RevOps Intelligence in Private Equity Firms

Meeting today's challenges calls for PE firms to focus on revenue

The latest reports on PE firms declare a wide range of upbeat forecasts, from ever-climbing multiples to exits picking back up. However, buried in the uplifting news is another perspective: a rising concern about the need to break from the status quo and move to a more mature approach that optimizes revenue generation.

This means that instead of merely relying on organic increases in multiples, exit speeds, and sales prices, all of which have likely reached their peak, PE firms need to pivot and focus on revenue generation along the entire buyer's journey. To achieve this goal, firms need to optimize revenue at every step of the customer lifecycle for every company in their portfolios.

Here are highlights of our findings from industry reports.

PE firms need to accelerate value creation agendas

PE firms have always been change agents, but recent disruption has strapped a rocket to the value creation imperative. Business decisions that used to take months now take days. Strategic ideas that seemed too disruptive are now firmly on the table. At a panel of value creation specialists from leading PE firms at the European Private Equity International (PEI) Operating Partners Forum, there was widespread agreement that the pandemic permanently changed the value creation imperative. Key takeaways included the need for automating routine tasks to drive efficiency, streamlining reporting to enable smarter data analysis, and an imperative to self-disrupt by changing legacy business or investment practices, regardless of the potential to rock the boat.

Source: "What an accelerating value creation agenda means for private equity," Ernst & Young

PE firms must generate more value to make good on returns

An annual private equity report highlighted how PE has been paying dizzying prices: U.S. buyout multiples averaged a record 11.4x EBITDA, and a majority of U.S. leveraged buyouts were done above 7x debt-to-EBITDA ratios, also a record. Some of this is driven by technology, which keeps seeing its sector-leading deal share increase. The simple math says that general partners buying companies at these prices will have to generate more value if they are to deliver on return expectations, and they will have to do so in a highly volatile and uncertain business environment.

Source: "Private equity firms dodge cost-cutting and aim for revenue growth," Axios

PE firms must seek new ways to improve returns

Today's valuations leave little room for error. Soaring asset prices in sectors like technology mean that multiples for deals getting done today are at or near record highs. General partners buying companies at these prices will have to generate more value if they are to make good on return expectations. An analysis of hundreds of funds shows that multiple expansion and revenue growth (not margin improvement) are by far the biggest drivers of PE returns. Funds will have to find ways to improve the mix if they aim to replicate the returns they've posted over the past decade.

Source: Global Private Equity Report, Bain & Company

Financial controls among top concerns for GPs

Some portfolio companies, mostly those expecting a decline in revenue, expressed concerns about PE investor actions. The top concern cited was financial controls, such as those placed on investments and expenses, as well as a lack of capital infusion. It was followed by tighter talent policies, such as headcount reductions and reduced compensation, while excessive operational scrutiny ranked third.

Source: "The growing private equity market: How PE firms can use expertise, technology, and agility to exceed stakeholder expectations," Deloitte Insights

PE firms need a stronger focus on hazards ahead

PE firms generally consider money multiples and internal rates of return more important than other measures of success. They tend toward an early exit of poor-quality investments (early culling) more often than an early exit of performing investments, and price considerations usually govern the choice of exit channel. An increased awareness of these hazards should help improve the quality of their decisions.

Source: "Decision-making in private equity firms: An empirical study of determinants and rules," Mark Broere, Leibniz School of Business

PE is in a mid-life crisis

There's trouble on the horizon for private equity. As the industry matures, investment returns are falling. For three decades, average buyout performance has been on a downward trend. What's ailing the industry is that the traditional tools of PE for generating performance have become less effective, a natural evolution for a maturing industry. Faced with a maturing, more efficient market that is chipping away at their returns, PE firms have innovated, operationally and financially, to create value. But the incremental moves are not sufficient to halt the structural erosion of industry returns. What is called for is a novel way for PE firms to create value.

"A Harvard Business Review study found a meaningful drop of six percentage points, over two decades, in the 10-year annualized return a buyout firm generates from buying, improving, and selling a company."

