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Frank Baumann

Managing Director at Cold Bore Capital Management

Rethinking Value Creation in Private Equity Having been immersed in the private equity landscape, I've observed a notable shift in how we approach value creation. The traditional levers—revenue growth, margin expansion, and multiple expansion—are now under greater scrutiny than ever before. From 2013 to 2023, nearly half of the value creation in global buyout deals came from multiple expansion, with revenue growth contributing 53%. However, margin expansion accounted for less than 1%. It's clear that we can no longer rely heavily on multiple expansion as a primary driver of enterprise value. Instead, we must shift our focus towards often overlooked areas, particularly margin expansion, and redefine value creation to include equity value and the strategic use of free cash flow for debt reduction throughout the investment cycle. Key Areas to Focus On: -Revenue Growth: In buy-and-build strategies, especially in the lower middle market, there are abundant opportunities for top-line growth. Professionalizing sales forces, optimizing customer acquisition channels, and expanding product/service lines—whether organically or through acquisitions—can also lead to meaningful margin expansion. -Margin Expansion: While cost-cutting is a well-known method, it’s often unsustainable. By focusing on service lines with higher recurring margins and driving synergies through buy-and-build strategies, we can achieve more sustainable margin improvements. -Multiple Expansion: Although its role will be more limited, opportunities still exist, particularly in the lower middle market. Managing cost-basis and pursuing accretive add-ons can still result in multiple expansion, especially when platforms scale and achieve a premium upon exit. -Net Debt Reduction: With the rising cost of debt, free cash flow becomes a critical focus. Setting value objectives that increase FCF allows PORTCOs to pay down debt over the investment's life, enhancing equity returns. Deciding whether to use excess FCF for debt reduction or reinvestment should be guided by a thorough ROI analysis. The future of value creation in private equity is about more than just numbers—it's about making strategic shifts towards margin expansion and prudent financial management to ensure sustainable growth and strong returns in an increasingly competitive market. #PrivateEquity #ValueCreation #InvestmentStrategy #RevenueGrowth #MarginExpansion #MultipleExpansion #NetDebtReduction #BuyAndBuild #LowerMiddleMarket #PE #FinancialManagement #BusinessGrowth #PortfolioManagement

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