Clifford Chance

Evolving the PE Playbook through operational transformation

Market pressures and new technologies are changing how private equity firms strengthen their portfolio companies. Putting aside the prospect of lower interest rates, PE investors are facing greater competition to boost profitability. The "standard playbook" of purchasing underutilized assets, leveraging debt, and deploying savvy financial strategies to generate superior returns has grown stale. PE value creation attributable to financial engineering has fallen from 51% in the 1980s to 25% in 2010. Within this changing landscape emerges a new opportunity: growth through operational engineering. In 2023, buyout funds held portfolio companies for, on average, 7.1 years; the longest period since 2000. Longer holding periods are, unsurprisingly, accompanied by a seismic uptick in technological and operational investments - PE firms invested $675 billion on new technologies to run organizations more efficiently in 2022, up from $100 billion in 2012. These notable market shifts incentivize investors to pursue more aggressive, longer-term strategies to escalate returns, such as leveraging third party providers to effectuate operational transformations. Operational transformation can range from enhancing back-office efficiencies, to incorporating complex AI models into core business practices, and to overhauling critical IT infrastructure for day-to-day operations. Regardless of choice, bolstering operational efficiencies with digital technologies is strongly correlated with an increase in portfolio firm sales, employee growth, and innovation.

Clifford Chance - with an integrated global legal team that spans the US, UK, continental Europe, the Middle East, and Asia - is uniquely situated to advise on the acquisition and implementation of third-party operational solutions and digital technologies to generate value for PE firms and portfolio companies alike. Clifford Chance's global Complex Commercial Transactions & Outsourcing team structures and negotiates third-party transactions that power our clients' mission-critical operations. #CCTO