Operational value creation is finally returning en vogue among private equity general partners (GPs) as the commoditization of deal structuring has eroded a preferred shortcut to driving returns.

We find it alarming, and sadly par for an era of historically cheap capital, that actively increasing portfolio companies’ equity value through intrinsic improvements to the business has emerged as a marketable differentiator.  Fortunately, the disciplined investor has built resilience against shifting trends/cycle and the jazz hands they inspire from a majority of underwhelming GPs

The Challenge for LPs: Sifting Through the Noise

For limited partners (LPs) attempting to evaluate the operational value-creation strategies of prospective GPs, the path is anything but straightforward; it includes sifting through an exhaustive number of pitch decks laden with ostensible operational initiatives, which often serve as marketing distractions rather than representing true differentiation. Frequent challenges often include the following: 

• Track Records present both realized and unrealized performance, which needs to be scrutinized; unproven strategies can be difficult to gauge through traditional measures.
• Information Asymmetry around past and current performance can leave LPs with an incomplete picture, requiring reference calls with company management teams and on-sites with GPs to fill in the necessary blanks.
• Time Constraints provide a limited window to conduct full due diligence, particularly for in-demand funds with short fundraising windows.

Crewcial’s Perspective: How We Evaluate Value Creation  

At Crewcial,  all strategy types—whether venture, growth, buyout, or real estate—re benchmarked against sector-relevant metrics uniquely attributable to grow asset value upon exit.  Within each strategy type, work to separate objective value-creation capabilities from the wishful thinking by scrutinizing  GP experience, domain expertise, operational resources, and operational networks against past and current investment success or failure. For example:

• Venture Capital: Early stage companies are typically judged based on hitting revenue growth, user growth, burn rate, etc., milestones—all indicators that dictate valuation during successive funding rounds. Venture capitalists should provide consistent examples of actively driving these key metrics in past investments to impact subsequent investment rounds for future investors.
• Buyouts: Buyout GPs typically target mature companies and emphasize profitability and cash-flow generation enhancements as key determinants of the EBITDA multiples potential buyers might pay. Demonstrated, repeatable operational prowess to catalyze growth or increase margins through efficiencies is key.

Getting the Story Straight: Understanding the Narrative 

That said, no single blueprint exists. However, strategies that stand out clearly articulate the core initiatives they can uniquely leverage, while demonstrating how these efforts will drive the metrics that matter most; for instance, a GP claiming an ability to enhance margins through automation or expand revenue via geographic growth should back these claims with numerous well-delineated historical examples and case studies. 

For institutional investors, defining value creation is an iterative process requiring multiple conversations, combining qualitative insights and quantitative analysis with the goal of anchoring the narrative in objective reality. At Crewcial, we leverage these insights to identify actionable strategies able to drive measurable, lasting impact for you and your communities.