As 2025 approaches, deal volumes are starting to tick up, and valuations are showing signs of recovery. However, longer-than-expected hold periods remain a challenge, leaving fund managers to optimize strategies for portfolio companies initially intended for shorter holds.
These still longer-than-historical holds place fund managers in two distinct camps when thinking about year-end plans for their portfolio companies: those nearing exit and those at the beginning of the hold period. Both camps need to consider three key value drivers:
- Product/service strategy and prioritization
- Go-to-market strategy, including channel investments and optimization
- Operational excellence, including resource allocation and technology enablement
Where these groups differ is in the prioritization and level of investment for each lever.
Those nearing an exit require a more tactical approach focused on maximizing value and preparing an exit narrative. Some may also find themselves in a situation in which they have met their goals for a shorter hold expectation and now require a new strategic plan that reflects the reality of a longer hold.
Portfolio companies earlier in the hold period can afford to take a longer view and make strategic investments in the product roadmap that will pay off in the future.
In both cases, strategic alignment with the deal thesis is key to driving toward a successful exit.
Near Exit: Building the Story and Maximizing Value at the End of the Hold Period
For companies nearing exit, now is the time to shift focus to maximizing value and building the narrative around realized milestones, growth, and value creation efforts earlier in the hold. Private equity operators need to:
- Identify and cut underperforming strategies and investments and double down on the initiatives driving returns. Decisiveness is critical in the home stretch.
- Explore quick wins like expanding into low-lift adjacencies or new markets. But be wary of undertaking costly upheavals.
- Evaluate the existing go-to-market channels. Are they still the right fit, or has the portfolio company outgrown them?
- Tighten up operations. Cost discipline and production optimization are key late in the hold. Strengthening core elements of operations can add 4% to 10% of additional earnings before interest, taxes, depreciation, and amortization (EBITDA) prior to sale, and optimizing through put strategy can drive significant value.
- Reallocate resources from non-core and underperforming initiatives to areas with the highest identified return on investment (ROI).
- Finally, build the exit story. What’s the narrative? Make sure the portfolio’s analytics and key performance indicators (KPI) mechanisms are in place and aligned with the deal thesis to present a strong private equity exit success story.
Early Hold: Draw the Blueprint for the Long Game of Value Creation
Fortunately for new investments, generating value is a years-long process, not a quick fix. For these portfolio companies, time is on your side to set a value creation blueprint for long-term growth. Now is the time to make sure the key foundational pillars of your product, operations, and go-to-market strategy are firmly in place. The next 2-3 years will be about enacting the right mix of investments and strategic moves to boost value. To that end, private equity operators need to:
- Work closely with portfolio leadership in the early stages of the investment to develop a clear product strategy focused on differentiation and scalability. Companies that don’t establish a clear roadmap early pay the price; the average growth rate of companies without a well-defined business strategy is 26% lower than their peers.
- Review go-to-market plans early in the hold to identify new opportunities. Consider expanding into adjacent markets or new segments to enhance long-term value. Product diversification has been shown to positively impact financial performance, increasing profitability by up to 20% in some industries.
- Invest in the right technology. A long-term view doesn’t mean you can afford to ignore efficiency gains—on the contrary, now is the time to enact investments that will drive cost savings both in the short and long term. Investments in enterprise resource planning (ERP), for example, drive efficiencies down the line but should be enacted earlier in the hold for maximum value. The right technology builds a foundation for controls, process improvements, and strong reporting needed for further investment or exit.
Key Takeaways:
- Hold periods are still long—how you prepare is key: With average hold periods barely coming down from 2023’s highs, focus on tailored strategic planning for portfolio companies in the beginning of the hold period and tactical value maximization efforts for those nearing exit.
- Prioritize core value drivers: Concentrate efforts on optimizing channel strategy, operational efficiency, and resource allocation, adjusting the level of investment based on the stage of the hold period.
- Streamline operations and get the most out of your investments: For portfolio companies nearing exit, cut underperforming initiatives and focus on high-ROI activities to boost EBITDA.
- Invest in long-term growth as early as possible: Early in the hold period, focus on product diversification, market expansion, and technology adoption to position the company for future growth.
- Leverage technology for efficiency and scalability: Implement ERP and automation systems early to enhance operational control, support scalability, and align with long-term goals.
By focusing on these key areas and aligning strategies with long-term goals, private equity firms can maximize returns and position their companies for sustained success.
To learn more, or to schedule a call with one of our private equity experts, contact us today.
