How private equity firms are reshaping value creation through pricing strategies

"In the past", says Mark Sheikh, M&A Partner at EY-Parthenon Belgium, "you could almost make money while sleeping." For years, buying low and selling high, in combination with the repayment of debt, was private equity's operating rhythm, underpinned by cheap debt markets and bullish exits. But financial engineering alone doesn’t cut it anymore.

The market has seen a fundamental shift in how private equity creates value. With economic headwinds, geopolitical uncertainty, and higher interest rates all squeezing traditional private equity (PE) approaches, firms are rolling up their sleeves and getting more hands-on, especially when it comes to portfolio management activities, such as commercial strategy and pricing.

As Sheikh puts it: "We're in a rough market right now. When major economies like Germany struggle, it affects everyone. The uncertainty originating from US politics certainly doesn’t help either. And to top it off, you have higher interest rates. All these things together create a slower deal market."

This has created a real mismatch between buyers and sellers. "Family business owners are sitting tight", Sheikh notes, quoting statements like: 'not the right time to sell—we're having a tough year' or 'let's wait until things settle down’.

"The third way to make money is now crucial"
Meanwhile, PE firms face completely different pressures. "Private equity has to buy", Sheikh explains. "They've raised money from investors with a promise to put that capital to work. They can't just sit on cash."

So what happens? When a decent company does decide to sell, it's like throwing chum in shark-infested waters. "All these PE firms jump on it because there are so few good deals out there", says Sheikh. "They all need it, so they pay quite a bit for it."

And that behavior generates some challenges further down the line. PE firms typically make money in three ways: "You either sell for a higher multiple than you bought. You use leverage and pay down debt. Or you improve your EBITDA, your profitability."

"PE firms typically make money in three ways: you either sell for a higher multiple than you bought. You use leverage and pay down debt. Or you improve your EBITDA, your profitability."

The challenge? Two of these three tools aren't working so well anymore. "Debt is tougher to come by, and it costs more," Mark Sheikh points out. "And selling at a higher price? That's really hard when you've already paid top dollar to get in."

This leaves just one main option: rolling up your sleeves and actually improving the business. "The third way is now crucial", Sheikh explains. "Private equity firms are becoming much more active in working with their portfolio companies. The days of passive ownership are over."

As PE firms are getting more hands-on, they're discovering that pricing strategy offers serious bang for their buck. Maarten Moreels, who specializes in Commercial Strategy & Pricing at EY-Parthenon Belgium, points out: "There are still some levers across Europe and globally that haven't been fully tapped, and pricing is definitely one of them."

It's not that PE firms don't know pricing matters. "Pricing isn't new to PE funds, far from it", Moreels clarifies. The real issue is know-how. "Many PE funds simply don't have the right pricing capabilities in-house. And their portfolio companies definitely don't – especially the mid-sized companies we often work with."

What's changing is how both portfolio companies and their PE owners think about pricing. "This has pushed PE funds to either build up their own pricing capabilities or make sure those capabilities exist in companies they're looking to buy," says Maarten. "It's becoming an increasingly important part of the due diligence checklist."

Beyond price increases
For M&A professionals advising PE clients, Moreels has some practical advice: "Don't be afraid of pricing, but don't oversimplify it either."

He points out a common misconception M&A specialists or PE-funds make, explaining that when they think about pricing, they think adjusting the list or catalogue prices.' That's the obvious part, but it's also the scariest, because it's the most visible to customers and can also lead to negative effects when done in a non-targeted way."

Instead, Moreels suggests starting with “price excellence or optimization work”, fine-tuning how you implement your existing pricing approach. "Maybe your list prices are fine, but you give away too many discounts. Or you throw in free services. Or you have great contract terms but never enforce them."

These smaller fixes can deliver quick wins, making them perfect for those first 100 days after an acquisition. The bigger transformations, like moving to value-based pricing, requires a complete overhaul of your commercial organisation. "This isn’t something you tackle in your first month”, he warns.

Valuing ‘pricing Power’ in deal assessment
PE firms are even changing how they evaluate acquisition targets, with ‘pricing power’ becoming a key criterion. This concept covers several elements: recurring revenue, cost pass-through ability, and overall pricing flexibility. "Pass-through is a big one", Moreels explains. "Can the company push unexpected cost increases onto their customers? Or do they have to absorb them and take the margin hit?"

"Can the company push unexpected cost increases onto their customers? Or do they have to absorb them and take the margin hit?"

How companies handle inflation is a good example. "About two years ago, we had inflation around 12 percent in Belgium, which is huge". Moreels recalls. "Companies would push the inflation onto their customers, resulting in blanket increases everywhere."

Moreels says these generic pricing strategies don't fly anymore, however. Instead, what's working is what he calls ‘precision pricing’; a much more targeted approach. "You need to identify which customer segments can handle a 15 percent increase, and which ones might need just 5 percent," he explains. "The goal is to hit your overall target without treating everyone the same way." And that’s not all that different in today’s context of potential cost increases because of applied tariffs.

Commercial sense in due diligence
The due diligence process itself is evolving too. Previously, financial due diligence (FDD) was the star of the show, with commercial due diligence (CDD) in a supporting role. "In the past", Moreels remembers, "you'd do your FDD and tax due diligence, and you'd throw in a CDD just to confirm and rule out red flags. Even if the CDD raised some yellow flags, you might still go ahead with the deal."

FDD is still essential, but commercial due diligence now carries real weight. "If you have great financials but a lousy commercial outlook, deals are falling apart”, Moreels says.

This changes what PE firms need from their advisors: "An M&A specialist can't just be a financial specialist anymore. They need commercial sense too, or at least team up with a partner who brings that to the table. And that level of integration is exactly what we have been doing within our own internal organisation.”

New exit strategies
“As PE firms are holding onto companies longer these days, this trend has even created new exit approaches. We're seeing more continuation funds now", Mark Sheikh explains. "Basically, PE firms move a company into a new fund structure. It creates some liquidity by technically 'selling' the asset, but the same investment team keeps working on it."

These funds "want to benefit from all the EBITDA improvements they're still implementing", adds Maarten Moreels. "That's how they make their money - by actually finishing the job they started."

Despite all these challenges, both experts see real opportunity. "The current market is actually forcing PE firms to build muscles they should have developed anyway", Moreels says. "They're getting better at improving businesses from the inside out. These skills will be valuable even when markets improve.”

Mark Sheikh remains upbeat about future deal flow too: "There's a wave of deals coming at some point; this is just a delay. PE firms can only hold companies for so long before they need to sell and return capital to investors. I'd say stay optimistic: it's just a matter of time."

For PE firms and their advisors, the message is clear: You can't buy returns anymore. But if you master operational improvements like pricing, you'll be ready for whatever the market throws at you next.