3 minute read 15 Apr 2019
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Why portfolio reshaping has moved to the top of the agenda

By

Steve Krouskos

EY Global Vice Chair – Transaction Advisory Services

Driving growth and investment priorities for global EY TAS. University of Florida alumnus. Son, husband and father of four.

3 minute read 15 Apr 2019

The speed of disruption is forcing executives to more frequently examine their portfolio for risks and opportunities.

The shift to more frequent portfolio reviews continues to accelerate. For the first time in the EY Global Capital Confidence Barometer history, more companies are performing portfolio reviews quarterly than annually. 

While more frequent portfolio reviews have been seen as a “Western world” phenomenon, companies in Asia are also starting to embrace this theme. They are now far more likely to be reviewing their portfolios quarterly than annually (57% vs 9%). 

Active portfolio reshaping should enable executives to identify areas of potential underperformance or emerging growth opportunities ahead of their competitors.

Frequent portfolio reviews drive capital recycling to invest in growth areas

Targeted investments and recalibrating capital allocation is the new normal for executives. Executives report that their most recent portfolio review resulted in them differentially investing capital in a particular business unit or reshaping capital allocation across the whole portfolio.

They are also using such reviews to identify underperforming assets or an asset at risk of disruption to divest.

Divestitures should be an integral part of an active portfolio strategy. Frequent and strategic divestitures reduce the complacency that can build up over time in a complex organizational structure. Divestments are also a relatively inexpensive form of financing new growth opportunities.

Executives should be constantly prepared to make the decision to divest when the facts support that decision. This “always-on” strategic mindset reinforces the agility and flexibility that will be key to driving above-GDP growth in a low-growth global economy.

Allocating capital in a connected way enhances value

Executives cite investing in existing operations and transformational investment in digital and technology as their top capital allocation priorities. The focus on their own ecosystem through a variety of lenses (digital, geopolitical, economic and demographic) should enable executives to pivot quickly as markets evolve.

Taken together with the intention to restructure their existing businesses through a combination of acquisitions and divestments, executives are signaling a period of active portfolio reshaping to accelerate growth.

Executives have a very balanced outlook on decisions to improve capital structure, make acquisitions and return capital to shareholders.

Businesses should embrace a robust and structured approach to capital allocation that will better position them to capture value in the current disruption-led environment. They need to develop the flexibility to quickly assess new and emerging investment opportunities.

Activist pressure is fueling more regular assessments and reshaping of portfolios

Many executives of public companies are experiencing pressure from activist investors. This is not new. The prime motive of the activist is to achieve an increased return through improved shareholder value. However, what may be surprising is that our respondents see activists agitating for M&A more so than divestments. This isn’t pressure to do deals for deals’ sake but for value creation.

Activists will generally do a tremendous amount of homework before investing and setting out their strategic view. Executives should engage activists to assess the merits of their business case. Activists are also likely to be media savvy, so companies need to articulate an equally compelling and clear public narrative.

  • The Global Capital Confidence Barometer gauges corporate confidence in the economic outlook, and identifies boardroom trends and practices in the way companies manage their Capital Agendas — EY framework for strategically managing capital. It is a regular survey of senior executives from large companies around the world, conducted by Thought Leadership Consulting, a Euromoney Institutional Investor company. Our panel comprises select global EY clients and contacts and regular Thought Leadership Consulting contributors.

    • In February and March, we surveyed a panel of more than 2,900 executives in 47 countries; 68% were CEOs, CFOs and other C-level executives.
    • Respondents represented 14 sectors, including financial services, consumer products and retail, technology, life sciences, automotive and transportation, oil and gas, power and utilities, mining and metals, advanced manufacturing, and real estate, hospitality and construction.
    • Surveyed companies’ annual global revenues were as follows: less than US$500m (25%); US$500m–US$999.9m (24%); US$1b–US$2.9b (21%); US$3b–US$4.9b (9%); and greater than US$5b (21%).
    • Global company ownership was as follows: publicly listed (54%), privately owned (40%), family owned (4%) and government or state owned (2%).

Summary

The EY Global Capital Confidence Barometer (pdf) gauges corporate confidence in the economic outlook and identifies boardroom trends and practices in the way companies manage their Capital Agendas.

About this article

By

Steve Krouskos

EY Global Vice Chair – Transaction Advisory Services

Driving growth and investment priorities for global EY TAS. University of Florida alumnus. Son, husband and father of four.