The key to growing your company in the next cycle? Profit margins…

There are two major paths to growing the valuation of a company. The big splashy way is to increase top-line revenue. During bull markets — like the one experienced over the last decade — that is the path that most investors focus on.

The other way — which gets far less attention — is to improve profit margins. During challenging markets with rising interest rates, like the one we are currently experiencing, successful multiple expansion will be driven more by profit margin improvements.

As detailed in an article today from PitchBook Data, “Private equity growth investors are becoming more selective amid a tough economic environment as they focus on increasing profit margins over multiple expansion. Higher rates impact portfolio valuations amid declining investor sentiment, making exits even harder.”

At E78 Partners, we firmly believe that most portfolio companies have a tremendous amount of internal value just waiting to be unlocked. In most cases, the path to uncovering that value runs through the office of the CFO and CIO. Gaining mastery over the data and metrics is key.

The portfolio sponsors that ‘win’ this next cycle will be the ones that successfully partner with their portco management to unleash that value. Large growth and buyout PE funds have skilled Operating Partners that dive deep into the portco to help make this happen.