we might be moving past the worst of the downturn. However, these have yet to merge into a consistent trend that provides a reliable forecast for the remainder of the year.

Focus on What You Can Control

Given the current market conditions, now is the time to focus on what you can control. By prioritizing operational efficiencies and value creation, you can position your portfolio companies for long-term success and resilience.

Role of Operational and Lean Six Sigma Resources

Operational and Lean Six Sigma resources are crucial in navigating these challenging times. They offer expertise in implementing and maintaining robust operational efficiencies, ensuring compliance, and optimizing business operations. These resources can assist with:

      • PROCUREMENT: RFPs, Agreements, Make vs. Buy decisions, Purchase Price Variance, and Maverick Spend.
      • INVENTORY: Increasing Turns, Managing Reserves & Write-offs, Service Levels, ABC Segmentation, and Replenishment/Reordering.
      • PROCESS EFFICIENCY: Addressing Overstaffing, Incremental Improvements, Location Performance, Labor Variability, and Cost Standards.
      • INTEGRATION: Managing Facilities, Relocation Constraints, Shared Services, Reverse Integration, and Risks.
      • CAPITAL EXPENSE: Maintenance, CapEx Trends, Reliability, Process Variability, and Downtime.
      • QUALITY: Handling Returns & Allowances, Warranty Expenses, Material Usage Variance, Scrap & Yield, and Inconsistencies.
      • CAPACITY: Managing Availability/Utilization, Downtime, Excess Capacity, Growth Projections, and Investment.
      • WAREHOUSE & LOGISTICS: Space Availability/Utilization, Branch Locations, Geographic Optimization, Freight & Logistics, and Inventory Placement.
      • COMMERCIAL: Rationalization, Margin Erosion, Customer Turnover, Sale Team Performance, and Sales Model Impact.
      • GENERAL COMPANY: Organizational Structure, Process/Practices, Data Systems, Inherent Risks, Un-addressable Elements, and Transition Services Agreements (TSA).

Call to Action

Compello Partners focuses on mid-market private equity firms and portfolio companies. We have the expertise to help you navigate these initiatives, driving significant improvements in performance and optimizing your cost structures. Don’t let the market’s uncertainty dictate your future—reach out to us today to discuss how we can support your efforts in enhancing operational efficiency and unlocking new growth opportunities. Let’s work together to ensure your business thrives despite external challenges.

Click here to schedule a discovery call. We would like to learn more about your company’s operational needs.

 

 

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