-- In an increasingly complex world, private equity can no longer afford to be a mere provider of capital. By relying on an accounting-based approach that observes more than it acts, the industry is failing its primary mission: to transform businesses.
Pre-Investment Valuation: The Limits of a Purely Financial Approach
Every PE professional knows the real money is made before the deal is even signed. Yet, current valuation methods remain trapped in an abstract, accounting-driven logic that is far removed from operational reality.
Valuation by multiples perfectly illustrates this gap.
First, it fails to distinguish between a stagnant company and one experiencing high growth.
Second, it often reflects market sentiment more than the internal dynamics of an organization. The post-2021 tech sector proved this: median SaaS valuation multiples collapsed from over 17x ARR to under 8x ARR in just over a year, even as their operational performance remained unchanged.
Finally, this P&L-focused approach is blind to the balance sheet. It fails to assign value to tangible assets (like factories or a negative working capital requirement) or to secure future assets (such as order backlogs and patents), which constitute the true wealth of a company.
The five-year business plan, another pillar of the traditional DCF model, is being severely tested by a succession of crises, from the pandemic to inflation and energy shocks. Claiming to forecast five years ahead has become an exercise in fiction.
Too often, these business plans are built on standardized assumptions, such as a generic 5% annual growth, without any real-world validation.
For instance, a growth plan based on e-commerce can look compelling in a spreadsheet, but how many funds go on-site to assess the company's actual logistical capacity, its last-mile delivery strategy, or the robustness of its customer service? The answer is remarkably few.
Portfolio Monitoring: Reporting Instead of Steering
Once the deal is closed, the traditional model continues to show its limitations.
First, monitoring relies on high-level P&L statements that are typically available on a monthly or quarterly basis. Those financial indicators are too slow and too broad to guide real-time decisions. Knowing that “payroll costs went up by 2% for the second quarter” offers no actionable insight. What a fund needs to understand is that “the absenteeism rate on the night shift rose from 4% to 9%”. Only this level of granularity allows for effective problem-solving.
Second, the governance rhythm is fundamentally broken. The entire structure revolves around the slow, predictable cycle of quarterly board meetings, a pace dangerously disconnected from the speed of modern business. This structural flaw means the fund is always reacting too late. For example, during the 2022 wheat price surge, a food processor’s margins deteriorated daily. Yet, because the board met only quarterly, shareholders became aware of the issue nearly two months after it began , long after significant losses had occurred.
Finally, this reactive posture paralyzes true value creation. If a fund's governance is too slow to even protect a company from obvious risks, it stands no chance of proactively identifying new opportunities. This is why value creation often stagnates, remaining confined to the initial "use of funds", a static roadmap defined on day one. The fund controls; it does not guide.
A Change in Stance: Toward an Operational Private Equity
To address these challenges, a new approach is essential. The goal is no longer to supervise, but to co-construct performance.
Before an investment, due diligence must become fieldwork again. Deep immersion in the business, through team interviews, factory visits known as Gemba walks, and accompanying the sales team on client visits, must come before any financial modeling. It is from these direct observations that the true potential for value creation can be quantified, revealing opportunities for productivity gains, scrap reduction, or pricing optimization. While the multiples method can serve as a foundation, it must be weighted by this operational assessment.
The multiple should no longer be a static figure but a dynamic score, incorporating the potential for value creation, the quality of management, revenue recurrence, the strength of the order book, and the ownership of strategic assets. In other words, we must shift from valuing a company's accounting past to valuing its real capacity to execute and endure.
After the investment, monitoring must become a real-time nervous system.
This requires a "single source of truth": reliable data automatically extracted from ERP, CRM, and HRIS systems, feeding into dynamic dashboards. Every operational KPI must be linked to a clear financial consequence: "one hour of machine downtime = $1,000 in lost margin."
From there, a management cockpit and a 13-week cash flow forecast, updated weekly, can be deployed to provide a rolling and responsive view of liquidity.
These indicators must then fuel weekly performance rituals for sales, procurement, and operations, driving a shared and continuous review of variances and corrective actions.
A New Chapter for Value Creation
Let's be clear: the era of value creation through financial leverage and multiple expansion is over.
In a world of cyclical growth and frequent shocks, performance can no longer be an external factor; it must be an internal discipline. It will be secured through relentless optimization, operational innovation, and a deep-seated culture of continuous improvement. The future of private equity will be defined not by the assets it can buy, but by the businesses it can build.
Media Contact:
Omar Hachicha
Performance Consultant
Email : [email protected]
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Release ID: 89172078
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