With debt leverage lower and the low-hanging fruit of cost take-outs usually harvested, revenue growth will need to generate IRR.
Private Equity International highlighted a BCG study that argues a portfolio company would need to generate compounding EBITDA growth of 11% over 5 years in today’s landscape of less leverage and ample dry powder in order to generate a 25% IRR for a fund. In absolute terms, this means that cash flow would need to be 68% larger in year 5. While process re-engineering and other cost-savings programs may quickly generate a significant portion of this increase, these tend to be one-time events. Moreover, there may not be much left to streamline if the seller of the company is a financial investor.
Our point-of-view is that a significant portion of this EBITDA growth must be created through revenue growth. This top-line growth also enhances the probability of a better exit multiple compared to growth generated largely through cost takeout. In pursuing revenue growth, we are confident that we can bring significant “intellectual leverage” to the equation. Given that our fees for projects are typically 1/3 the rates of McKinsey, Bain and BCG, an “investment” in a project will likely generate a significant payback. As always, we are more than happy to have a discussion about a business issue with you and/or management that a portfolio company may be having.