Looking ahead to 2025, CEOs of PE-backed portfolio companies face unique challenges that highlight the need for disciplined, forward-looking strategies. Interest rates have fluctuated but are still higher than they were five years ago, and ongoing economic shifts and political transitions continue to shape strategic choices. At the same time, sponsor expectations are rising, increasing the demand for consistent and tangible returns. Against this backdrop, CEOs must prioritize sustainable value creation, operational optimization, and well-constructed exit strategies to effectively navigate these challenges.
The following approach, based on operational improvement best practices, provides PE-backed companies with a blueprint for driving growth, meeting sponsor expectations, and creating attractive exit opportunities even in complex market conditions. Masu.
1. Leverage your current capital position for strategic investments and long-term value creation
Today's high cost of capital may seem prohibitive, but strategically allocating capital to areas with high ROI can significantly increase long-term value. By carefully timing investments in technology, productivity, and efficiency, CEOs can position their companies to drive sustainable, long-term value creation. Here's how:
• Selective innovation investment: High-impact technology advances such as AI and data analytics can drive productivity gains, increase profit margins, and increase competitiveness. Leverage data-driven insights to make smarter decisions and streamline operations.
• Refinancing and strengthening capital structure: Lower interest rates may create opportunities to refinance debt on favorable terms, facilitating reinvestment and expansion. Strategic restructuring helps optimize capital deployment, balancing cash flow management and growth opportunities.
• Implement a Total Value Optimization (TVO) strategy. Companies use TVO to maximize value creation across the supply chain, from planning and sourcing to operations and logistics. Through cross-functional collaboration, TVO identifies opportunities to improve efficiency, reduce risk, and drive measurable results. This approach targets key levers such as capital efficiency, operational enhancement, and process optimization to drive EBITDA growth, improve cash flow, and enable sustainable business growth. I'm focusing on that.
2. Build flexible strategies in collaboration with sponsors within market realities
In a market where capital availability can change rapidly, maintaining alignment with sponsor expectations is important. Sponsors expect stable revenues and agile adaptation to economic fluctuations. CEOs can increase their sponsors' trust by creating transparent and measurable value creation plans (VCPs) that align with today's market realities.
• Re-evaluate your investment theory and update your VCP.: Start by thoroughly reviewing the original value creation plan. Adjust this plan to reflect current market conditions and ensure alignment with the sponsor's objectives and economic conditions by incorporating margin expansion, capital efficiency, and growth strategies through organic means and mergers and acquisitions. .
• Focus on core value levers: Prioritize four key value drivers: margin expansion, capital efficiency, growth, and capital structure. Cross-functional workshops with operations, finance, human resources, and corporate development teams can identify the most impactful levers to improve EBITDA and cash flow.
• Operationalize your competitive advantage with TVO: Applying the principles of total value optimization allows companies to build resilience by aligning operational and financial goals.
Sponsor-aligned strategies, including growth strategies, helped one PE firm grow its portfolio to $500 million in revenue within five years. The PE firm has acquired nine metal fabrication businesses serving the aerospace new and replacement engine market. Strategic sourcing efforts have enabled this purely aerospace company to achieve economies of scale, resulting in more than 18% reduction in cost of goods sold. The client has seen significant inventory growth, which has allowed it to free up approximately $100 million in inventory and free up cash for potential acquisitions.
3. Execute a compelling exit strategy at the right time
For many PE-backed companies, achieving a timely exit remains difficult due to market unpredictability. CEOs need to develop exit strategies that balance immediate profits with sustainable growth, especially if their holdings do not have an immediate exit. A successful exit strategy requires the following steps:
• Assess exit value and growth potential: To maximize exit valuation, it is essential to assess how much value creation can be captured before exit. CEOs must assess their team's ability to execute on their value creation plans and consider available resources to maximize growth and exit potential.
• Reduce operational costs and eliminate inefficiencies: Addresses operational inefficiencies that may remain from previous acquisitions or inventory fluctuations. Strategic cost reduction measures such as zero-based budgeting and network optimization can significantly reduce costs and increase end-of-life asset value.
A PE owner of a European specialty packaging company is looking for areas for improvement in overall equipment effectiveness, productivity and operational excellence, wanting to increase the chances of a profitable exit. Ta. The value creation initiatives identified a future EBITDA impact of €29 million, which was particularly attractive to buyers.
4. Optimize operations with specialized resources
For CEOs facing internal capacity constraints and skills gaps, executing value creation plans may require specialized resources. Identifying and addressing these needs early in the process increases agility and increases the likelihood of operational success.
• Leverage specialized resources for targeted change.: When in-house teams lack the necessary expertise, external experts can provide streamlined strategies in procurement, network optimization, and financial restructuring to accelerate implementation and reduce risk.
• Develop an adaptive operating model.: Moving from a static improvement model to a continuous improvement model allows companies to pivot as the market changes. This flexibility maintains growth momentum, strengthens cash flow, and reduces dependence on external financing.
• Monitor and adjust your strategy in real time.: By taking a dynamic approach to performance monitoring, CEOs can track the success of initiatives, refine strategies as needed, and maintain alignment with investor expectations. This consistent monitoring supports a steady increase in company value and strengthens confidence in the growth trajectory.
CEOs may face capacity constraints and skills gaps as well as an inability to go beyond traditional responses. A wholesale distribution company whose core business is office supplies and cleaning supplies has found that demand for its services has decreased. The company was trying to reduce costs in its supply chain by closing distribution centers, but was unable to make enough cuts to offset the loss in revenue. A different approach was needed. Start by carefully observing the market from both a competitor and customer perspective, and then decide on any necessary changes. New business intelligence tools such as network modeling, data analytics, and spend cubes increase visibility and enable the implementation of world-class processes. The company achieved a $27 million improvement in EBITDA (from negative to positive) and significant efficiency gains enabled it to reduce redundancy by 20%. The value creation efforts also revealed $27 million in future cost improvements.
Building a solid foundation for 2025 and beyond
As 2025 approaches, CEOs of PE-backed companies have a key opportunity to strategically navigate economic challenges and leverage operational efficiencies to drive long-term value. By focusing on disciplined capital utilization, a strategy aligned with sponsors, and a timely exit approach, CEOs can deliver strong returns and position their companies as attractive acquisition targets.
Whether dealing with high costs of capital or operational challenges, these strategies enable CEOs to effectively adapt to market changes while preparing their companies for successful high-value exits. You can. This approach not only delivers immediate benefits, but also sets the stage for sustainable growth and fosters resilience in an evolving context.
