The New Value Creation Playbook

There are many ways to use new technology to increase the value of portfolio companies. And though your mind may leap to artificial intelligence (AI), it is important to recognize that although the future is here, it is “unevenly distributed.” in many of our financial and tech audits we find that portfolio companies have not yet captured the full value of basic digital tools. Even simple upgrades — like a cloud-based ERP or a Wi-Fi-enabled point-of-sale system—can unlock significant gains, sometimes in the double digits.

From there, you can begin thinking about more complex workflows. For most companies, the bulk of the work still lies in financial standardization, GAAP accounting, and CRM dashboards. Once those basics are in place and data clean, you can layer in intelligent automation tools such as AI to drive smarter decision making.

This article explores how private equity and venture capital firms enhance the performance of their portfolio companies through financial and technological upgrades.

The Standardization Question

Your ideal strategy for adding value depends on your operating structure. If your firm offers a platform, aims to standardize, and shares back-office services, you may consider:

• Standardizing data collection and reporting
• Aligning sales and marketing processes for better comparison
• Gathering and comparing key performance indicators (KPIIs) across portfolio companies
• Centralizing and normalizing data to generate actionable insights

This approach is particularly effective across a homogenous portfolio. A private equity firm that buys mid-stage software companies would likely find it useful to encourage all of them to adopt the same CRM and marketing automation tools. Doing so streamlines reporting, improves comparability, enhances staff flexibility, and increases purchasing power with vendors.

At the same time, many firms see great success with a mostly independent, hands-off model. In those scenarios, the private equity owner can still add value by acting like a buying group and negotiating with a shared ERP system vendor to obtain choice discounts. That parent company can also still share some services, such as procurement advice, so every company has access to shared intelligence.

As a rule, it is vital to understand why each company has adapted to working the way that it has before implementing any changes. However, with thoughtful due diligence and careful audits, you can add significant value by standardizing the financials and technology. We explore these opportunities next.

5 Areas to Add Value to Your Portfolio Companies

Conduct a Financial Audit and Professionalize Those Processes

Operators can add value by applying their own financial expertise to their portfolio companies. It is a generalization, many of these companies lack robust financial talent and structured processes. In some cases, a lack of structure is so ingrained that leadership no longer sees it as an obstacle to growth.

Start by auditing the period-end close process, as this can reveal broader gaps. If the company does not have standardized metrics, a way of comparing budgets to actuals, a strategy for managing debt, a way to enforce internal controls, or financial data to support company decisions, there is opportunity for improvement.

Consider:

• Professionalizing the period-end close process
• Defining the metrics they should be measuring
• Drafting policies, operating procedures, and training
• Implementing cost reporting
• Conducting federal, state, and local tax planning

Audit For Tech Maturity and Explore a Transformation

Assess the technological maturity of the portfolio company, starting with the financial systems, data, and reporting. It is here that you are likely to see the most significant gains, as improvements in this area will improve leadership’s understanding of what is working and what you must do next.

An obvious place to start is with the ERP system. If the ERP is not set up to report on product and component level data, nor easily measure subscription revenue in aggregate and by segment, consider upgrading. That said, make a value case before investing in any new tools.

“Stay focused on delivering real, immediate value,” advises Sylvie Gadant, Transaction Advisory Services managing partner at Citrin Cooperman. “Technology doesn’t have to be ‘new’ to be transformative. Common tools may still be unfamiliar — and therefore valuable — to the portfolio company. The hype cycle is real, and chasing trends for their own sake can distract from practical gains.”

Modernizing ERP and improving financial reporting capabilities lays the groundwork for future initiatives involving automation and AI.

You can score a company’s tech maturity based on whether it:

• Has deployed foundational (obvious) technologies
• Has adopted more advanced (non-obvious) technology
• Understands its data sources and flows
• Has well-defined questions and is able to answer them
• Is seeing measurable benefit from its technology
• Keeps the tech up-to-date
• Sees high adoption among teams
• Has an effective support structure in place
• Periodically reviews and optimizes its tech stack

Explore AI and Automation

While we caution against pursuing AI for its own sake, there are practical problems you can address with these tools. It is often best to begin by testing AI features within tools that portfolio company already uses. For example, many ERP systems now include chat-based interfaces that allow users to query data in plain language. When the AI is already embedded within a software that supports the company’s workflow, adoption is easier, and the company benefits from the software provider’s robust product development and user experience—without the need to build or maintain something ad hoc.

The most common AI use case we see, in order of value:

• Automate accounts payable
• Automatically collect data to build reports
• Analyze contracts to take automatic action
• Ease the customer service burden
• Generate documents, templates, text, and images

Start small, focus on proven tools, and prioritize use cases that deliver measurable value.

Revisit Their Pricing Strategy

Help your portfolio companies understand how they might be making better margins. Many companies fall into their pricing strategy by default, lacking the outside perspective, experience, or analytical support needed to optimize them. Many CEOs or COOs rely on basic spreadsheets and apply uniform price increases across all products, without considering the price sensitivity of various customer types.

Helping companies revisit these unexamined decisions can unlock significant value. Pricing is both an art and a science — it requires testing, data, and strategic thinking. Encourage companies to build models and run clustering analyses to explore key questions, such as:

• Which customers are most sensitive to price?
• Where is there room to increase margins without risking churn?
• Are we underpricing high-value offerings or over-discounting to win deals?

“If inflation chips away at 3.5% annually, will the market bear a 7% increase? How can you build those increases into the product in ways that do not cause customer churn?” says Gadant. “The more delta you can create between the company’s revenue and bottom line, the more you achieve that EBITDA growth that private equity firms are looking for.”

Upgrade Their Cybersecurity

Cybersecurity is a glaring and often overlooked weakness among portfolio companies. In our annual survey of 1,000 business leaders, portfolio companies consistently score lower on cybersecurity measures compared to their peers. They tend to underestimate its importance, conduct fewer trainings, and have fewer tools in place. Yet the effects of a breach or ransom event can be catastrophic. Protect your investment by engaging a cybersecurity specialist to audit the company, and keep in mind that IT and cybersecurity are not the same. Cybersecurity is an entire discipline and a portfolio company IT manager who devotes a fraction of their time to security can outmaneuver a professional cybercriminal.

Pursue the Quickest Value First

Many of the opportunities for creating value among portfolio companies start with basic financial and technological hygiene. A simple data dump from their ERP system or sales database into a spreadsheet can provide enough insight to start running analyses and generating ideas. That fundamental hygiene then creates opportunities for higher-order value creation. A portfolio standardized on common software for planning, marketing, and sales will produce comparable metrics across companies, where you can have your specialists do the rounds and help each team improve one-by-one.

While this process requires effort, attention, and experienced operators, much of it can be achieved through careful outsourcing. A specialist that can assist with financial audits, accounting, technology audits, and cybersecurity audits can develop a comprehensive regimen and scorecard for each company, to guide the next steps.

If you would like to discuss auditing your portfolio companies for financial or technological maturity and hygiene, please reach out to Smija Simon.