Nearly every large and medium-sized private equity firm has an internal consulting team to help analyze and manage portfolio investments. Private equity consultants can be very helpful to private equity firms in improving the growth and profitability of their companies and investments by performing various tasks, including post-acquisition value creation, deal sourcing, and commercial and vendor due diligence. Consultants can be just as valuable as private equity investors to the firm as they are integral to the value creation process, restructuring, and turn-around plans for an investment.
Post-acquisition Value Creation
Private equity investments are primarily centered around improving the value of businesses by helping to improve one or more of the key performance indicators including growth, profitability, and cash flow generation. Without some type of post-acquisition value creation plan, there would be no outsized value being created for investors by simply purchasing and selling a company five years later.
Private equity consultants can be crucial in helping achieve value creation post-acquisition, as they are experts in corporate turnaround, streamlining business operations, and identifying key growth drivers. Consultants help improve post-acquisition value creation by performing various tasks, such as:
- Developing strategic blueprints for acquired companies based on their strengths, weaknesses, opportunities, and threats, as well as market trends, customer needs, competitive dynamics, and regulatory environment. These blueprints are an important part of what is commonly referred to as the “100-day plan” following the acquisition. These 100-day plans outline the strategic initiatives the private equity firm will take to drive outsized value for their company over the investment horizon.
- Leading workshops that align management teams with strategic priorities and defining clear roles, responsibilities, accountabilities, and incentives for each team member. In addition to just outlining a plan, consultants may need to help incentivize and reorganize the management team. Consultants have relationships with managers they have worked with in the past to bring over to a new investment.
- Providing ongoing support and guidance to monitor the performance and results of portfolio companies and identifying potential issues and risks that may affect the value creation plan. Companies and the industries they operate in are dynamic. Consultants that are closer to the ongoing operations of the investments than their private equity colleagues may be quicker to identify issues and come up with and install potential solutions.
- Advising on potential add-on acquisitions or divestitures that may enhance the value proposition and differentiation of portfolio companies. As consultants help with the due diligence process of large platform company investments, they can provide support for tack-on investments that help improve growth and profitability, add product functionality, and improve exit multiples.
- Advising on potential exits from the investment through sale or IPO support. Private equity consultants can help private equity firms identify potential buyers through their professional connections, run competitive auctions, and negotiate favorable terms with vendors and third-party financial service providers.
Deal Sourcing and Screening
Private equity consultants can help private equity firms identify attractive investment opportunities in various sectors and geographies, using their industry expertise, market insights, analytical tools, and global network. A consultant’s network can be one of their most valuable resources, with professional and personal connections from working at global consulting firms, working with different management teams, and through undergrad or business school. Being in the know of what industries and companies are changing or are attractive can help private equity firms screen for attractive investments. Additionally, professional relationships with leaders of various companies can help a firm get the inside scoop on what is happening at companies and who may be open to selling, fundraising, or partnering with a private equity firm.
Commercial Due Diligence
Private equity consultants can help private equity firms conduct rigorous commercial due diligence on target companies, using their deep understanding of the business models, competitive landscapes, customer segments, growth drivers, and risks of various industries. Private equity consultants can also help private equity firms validate the assumptions and projections of target companies, as well as identify key value creation levers and synergies.
Private equity consultants are typically more in the weeds with the companies they monitor than their private equity investor peers. Having deep knowledge and understanding of how businesses work, sell their products, service their customers, and incentive and retain employees can be highly valuable during the diligence process. Consultants are especially important when private equity firms are digging into new companies or industries that the investment team is not an expert in.
Vendor Due Diligence
Private equity consultants can help private equity firms conduct diligence on new vendors to use, including IT services, finance, enterprise resource planning (ERP), HR, etc. Before a private equity firm engages with a new vendor, they typically need to conduct due diligence on their own to make sure the vendor is providing all the services they need at an agreeable price and with enough privacy and security. Consultants’ extensive experience with these various vendors at different companies they have supported in their careers can help private equity firms make these decisions and save on third-party advice and consulting services. Any outside consulting services come out of investor returns.
Additionally, private equity firms can utilize these same vendors for their own companies. Through deals with vendors, private equity firms can provide discounts to their portfolio companies for these systems. All vendor costs come out of the income statements of the portfolio companies.
By performing these tasks, private equity consultants can provide several benefits to private equity firms including 1) increased confidence and reduced risk in making investment decisions 2) tangible growth plans and value enhancement, and 3) easy access to valuable industry and company insights and experts.
Private equity consulting is a valuable service for many private equity firms to help improve portfolio performance. For consultants who want to join private equity firms, becoming a private equity consultant may be an interesting and worthwhile path to pursue as you will get exposure to the private equity diligence process and managing portfolio companies. Additionally, your experience at a consulting firm can be directly utilized by the firm. Finally, you can be granted a carry-in fund and similar pay packages as your peers. Some private equity firms may even be open to hiring their in-house consultants as full-time investment associates if there is mutual interest.
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