Every private equity firm has a value creation plan.
Every portfolio company has strategic initiatives.
Every management team has an operating agenda.
Revenue growth.
Pricing.
Procurement.
Technology.
Margin expansion.
Integration.
Most of these initiatives are important.
Many are necessary.
Yet an interesting question remains:
If every company has a plan, why are so many sponsors still struggling to achieve their value creation objectives?
The answer may have less to do with execution than with discovery.
The Environment Changed
For much of the last decade, private equity benefited from multiple expansion, inexpensive debt, and abundant liquidity.
Those conditions amplified returns.
Today, the environment is different.
Hold periods have lengthened.
Exits have slowed.
LPs are increasingly focused on distributions.
Operating performance has become a larger driver of investment outcomes.
McKinsey and Alvarez & Marsal both point to a similar conclusion: operational improvement has become one of the primary sources of value creation in private equity. Margin expansion now represents a substantial portion of EBITDA growth in exited investments.
The question for sponsors and operators is no longer simply:
"How do we execute the value creation plan?"
It may also be:
"What opportunities never made it into the plan?"
Most Organizations Are Not Missing Information
Most organizations have smart people.
CFOs understand cash.
Operating Partners understand value creation.
CEOs understand execution.
Controllers understand risk.
HR leaders understand the workforce.
The problem usually isn't intelligence.
The problem is ownership.
Finance owns cash.
HR owns benefits.
Payroll owns administration.
Operations owns productivity.
Technology owns systems.
Nobody owns the intersection.
And that is often where opportunities live.
As a result:
Everybody sees pieces.
Nobody sees the whole picture.
The Largest Expense Nobody Discusses
Across many portfolio companies, workforce costs represent 40% to 70% of operating expense. Compensation and benefits are often the largest controllable expense in the business.
Yet workforce economics rarely appear in value creation plans with the same level of rigor applied to procurement, pricing, or revenue growth.
Benefits costs continue to rise.
Administrative complexity expands.
Payroll taxes remain largely unmanaged.
Fragmented systems create inefficiency.
None of these items individually appear material.
Collectively, they often are.
This is not because management teams ignore them.
It is because they sit between functions.
The opportunities belong to everyone.
And therefore belong to nobody.
Why Advisors Miss Them
Benefits consultants focus on benefits.
Payroll providers focus on payroll.
CPAs focus on tax.
Attorneys focus on legal risk.
Operating Partners focus on major initiatives.
Each advisor sees part of the problem.
Very few are responsible for evaluating the entire operating system.
That creates an interesting dynamic.
Organizations may reject opportunities not because the economics are unattractive.
They reject them because nobody feels qualified to evaluate both the economics and the risk.
The result is organizational paralysis.
The Wrong Question
Many organizations ask:
"Can we save money?"
Sophisticated organizations ask a different question:
"Can we do this correctly?"
Take employer payroll taxes.
Take benefits strategy.
Take administrative automation.
Take Section 125 planning.
Take workforce governance.
The opportunity itself is often not the challenge.
The challenge is understanding:
The economics
The compliance requirements
The operational execution
The documentation
The ownership
Free cash flow that creates future liabilities is not free cash flow.
It is deferred risk.
That is why many of the most interesting opportunities require multiple perspectives:
Finance.
Tax.
Payroll.
Benefits.
Legal.
Operations.
The objective is not speed.
The objective is confidence.
Small Improvements Compound
One of the mistakes organizations make is assuming value creation must come from a single transformative initiative.
Sometimes it does.
Often it does not.
An additional $200,000 of free cash flow.
A reduction in benefits expense.
Administrative automation.
Improved retention.
Faster integration.
Cleaner workforce data.
None of these may individually transform a company.
Together they can materially influence EBITDA, cash flow, and enterprise value over a multi-year hold period.
Incremental improvements compound.
Especially when hold periods lengthen.
The Question
The best operators I have met ask a different question than most organizations.
Not:
"What are we working on?"
But:
"What are we overlooking?"
Because some opportunities are not hidden.
They simply receive less attention than their economic impact warrants.
And many of them exist precisely because nobody owns finding them.
The question for sponsors, operators, CFOs, and management teams is not whether additional opportunities exist.
The question is:
What opportunities inside your organization currently belong to everybody—and therefore belong to nobody?
Because in my experience, that is where some of the most interesting free cash flow opportunities are hiding.
—
Preston Leahy
The Portfolio Value Creation Report
Where Operating Performance Drives Enterprise Value.