Profitability Improvement

Situation

A learning private equity firm owning a €2bn scrap trading and metal recycling company, was concerned that the latter was having difficulty in estimating and delivering sustainable profits. The company was susceptible to external shocks that affected profitability – caused by the volatility of prices, FX markets and other factors. Aleron was commissioned to develop a statistical model to help the company make better decisions about their strategic priorities and hedging strategy – reducing EBITDA volatility and improving the valuation of the company on exit.

Our approach

We built a modelling strategy that enabled us to test the probability of a vast amount of market scenarios using Monte Carlo simulations. For each scenario, we modelled the impact on the company’s EBITDA using MatLab. We then developed a strategy for simulating and stress-testing the volume of different scenarios. Using simulations, we designed and optimised a hedging strategy that guaranteed profitability in all scenarios.

Our impact

As a result of the new strategy, the portfolio company reduced its EBITDA volatility by 50% and senior management was assured that profitability was guaranteed despite significant market movements. Over time, the investors will be able to increase the company’s EBITDA multiple by 1-2x to ensure profits at exit.