"Private Equity's Mid-Life Crisis," Harvard Business Review

Mergers and acquisitions come with big challenges

In a single record half-year, private equity firms generated over $500 billion worth of deals and propelled mergers and acquisitions to an all-time high. The industry called these achievements "truly extraordinary" and "beyond any of our expectations." Among the reasons for this success is that mergers and acquisitions can offer a clear path to value at a time when deal multiples are at record levels and GPs are under pressure to deploy strategies that do not depend on traditional tailwinds, such as stable GDP growth and declining interest rates.

An increasingly popular acquisition strategy for PE firms is "buy and build." In this approach, existing portfolio companies create platforms and look for add-on acquisitions to achieve rapid growth and scale. Over roughly fifteen years, add-on transactions grew from about 43% of PE firms' deal volume to nearly 71%.

While acquisition deals have been a growth initiator for PE, they also come with big challenges. Among them is determining the ideal ratio of integration versus standalone for new acquisitions, and maintaining a consistent product user experience, all the way through to customer support. PE firms that mismanage an acquisition risk moving too quickly in the wrong direction, neglecting essential steps along the path to a smooth integration, losing customers in a clumsy transition process, and missing opportunities to maximize the revenue potential of the purchase.

To succeed and hit the ground running on revenue generation of new acquisitions requires having the right infrastructure and platform integration strategy for merging the acquisition into the firm's business structure, and having a clear financial plan to achieve the targeted ROI. Here are some highlights from industry reports on the growth of PE mergers and acquisitions.

Successful acquisitions require solid foundations

To pursue an efficient acquisition strategy, buyers need the right foundational infrastructure, including a robust IT system, a strong balance sheet, repeatable financial and operational models, and assets like distribution and sales networks that are set up for expansion. These objectives are not always easy to accomplish. A central question in due diligence is how much work the platform company needs to do to spearhead the strategy. If the answer is a lot, it can dramatically impact the timing of value creation.

PE firms are often buying someone else's starting point. So, the company might already have made acquisitions that are poorly integrated. For example, IT systems may look like spaghetti, go-to-market strategies may be at odds, or one unit's delivery trucks might be driving past another's distribution centers. Fixing issues like these takes both time and planning, which may pay off if the opportunity is big enough. The key, however, is going in with eyes wide open as to what the costs and revenue potential actually are.

Source: "Buy-and-Build: A Powerful PE Strategy, but Hard to Pull Off," Bain & Company

Winning at PE integrations

While buy and build can be a winning strategy, mediocre integrations turn deals that might have been transformative into slow-growing add-ons. At worst, poorly managed integrations can erode investor returns. A large group of PE owners and portfolio companies will likely have inconsistent integrations for many reasons, including a lack of expertise, slow decision making, and poorly defined roles. Firms often call on management teams that lack merger-management experience to execute the integration. Although the leaders of the teams may be experienced in running private companies with great success, they often realize too late that an integration is different and that it requires highly specific expertise. In such situations, the integration falters and is managed only intermittently.

PE firms can, however, capture maximum value from their integrations. For example, leading PE firms approach integration planning with the same discipline and rigor they use in deal sourcing and diligence.

Source: "Winning at private-equity integrations," McKinsey & Company

It's time for PE to enter the no-silo zone

Businesses leak revenue and are unable to maximize their revenue potential for many reasons. One of the most significant is the challenges that silos create. Different departments tend to create information silos between teams, which grow larger as a company matures. The teams are increasingly bound together by their own systems and processes. Often, they are culturally misaligned, and inherently distrustful and territorial. During times of significant change, when organizations must be agile, silos can be stubborn obstacles to creating a more effective path to growth and profitability.

However, to stay competitive in the face of accelerating business disruptions, companies need to rethink and retool their operations. The level of transformation required demands a collaborative effort from all parts of the organization. Simply stated, the silos need to break down and work together with a shared sense of purpose. They need to share the data, systems, and analytics required to get a holistic view of the customer journey and make meaningful changes that result in higher revenue generation. Here are highlights from industry reports on the constricting impact of departmental silos.

Breaking down departmental silos is an imperative

The integrated solutions that most companies want to deliver to customers, but struggle to create, require horizontal collaboration. Employees who can reach outside their silos to find colleagues with complementary expertise learn more, sell more, and gain skills faster. Research involving hundreds of executives and managers in dozens of organizations confirms both the need for and the challenge of horizontal collaboration. However, although most executives recognize the importance of breaking down silos to help people collaborate across boundaries, they struggle to make it happen.

