Insights on private company growth
According to the KPMG LLP (KPMG) Private Markets Group’s recent survey of 226 U.S.-based private company executives, which gauges the current perspectives and three-year plans of one of the most impactful sectors of the U.S. business landscape, strategic growth is a top priority for today’s private company CEO.
The findings reveal that 58 percent of private company CEOs are more confident about their growth prospects over the next three years, and 72 percent expect their headcounts will increase.
Yet despite their general bullishness, 56 percent of private company CEOs characterize their overall growth strategy as “conservative.”
According to Brian Hughes, national leader of KPMG’s Private Markets Group, that is because while economic resilience, at home and abroad, is looking more and more likely each day, private companies are still operating in an era of uncertainty, characterized by regulatory pressures, changing customer dynamics and demographics, technological complexity and unrelenting globalization.
“Private companies tend to be more optimistic and more flexible than public companies, as they are not constrained by quarterly earnings and can operate with greater independence and a higher risk appetite,” says Hughes.
“Still, they have the external world to be concerned about,” he adds. “Overlay budget constraints with the slow-moving recovery in the United States, uncertainty in foreign markets including Europe and Asia, and capital gridlock in Washington including ambiguity about business tax reform, and it makes sense that private companies are highly confident but also guarded when it comes to growth.”
In the shadow of these challenges, the survey results show that private company CEOs are smartly taking the time to patiently refine the strategies that will drive years of growth while actively pursuing innovation and expansion opportunities at the same time.
Reacting to the growing strength of the global economy, but rightfully still concerned over the uncertainty that characterizes today’s global business environment, many are embracing a long-term outlook on growth. Our survey results show that operational transformation initiatives like reducing cost structure and operational complexity are high on the priority list of private company CEOs, even as they are poised to pursue growth strategies like innovating new products and services, buying and selling companies, and pursuing new markets abroad.
By balancing organic and inorganic growth strategies with operational transformation initiatives, private companies are positioned to drive efficiencies and reduce costs at the same time as they work to increase their size and accelerate their profits.
For example, organizations that move back-office functions like finance and IT to the cloud can help private companies reduce their cost structure and become more efficient, enabling them to better support the revenue side of the business.
Because transformation projects are typically complex and touch so many areas of the business, it is important that organizations take a strategic and disciplined approach. In preparation for a transformation initiative, private CEOs should ask themselves some simple questions:
For many private companies, the time is ripe to seize growth opportunities. As business leaders plan for the future they should consider looking at growth through a number of lenses.
Geographic expansion, especially in untapped emerging markets, may offer ideal opportunities for immediate penetration. New product development will be critical as new entrants in the market disrupt companies and industries with new business models.
Public markets are also growing more robust alongside the overall recovery of the stock market, making it an ideal time for well positioned private companies to consider going public. Driven by Alibaba Group’s massive $25 billion offering, the U.S. IPO market has seen $92.5 billion in total volume in 2014, the highest since the technology bubble of 2000, according to Dealogic. Citigroup analysts project an IPO market of similar size in 2015.1
Our survey results reflect the projected impact of these growth lenses on private companies in the next three years. We found that 69 percent of private company CEOs are committed to innovating more relevant products and services, and 30 percent are planning more investment in new overseas markets. We are also likely to see an uptick in merger and acquisition activity among private companies in the next three years.
These growth strategies have the potential to create a bright future for private companies if leaders embrace best practices in global expansion, innovation and transactions.
For example, private companies that are entering new domestic or international markets should do so only after they have considered all of the potential financial, regulatory, operational, cultural and geopolitical challenges that could arise— including the tax implications.
Additionally, private companies should use their innovation budgets wisely and find inexpensive ways to generate new ideas, such as collaborating with third parties and connecting with customers through social media.
Last, private companies that pursue inorganic growth through partnerships, mergers or sale should make sure they stay true to their vision and strategy, and not let potential
Enterprises that plan strategically for growth from the beginning will likely be better positioned to operate effectively—and profitably—during and after growth.
For example, we see that many private companies remain focused on efficiency, even while in growth mode. That is because growth and efficiency are not contradictory. Investing in infrastructure and back office and support functions should help private companies not only streamline operations, but also position the operating environment to support the business as it grows.
Before implementing even the earliest phase of a growth agenda, private company leaders should also focus on:
Future issues of Privately Speaking will explore ideas and approaches that may help private companies enhance their innovation efforts, adapt to change through operational transformation, gain value from transactions, overcome common challenges of going global, and otherwise seize growth opportunities.
Entrepreneurs and business leaders of fast growing, private enterprises are driven by passion. Translating that passion into marketplace success can be a challenge. The Privately Speaking series examines the strategic choices that private company business leaders are faced with on their journey towards achieving profitable and sustainable growth. Join us as we explore these topics and share our perspectives on how to best position your company for long term success. Download the latest piece in the series here.
KPMG’s Private Markets Group (PMG) has the knowledge and insight to help private companies address complex marketplace challenges and drive growth in today’s global economy. Focused on serving privately-held entities, including private equity- and venture capital-backed companies, our global network of professionals offers integrated Audit, Tax and Advisory services tailored to meet the needs of private enterprises. By providing industry perspectives and proactive guidance, our PMG teams help private companies achieve their strategic objectives throughout each stage of the business life cycle. Learn more at KPMG's Private Markets Group.