The Most Underutilized Value Creation Lever for Private Equity Firms

The last decade was strong for Private Equity, with deal multiples shooting up 50 to 60 percent between the 2010s and the 2020s.  But things have changed, and competition for the best deals is fierce.  Inflation is at a record high, interest rates have made a comeback, and a recession may be coming soon.

Per the recent PwC report, “Private Equity: US Deals 2023 Mid-year Outlook”:

  1. The start of 2023 has seen a continuation of 2022’s significant slowdown in PE-related deal activity as buyers and sellers navigate ongoing macroeconomic turbulence, challenging debt markets, and global geopolitical uncertainty.
  2. PE firms sit atop unprecedented dry powder reserves (about $1.1 trillion in the US), in part reflecting reduced outflows.
  3. Changing macro conditions has significantly changed how PE firms evaluate their portfolio companies’ growth strategies.
  4. There is a heightened emphasis on integrating value creation into the diligence process.

To win in this challenging environment, private equity firms must adapt and evolve to include non-traditional value creation strategies.  Enter health benefit plans…

Health benefits are a commonly undermanaged expense within portfolio companies.  While they are often included in the deal evaluation and due diligence process, many PE firms and their advisors are simply “checking the box”, looking for obvious compliance and other risks, and getting a general feel for the liability they are acquiring.  In other words, they are playing defense, not offense.

However unmanaged healthcare costs represent a massive opportunity for value creation.  Let’s look at an example:

  • Take a PE firm with 10 portfolio companies and a total of 1,000 employees.
  • Health benefits cost employers roughly $10,000 per employee per year ($10,000,000 per 1,000 employees).
  • Annual trend increases of 6%-10% represent a $1,200,000 to $2,000,000 annual EBITDA hit.
  • However, by utilizing commonly deployed financial levers, costs can be mitigated by 10%-25%, resulting in $2,000,000 to $5,000,000 of value creation.
    • AI powered risk evaluation analytics,
    • Alternate healthcare funding strategies, such as captives,
    • Pharmacy cost containment solutions, and
    • Direct contracts for common procedures like imaging, surgeries, etc.
  • At a 20% margin, these companies would have to generate $10,000,000 to $25,000,000 of additional sales to create similar value.

The ability to recognize, evaluate, and execute these strategies creates tremendous value for portfolio companies and a competitive advantage for astute private equity firms looking to “play offense”.   If you are a private equity firm focused on the mid-market space and interested in evaluating the opportunity that exists within your portfolio companies, click here to learn more.


Michael Godwin

  • Self-Funding
  • Data Analytics
  • Ancillary Benefits & Absence Management
  • Estate & Business Planning
  • Executive Benefits

Advisor - Michael Godwin

Next Post Previous Post

Comments are closed.