Financial engineering and strategy development are key to creating portfolio value


Leverage and cash flow management are often seen as critical to creating value in a private equity firm’s portfolio companies. Strategy development also often plays a predominant role.

Two critical contributions private equity firms make to their portfolio companies are helping them manage their balance sheets and providing strategic advice. The ability of private equity firms to make meaningful contributions can translate into superior results for everyone involved.

More effective management of a company’s balance sheet, including access to capital, is a critical capability of private equity firms. It is also key to generating superior returns. A balanced approach to financial engineering, with the long-term success of the business at the forefront, creates value for general partners, limited partners, officers and other employees of the business as well as for the entire business ecosystem.

“Financial engineering encompasses a set of different strategies,” explains Kevin Hudson, National Managing Director of Grant Thornton’s private equity industry practice. “Examples of some of these strategies include changing the capital structure of the business in addition to astutely addressing and mitigating tax liabilities. The particular strategies that a private equity firm implements depend on the company itself, the holding company and the particular situation.

According to Hudson, “In our survey of 217 middle-market portfolio companies, they all said they had worked with their private equity investors in some way to change their capital structure. Ninety-three percent found the contributions from the private equity firm very helpful.”

“Many private equity firms have strong relationships with banks and other debt providers and thus help their portfolio companies obtain the right amount of leverage at favorable rates, usually streamlining the process and relieving often part of the burden of the management teams of their companies,” says Nick Veronis, co-founder and managing partner of iCapital network, an online platform offering selected private equity funds for qualified investors. “So it’s not just about educating their teams on the benefits of leverage and an optimal capital structure, but it’s also about connecting them to their banking relationships and helping them negotiate agreements and secure competitive terms.”

Securing the vision with supportive actions for the business is critical to the success of the business and its investors. Often, private equity firms become involved in the ongoing process of strategy development and refinement. “In the portfolio company survey, 62% received strategy assistance from their private equity firms, with 91% saying it was very helpful to them,” says Hudson. “While not as widespread as financial engineering, strategy development is – for a subset of portfolio companies – a very important and valued service of private equity firms.”

Beyond providing investment capital, private equity firms are regularly very important sources of expertise. The most common form of engagement is through financial engineering, which is central to private equity firms and highly valued by portfolio companies. To a lesser extent, strategy development is a service provided by private equity firms to the companies in which they invest and is considered equally beneficial.


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