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Achieving 4-5x Growth in PE

What is the most efficient way that PE firms grow their portfolio companies by multiples? I doubt it can be realistically achieved through aggressive growth strategies / operational improvement... How realistic is a 4-5x target in a 5-10 yr timeframe if even the most aggressive (non-nascent) companies grow less than 20% annually. What happens where scaling via buyouts is not very feasible (i.e. in an emerging industry where there aren’t many companies to buy)? Are most PE firms basically betting on another larger company buying their portfolio company, or on an IPO? What other non-acquisition-or-sale/non-IPO strategies do PE firms use to achieve growth in multiples?

Newbie here- apologies if this question has already been answered or the answer seems obvious…

What is the most efficient way that PE firms grow their portfolio companies by multiples? I doubt it can be realistically achieved through aggressive growth strategies / operational improvement... How realistic is a 4-5x target in a 5-10 yr timeframe if even the most aggressive (non-nascent) companies grow less than 20% annually. What happens where scaling via buyouts is not very feasible (i.e. in an emerging industry where there aren’t many companies to buy)? Are most PE firms basically betting on another larger company buying their portfolio company, or on an IPO? What other non-acquisition-or-sale/non-IPO strategies do PE firms use to achieve growth in multiples?

Newbie here- apologies if this question has already been answered or the answer seems obvious…

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Hi there,

Thanks for bringing this question to the forum, it's a good one. I am no PE expert by any means, but I want to contribute to the thinking process here.

I would begin by stating that the question is stated in a generalized manner. PE can be broken down in its sub-sectors / sub-focuses, which entail its investment strategies: (a) venture capital; (b) growth capital; (c) mezzanine financing; (d) LBO; (e) distressed buyouts; (f) fund of funds. As such, a portfolio of companies for a PE firm will look very different based on the investment strategy. And the areas of focus when creating value will be different as well. Finally, the risk-reward relationship will be different, affecting the multiples. On another note, PE is different in different geographies. As such, it's difficult to provide a one answer fits all.

Next, let's highlight the ways PE firms create value: (1) exit (multiples arbitrage: buy cheap, sell expensive; IPO; sale; merger etc...); (2) operational and organizational efficiencies (i.e. profitability improvements); (3) financial engineering (capital structure, debt restructuring, tax improvements etc...); and (4) business growth. Based on the investment strategy chosen, the use of each value-creation tool/approach will vary in degree and focus. For instance, in a distressed buyout, the PE firm will likely benefit from operational efficiencies and the exit value after buying cheap, improving the business and then selling it. It will perhaps focus less on business growth since the focus will be to ensure survival > focusing on growing the business from day 1.

To conclude, I would like to make a final comment on the aspect of achieving the high returns on a portfolio of companies. The portfolio performance will be based on the risk-reward structure chosen by the firm, and will depend on how good the firm is at achieving its objectives. In finance, it's most important to remember that your financial performance is meaningless if not against a benchmark (or competition). Financial metrics are always meant to be compared to cost of capital, opportunity costs, required rate of return, industry benchmark, market expectations etc...

Hope this helps, and happy to discuss any points further.

Rakan

Hi there,

Thanks for bringing this question to the forum, it's a good one. I am no PE expert by any means, but I want to contribute to the thinking process here.

I would begin by stating that the question is stated in a generalized manner. PE can be broken down in its sub-sectors / sub-focuses, which entail its investment strategies: (a) venture capital; (b) growth capital; (c) mezzanine financing; (d) LBO; (e) distressed buyouts; (f) fund of funds. As such, a portfolio of companies for a PE firm will look very different based on the investment strategy. And the areas of focus when creating value will be different as well. Finally, the risk-reward relationship will be different, affecting the multiples. On another note, PE is different in different geographies. As such, it's difficult to provide a one answer fits all.

Next, let's highlight the ways PE firms create value: (1) exit (multiples arbitrage: buy cheap, sell expensive; IPO; sale; merger etc...); (2) operational and organizational efficiencies (i.e. profitability improvements); (3) financial engineering (capital structure, debt restructuring, tax improvements etc...); and (4) business growth. Based on the investment strategy chosen, the use of each value-creation tool/approach will vary in degree and focus. For instance, in a distressed buyout, the PE firm will likely benefit from operational efficiencies and the exit value after buying cheap, improving the business and then selling it. It will perhaps focus less on business growth since the focus will be to ensure survival > focusing on growing the business from day 1.

To conclude, I would like to make a final comment on the aspect of achieving the high returns on a portfolio of companies. The portfolio performance will be based on the risk-reward structure chosen by the firm, and will depend on how good the firm is at achieving its objectives. In finance, it's most important to remember that your financial performance is meaningless if not against a benchmark (or competition). Financial metrics are always meant to be compared to cost of capital, opportunity costs, required rate of return, industry benchmark, market expectations etc...

Hope this helps, and happy to discuss any points further.

Rakan

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