Robin is to Batman what intelligent automation is to private equity; before the introduction of his trusted sidekick, Batman was limited in his ability to fight crime. To unlock real value and drive EBITDA (Earnings Before Interest, Tax, Depreciation, and Amortization) growth within their portfolio companies (i.e. kick a**), private equity firms must put their trust in intelligent automation.

According to an article by Brookfield, entry multiples increased globally from 7x to 13x from 2011 to 2022, a near doubling in asset costs in a decade. Prior to 2000, thanks in part to the low entry multiples, private equity firms could rely heavily on leverage and financial restructuring, with debt making up as much as 75% of the transactions.

The current state of Private Equity

Today, General Partners (GPs) are focusing on a debt-equity split, with equity making up roughly half of the overall value of transactions. With the higher cost of capital resulting from higher interest rates, these firms are less likely to use leverage as aggressively as they once did, as too much debt will increase their already-inflated cost of capital.

The current era is defined by less of a focus on financial restructuring and more on driving value creation. Shifting away from the traditional buy-and-hold or buy-and-build methodologies, GPs focus on margins, identifying ways to reduce expenses without hurting their top-line growth.

Driving growth beyond traditional methods

Adam Coffey, the President of three private equity-backed companies, attributes the following three methods to achieving sustained growth:

• Mergers & Acquisitions
• Organic growth
• Margin expansion

Mergers and acquisitions typically require a lot of capital but ideally result in increased synergies over time. Organic growth results in growth over a long period but is not a great tool for most firms battling our current market conditions while looking to create value. Margin expansion—the decrease in operational costs relative to revenue over time—is a fantastic tool for private equity firms, and the focus of this article. It enables them to grow their EBITDA multiple and shareholder value through servicing the existing revenue stream.

Enabling operational efficiency and margin expansion through Automation

In a study conducted by McKinsey, GPs that focus on value creation through operational improvements achieve a 2-3% higher IRR than their peers. Implementing artificial intelligence, intelligent automation, machine learning, natural language processing, and/or robotic process automation drives margin expansion through operational improvements. Operating partners can enable these efficiency gains, which in turn grow the value of the portfolio companies without needing to lower costs or increase revenue.

Although many are still addressing their internal automation requirements, we anticipate that most private equity firms will push automation adoption across their portfolio companies in the next few years to streamline operations. The efficiency gain for these portfolio companies translates directly to cost savings and improved overall operational performance.

There is a massive demand for performance from the operations/value creation teams, creating a unique period for Operating Partners that must be capitalized on. In times of increased cost of capital, the use of capex for technology becomes limited or pushed to the side entirely, as these costs are often front-loaded with benefits typically accruing over a longer time horizon. In contrast to other technology costs, intelligent automation has an average payback of less than 12 months. Thus, the efficiency gains from implementing automation into business processes can be realized well within a typical 3- to 7-year holding period.

Ready to harness the power of Intelligent Automation?

Is building up portfolio companies akin to fighting crime in Gotham City? Not really. However, intelligent automation is the perfect sidekick for private equity firms, enabling several opportunities for both top-line growth and bottom-line optimization. Through improved operational efficiency, private equity firms unlock real value and drive EBITDA growth within their portfolio companies.

At Reveal Group, we have the expertise and coverage to help firms reap the benefits of automation. Alone, firms will need to resort to the methods and tools that work in an entirely different market. With intelligent automation, firms can service their existing revenue by increasing operational efficiencies. With intelligent automation, we get The Caped Crusaders!

To learn more about the intelligent automation opportunities in your organization, reach out on LinkedIn, or click here to throw some time on my calendar.