Source: "Cross-Silo Leadership: How to create more value by connecting experts from inside and outside the organization," Harvard Business Review

Silos are the enemy of effective marketing

Marketing silos can result in lost opportunities, ineffective campaigns, lower customer satisfaction, and an eroded bottom line. More than half of marketers say their biggest barrier to leveraging data is fragmented or siloed data, making it tough to get an accurate, integrated view of today's complex customer journeys. Nearly 48% of marketers say they are not using a formal attribution strategy, making it difficult to know which efforts produced sales. Some marketers may count on unreliable data because it's easy, not necessarily correct.

Source: The State of the Customer Journey, Treasure Data

Teamwork across functions is fundamental to growth

Developing operating models, incentives, and platforms that help get marketing, sales, and customer success silos working as one revenue team with a single common purpose has become a primary growth imperative. An analysis of hundreds of organizations found that businesses that continue to use outdated functional approaches to managing these departments and the enterprise customer journey are struggling to become more digital, data driven, and dynamic.

The failure to align commercial teams, operations, processes, and systems around the customer has significant financial consequences, including the fragmented management of revenue-generating commercial assets: customer data, digital technology, digital channel infrastructure, and customer relationship equity. This has resulted in lower than acceptable returns on the technology, data, and digital infrastructure assets that underpin firm value and future revenue streams. The fractured management of enterprise commercial processes causes revenue and margins to leak through air gaps and handoffs in the customer journey. The uncoordinated leadership of customer-facing revenue teams leads to coverage gaps, suboptimal resource allocation, higher selling costs, customer churn, and missed opportunity.

Source: The Revenue Operations Report, Revenue Enablement Institute

"Firms with more cross-boundary collaboration achieve greater customer loyalty and higher margins."

"When Senior Managers Won't Collaborate: Lessons from professional services firms," Harvard Business Review

RevOps by the numbers

Leveraging today's big data for PE revenue growth

Better data supports better decision making and more accurate predictions, and market uncertainty has led to an increased reliance on data-driven decision making. The world is drowning in data. According to Domo, 90% of all the world's data was generated in just two years, and the world now produces about 2.5 quintillion bytes of data per day. For companies with strong data and analytics capabilities, this represents a significant opportunity to gain a competitive advantage. Data can enhance their ability to manage risk, identify opportunities, make informed decisions, and measure aspects of their business, such as trust, that were difficult to quantify in the past. Data can be invaluable to help better understand how businesses are positioned to perform and create stakeholder value in the long term.

For PE firms, data science can help them make smarter, faster decisions by providing more confident rationales for investment or uncovering red flags that stop a deal from completion, allowing money to be deployed more profitably elsewhere. The ability to access and parse the data is a key determinant of business success. However, for PE firms the data they need is often locked in different systems in different departments, including marketing, sales, customer support, finance, and human resources. For the PE industry, now is the time to solidify and accelerate a comprehensive approach to data science. Here are highlights from reporting on the growing demand for data-driven business insights.

PE needs to accelerate its move to data science

PE has long relied on spreadsheets, analysts' experience, and personal relationships to guide decisions on which companies to acquire and strategies to pursue. This approach helped vault the global PE industry into the multi-trillion-dollar juggernaut it is today. But new methods have emerged and are quickly advancing, like data science. Data science is multidisciplinary. It brings together statistics, econometrics, data engineering, and computer science to collect, combine, and analyze significant amounts of structured and unstructured information to provide better insights and predictions that drive strategic decision making. When applied to PE, the result is a faster, more accurate way of assessing value both pre- and post-deal. This is a landscape where the consequences of slower decision making, or a false step from faulty reasoning or incomplete information, are costly. As a result, the future of PE is one where data science is fully integrated into deal investments and firm operation.

Source: "Why private equity leaders need to level up on data science," West Monroe

High-quality data eliminates uncertainty

Decision making is only as sound as the data that supports it, yet firms often don't fully appreciate how data management can drive business outcomes and smooth due diligence efforts. Poor data quality is one of the common reasons why business initiatives fail, which explains why PE buyers are more likely to invest in data-driven businesses that demonstrate they care about quality. If the goal is to increase investor interest and drive higher valuation multiples, firms need to focus on high-quality data that eliminates uncertainty and directs the focus to the strength of the business and its value creation opportunities.

