This article was written by Middle Market Growth Executive, the official publication of the Association for Corporate Growth, and includes a print magazine, website, weekly e-newsletter and daily newsfeed.

Stout Managing Director Rudi Moreno recently joined the Middle Market Growth Conversations podcast to discuss how the trend toward longer hold times requires a different approach to value creation. Below is an edited and condensed version of the interview.

Middle Market Growth: What’s prompting private equity sponsors to hold onto their assets longer, and is this a trend you expect to continue for the foreseeable future?

Rudi Moreno: First and foremost, we’re in a higher interest rate environment. Higher interest rates just make it harder to get deals done. Second is the uncertainty around the direction of the economy. There were talks about a potential recession due to higher interest rates, but we were all hopeful that there would be a soft landing. I think the combination of those two things really became a drag in the dealmaking environment over the last 12 to 18 months. There is still record amounts of dry powder, so at some point this is going to have to turn. We’re all hoping that by later this year, we’ll begin to see a turnaround in terms of the deal environment, but it might flow later into 2025.

MMG: In instances where a portfolio company is held for a longer period, what projects and initiatives are being prioritized, and do those look different from what you might see during a standard hold period?

RM: One thing we’re seeing a lot is bolt-on acquisitions. We’re still seeing a large number of deals; they just tend to be smaller in terms of size. Companies are finding that, by doing bolt-on acquisitions, they’re able to continue to realize growth through those acquisitions. Not only that, but they’re getting some efficiencies by rapidly integrating them.

On the operations side, we’re seeing an increased drive toward adopting technology and making investments that are longer term in nature. You hear a lot about artificial intelligence, and that’s the cool and sexy thing, but there’s even more basic automation—automating manual processes and finding ways to squeeze out inefficiencies.

MMG: How does pressure from LPs to sell fit into this equation? Are they pushing sponsors to offload stakes or influencing their decisions in other ways?

RM: I think LPs will always try to get the cash in sooner rather than later, so I think there will be that continued push to get distributions. But LPs are realistic. They understand that you don’t want to force an exit if the market isn’t ready. Taking into account the fact that you want to get the best exit possible, I think a lot of them are willing to be patient.

That said, I think you see pressure when sponsors try to raise new funds. If they’re not able to show a history of distributions, when they come back asking for additional funds, LPs might want to hold off and say, “First I need you to prove to me that you can actually successfully exit before I’m going to fund the next round.”

MMG: You’ve described value creation as mostly keeping value from leaving a company. To that end, what are some of the strategies that help prevent value deterioration

RM: As you look for efficiencies or to integrate a company into another business, you need to be careful that you’re not destroying the things that create value.

One example is a company that we worked with that had done an acquisition. They bought a company in an adjacent space, but their thesis going in was “We’re just going to integrate this and bring them into our processes and our systems,” without realizing that there were some unique things about the business that should have been preserved. And unfortunately, those things weren’t preserved, so the new owners weren’t getting the growth they expected and ultimately, they divested.

While it’s important to have a vision for where you want to go, I think it’s equally important to understand what value the business has to begin with and to make sure you’re not taking actions that would negatively impact the ability to retain those capabilities.

MMG: What are some of the operational efficiencies that firms can tap into as they look to boost value?

RM: It’s always hard to generalize because there are vast differences depending on the business. It’ll be very different for a manufacturing firm versus a services firm versus a technology-based company.

The one common denominator is probably general and administrative (G&A) costs. There are always ways to cut costs in G&A, but make sure to do it in ways that don’t ultimately affect the clients or other key stakeholders. As companies grow, G&A does not grow at the same pace as revenue, so one obvious area for operational efficiencies is to keep the G&A essentially either flat or growing at a much slower pace.

In the manufacturing space, there are obvious things around manufacturing distributions, consolidating sites, locations, etc. But one thing that people sometimes overlook is leveraging knowledge. If you’re doing a bolt-on, are there things about the way the target was doing business that we can leverage for the portfolio company? We have to think about these things not only in terms of assets and asset efficiency, but also leveraging knowledge across the business or leveraging best practices.

One last area that comes to mind is streamlining systems and processes. By finding ways to leverage technology, especially with these longer holding periods, it gives you a longer runway in terms of investing in technologies that you might not see payback on immediately. In fact, there might be some increase in costs, but that’ll bring you dividends a year or two down the road. A lot of people talk about AI, but there are some much simpler technologies that can get you some efficiencies in the shorter term without being quite as sexy.

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