Creating Value in Portfolios Leveraging Four Key Levers

The holding period for private equity owned businesses is at an all-time high, rising financing costs and economic uncertainty limit exit opportunities causing financial sponsors to extend holding periods.  Research from business magazine Chief Executive suggests that the median holding period for portfolio companies is now 5.6 years[i], while S&P Global puts the figure even higher at 5.89 years[ii]– the longest holding period in a decade

Aon’s latest M&A Transactions whitepaper - How Financial Sponsors Are Moving the Value Creation Needle [iii] – points out that there is no rush to exit given businesses are still in recovery from the Covid pandemic and are now battling economic headwinds relating to factors such as high interest rates, supply chain challenges, as well as labour and skills shortages. Lower than expected valuations in depressed equity markets means financial sponsors are more likely to hold on to their portfolio companies for longer in the expectation that the markets and financial returns will improve.

In turn, this throws up a new challenge: How to create additional value across the portfolio over a longer holding period. It requires a well-rounded strategy to extract and create value, derisk and make assets more attractive come exit while managing exposed earnings volatility.

Leveraging Four Key Levers to Extract Portfolio Value

“By strategically pulling key levers during the holding phase, sponsors can optimise returns, mitigate risks and improve asset attractiveness at exit. The four primary levers—human capital, ESG, intellectual property and cyber protection—are instrumental in value creation, governance and data-driven decision-making,” says Zamani Ngidi, Business Unit Manager for M&A and Cyber Solutions at Aon South Africa.

1. Human Capital: Strengthening Workforce Value

Recruitment and retention remain major challenges for financial sponsors. A company’s ability to position itself as an ‘employer of choice’—offering competitive benefits, career progression, skills development and workplace culture—directly impacts operational stability and long-term performance.

Key workforce strategies include:

• Workforce benchmarking to assess skill alignment with business needs.
• Employee engagement initiatives to reduce attrition and improve productivity.
• Strategic compensation models, including medical coverage and executive incentives.

“By mapping critical skills to business needs and structuring total rewards effectively, financial sponsors can enhance employee retention and build resilient, high-performing organisations,” Zamani explains.

2. ESG Considerations: Enhancing Sustainability and Compliance

Investors and employees alike scrutinise companies on environmental, social and governance (ESG) factors. Financial sponsors must ensure that portfolio companies prioritise sustainability, regulatory compliance and corporate responsibility to drive both value creation and risk mitigation.

Key ESG considerations include:

• Climate resilience strategies to manage risks associated with extreme weather events.
• Transparent decarbonisation efforts to align with investor expectations and regulatory mandates.
• Diversity, equity and inclusion (DE&I) initiatives to improve workplace culture and attract top talent.
• Ethical supply chain practices, employee health and safety and human rights policies.

“By integrating ESG into their portfolio strategies, financial sponsors can achieve meaningful progress, enhance brand reputation and command higher valuations at exit,” says Zamani.

3. Intellectual Property: Protecting and Monetising Assets

“IP management is an increasingly critical aspect of portfolio company valuation. Protecting against infringement, ensuring clear title ownership and optimising IP-related contracts can significantly enhance asset value and provide additional financing opportunities,” Zamani explains.

Key IP strategies include:

• Strengthening contractual protections to safeguard legal ownership and enhance negotiating leverage.
• Utilising insurance-backed IP lending to optimise financing structures.
• Conducting IP valuations to assess their impact on enterprise value and potential refinancing options.

By treating IP as both a legal asset and a commercial driver, financial sponsors can unlock hidden value and improve financial flexibility.

4. Cyber Protection: Safeguarding Against Digital Threats

“Cyber risk is a growing concern for financial sponsors, particularly as portfolio companies face increasing regulatory scrutiny and rising cyber threats. Effective cyber risk management not only protects against financial losses but also enhances governance and operational resilience,” says Zamani.

Key cyber protection strategies include:

• Open-source intelligence assessments to identify technical vulnerabilities.
• Financial quantification models to simulate potential cyber-attack impacts.
• Risk management frameworks that balance cybersecurity investments with risk transfer mechanisms.

By proactively addressing cyber risks, financial sponsors ensure that portfolio companies maintain strong security postures and remain attractive investment opportunities.

Value Creation, Governance and Data: The Pillars of Success

These four levers directly impact three interconnected areas that drive portfolio success:

• Value creation: Achieved through cash savings, working capital improvements and cost optimisation.
• Governance: Strengthened by structured risk management, cybersecurity frameworks and ESG integration.
• Data-driven decision-making: Enhanced through real-time access to risk, workforce and financial data, enabling better transparency and strategic planning.

By leveraging data insights, financial sponsors can identify opportunities to aggregate spending, optimise insurance procurement and implement cost-effective risk management solutions.

A Competitive Differentiator in a Challenging Market

“As deal volume declines and investor expectations rise, financial sponsors must go beyond traditional financial performance metrics. Human capital, ESG, IP and cyber protection have become essential components of portfolio strategy. These factors not only enhance exit valuations but also serve as key differentiators in an increasingly competitive fundraising environment,” says Zamani.

“The ability to strategically leverage these four levers positions financial sponsors for long-term success—driving value creation, enhancing governance and ensuring data transparency across their portfolio companies,” Zamani concludes.

References:

[i] https://chiefexecutive.net/as-pe-company-exits-slow-holding-periods-now-longest-ever/

[ii] https://www.spglobal.com/marketintelligence/en/news-insights/latest-news-headlines/european-private-equity-holding-periods-extend-as-exit-activity-slumps-77643308

[iii] https://www.aon.com/en/insights/reports/how-financial-sponsors-are-moving-the-value-creation-needle