Source: "The Importance of Data Quality for Private Equity Deal Teams," Middle Market Growth

AI to become a deal driver in PE

Data analytics is omnipresent and expanding in the toolkit of many portfolio companies. Artificial intelligence does not have the same broad application, though this is evolving. Deal volume focused on data monetization and the efficiencies created through AI-driven strategies has been increasing. Experts expect AI to continue to be a deal driver for PE firms and their portfolio companies, including the use of data analytics to identify value-enhancing synergies among prospective targets and business models.

Source: "Special Report Q&A: Outlook for private equity: challenges and opportunities," Financier Worldwide

"Gartner predicted that 60% of businesses would transition from intuition-based to data-driven GTM strategies."

Gartner

Driving value through digitalization instead of outdated business practices

The pandemic raised the stakes on the potential for digital value creation. The digitizing of customer journeys is transforming what companies can do with data. A great deal of value can be captured from the creation of data assets that flow naturally from the rapid digitization of the customer journey. Digital is about driving enhanced experiences for customers and stakeholders, whether it's an end consumer, business customer, employee, business partner, or investor. It is about modernizing businesses and incorporating new ways of thinking, as well as deploying the technologies that underlie enhanced user experiences.

As the focus on digital technology rapidly accelerates for top-performing PE firms, who are ahead of the curve on this trend, activating a digital strategy throughout the deal lifecycle is becoming a core component of the value creation agenda and leading to higher multiples on exit. Yet many other PE firms have been slow adopters of digital ecosystems. Here are highlights from several reports on digitalization.

Digitalization is a leading driver of higher deal valuation

EY's Global Private Equity Divestment Study reveals that digitalization of businesses' operating models or routes to market has become a leading driver of higher deal valuation, more important than proven organic growth. Digitalization of a business ranked as a critical component of the value story and divestment thesis in the last major exit for 52% of respondents, and 51% of PE firms regard AI as a critical value lever for portfolio companies in the near term. What's more, for 45% of PE firms with a primary focus on digital growth, digital analytics is the top priority for their portfolio companies' digital development.

Accelerated by the pandemic, digitalization is a key value driver that impacts the operating model, cost base, and break-even point for a business; enables revenue growth through better customer service, pricing, and margins; and allows new routes to market that expand the addressable customer base. In addition to increased automation of processes and controls, AI can also support forecasting and decision making that directly impacts margin enhancement and cash conversion.

Source: "How private equity is refining exit strategies for stronger valuations," Global Private Equity Divestment Study, Ernst & Young

PE firms must accelerate their transition from analog to digital

Before the pandemic hit, the most effective PE firms were already deploying big data, AI, web-based analytics, and other technologies to make smarter and faster decisions about companies and their prospects. Since then, they've learned that these tools can lead to significantly deeper insights into how industry patterns are shifting, where disruption is coming from, and whether their portfolios are prepared for whatever comes next. Digital-assisted due diligence is rapidly becoming table stakes. Yet, despite widespread growth of digitalization, many PE firms still use highly labor-intensive, paper-driven processes. They must realize that a major result of going digital will be excellence in using tools and analytics throughout the PE value chain.

Source: Global Private Equity Report, Bain & Company

Early adopters move into the digital world

Only the largest and most sophisticated private market firms are starting to capture real business value from digital and analytics. Most of the industry is watching from the sidelines, either unwilling to change established ways of working, unconvinced of the potential, or unable to design a path toward building the desired digital capabilities. Several PE firms have announced efforts to build or expand data science and analytics teams, recruiting new tech talent and investing in new capabilities. One leading GP hired a new chief information and innovation officer to lead data strategy initiatives on investing and operations. A rival firm hired a dozen data scientists to assist investment decision making and portfolio company support while developing a proprietary data platform. One firm built a quantitative research group, whose mandate was to use data science to better understand and evaluate risk exposures in its own portfolio and those of its LPs. Another firm's venture arm has completely integrated algorithmic tools such as neural networks into its sourcing process, which drastically increased the pool of deals evaluated by targeting deals with characteristics similar to those that had been successful in the past.

