Dry Powder: The Private Equity Podcast
The Renewed Urgency of Operational Due Diligence
Aug 15, 2024
As private equity firms grapple with shrinking margins, operational due diligence becomes essential. The discussion highlights the balance between revenue growth and cost-cutting amid inflation. Conflicting insights from consultants pose risks, stressing the need for cohesive strategies. Early engagement with advisors and data-driven decision-making are emphasized for better evaluations. A successful turnaround case showcases how focused operational assessments can significantly boost margins, underscoring the value of disciplined diligence in enhancing investments.
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Quick takeaways
- Private equity firms must emphasize operational due diligence as margins decline and reliance on revenue growth becomes increasingly unreliable.
- Collaborative efforts between operational and commercial due diligence teams can enhance analyses and align growth initiatives, preventing misleading management recommendations.
Deep dives
The Importance of Operational Due Diligence
Operational due diligence is becoming essential for private equity firms as the landscape of returns shifts. With previous reliance on multiple expansion and revenue growth becoming less viable, focusing on operational efficiencies is crucial for future profitability. Firms must understand that EBITDA margins have not only stagnated but have often declined, indicating a need for rigorous operational analysis. This shift emphasizes the necessity for private equity teams to evaluate margin improvement thoroughly to sustain returns over the next decade.
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