What do PE firms look for in value creation plans?
Short Answer
PE firms evaluate acquisition targets based on post-acquisition value creation plans: revenue growth, cost optimisation, working capital efficiency, and synergy realisation drive exit returns.
Full Explanation
When a PE firm acquires a company for £50M with the intention to exit 5 years later at £150M (3x MOIC), that £100M value creation must come from identified sources. PE value creation plans typically include: (1) Revenue Growth (acquiring customers, expanding into new markets, raising prices, cross-selling), (2) EBITDA Margin Expansion (eliminating redundancy, consolidating vendor agreements, automating processes), (3) Working Capital Optimisation (improving receivables collection, negotiating better payables), (4) Add-On Acquisitions (buying smaller competitors, consolidating industry), (5) Synergies (combining with portfolio companies to reduce costs), (6) Multiple Arbitrage (buying at 6x EBITDA, exiting at 8x EBITDA if market improves or risk de-risks). For intangible assets, PE firms focus on customer relationship value, brand strength, and proprietary technology as sources of defensibility that can drive exit multiples. A company with strong brands, deep customer relationships, and proprietary technology can support higher exit multiples and is more attractive to PE. For founders being acquired by PE, understanding the value creation plan is important — it determines whether PE is investing in growth (supportive) or cost-cutting (harsh).
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Further Reading
AI in Private Equity: Due Diligence for AI-Enabled Targets
Private equity firms are acquiring AI-enabled targets at record rates, but traditional due diligence frameworks miss critical AI-specific risks. This article provides a comprehensive AI due diligence methodology covering technical, commercial, regulatory, and talent dimensions.
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