Source: McKinsey Global Private Markets Review, McKinsey & Company

PE needs to define a business strategy for a digital world

The pandemic exposed organizations lacking strong digital capabilities and relegated them to the sidelines as their savvier competitors delivered measurable business benefits and attractive returns for investors. The organizations caught off-guard are the ones now making digital a priority. The time has come for PE to embed a digital strategy throughout the deal cycle, from origination and due diligence through value creation and exit, as well as within the infrastructure of the firm itself. Activating that transformation has become a core component of the value creation agenda. Digital can help PE drive transformative growth both midstream and downstream. It can help firms be better connected to their portfolio companies and operate more effectively.

Source: PE Pulse, Ernst & Young

"Digitalization of a business ranked as a critical component of the value story and divestment thesis in the last major exit for 52% of respondents."

Global Private Equity Divestment Study, Ernst & Young

Predictable revenue through transparency and cross-functional wisdom

The concept of revenue operations is not new, but its popularity is on the rise as more companies realize that their entire organization needs to work together to accelerate the revenue pipeline, profits, and value growth. RevOps is the alignment of sales, marketing, and customer success operations across the full customer lifecycle to drive growth through operational efficiency and keep all teams accountable to one leading metric: revenue. Revenue intelligence means business leaders operate with a complete 360-degree view of activities throughout the customer journey. By unifying all teams with a cohesive set of revenue metrics, RevOps becomes the neutral arbiter, keeping everyone tracking toward the same goals.

To achieve this outcome, RevOps bridges gaps created by silos, bringing all the wisdom, data, and systems together as a single source of truth. RevOps is the glue that binds everything together. This enables a clear view of the sales funnel, leading to quick internal and external analysis and translating into prompt actions and adjustments. While creating material gains in revenue, RevOps also structures the critical insights needed to accelerate exit plans. With better information, PE firms can exit faster and maximize multiples. Here are highlights from several reports on the rise of RevOps.

Private equity's next frontier for value creation

The current PE approach is to treat holdings as several isolated, individual investments, and to focus on how the stand-alone performance of each one can be improved over time. This approach is about diversifying risk, and it's how PE investors create value vertically. Conversely, the next frontier of value creation is to design and manage PE portfolios as a business ecosystem. In this approach, which is largely unexploited so far, value is primarily created through revenue enhancements, cost efficiencies, higher valuation ratings, and some downside protection. In one area, procurement, a large PE fund generated $550 million in cumulative savings over five years through coordination across its portfolio. Another generated a 2.3-times ROI in three and a half years in a declining sector, driven in large part by revenue relationships between interacting businesses. In sophisticated cross-portfolio arrangements, experts find that operating profit can be increased by 15% or more.

Source: "Private Equity's Mid-Life Crisis," Harvard Business Review

Key takeaways

Incorporating a RevOps strategy into PE operational practices delivers these key benefits.

RevOps has become a strategic component of PE fund management. Moving to a RevOps business model is a transformative process for firms. As they move from traditional models to a RevOps model, they begin to see the breakdown of silos and alignment among teams, new levels of visibility through data analytics, greater efficiencies, and smarter decision making across the value chain. However, the transition to RevOps is complex and should not be taken lightly.

RevOps framework: six critical steps

The process of deploying a RevOps division requires executing critical steps effectively. The following six-step framework provides a sequential methodology for building and deploying a successful RevOps initiative.

As a strategic partner to private equity firms, Cortado Group can manage every step of a RevOps transition or support any step along the way. By listening to our customers and monitoring market trends on a regular basis, we provide leading-edge solutions across six critical stages of development of a robust revenue ecosystem. We help high-growth companies achieve their most challenging revenue growth objectives, especially in times of economic uncertainty.

We combine the operating experience of tenured leaders with a data-driven approach, which drives profitable revenue growth. Our team is trained in this disciplined approach so we can help our clients develop a profitable, competitive market advantage. Bringing on an experienced partner can make your RevOps transition painless, accelerate the process, and deliver value faster. During the process, your team is free to stay focused on critical day-to-day business operations.