In my previous posts I outlined why, in the wake of the covid-19 pandemic, PE funds are likely to be investing more in portfolio improvement efforts and I made the case for a more structured and systematic approach to these improvement efforts.  

Maximising the performance of their portfolios has been an increasingly complex undertaking for private equity funds. A more robust, systematic and transparent approach to delivering performance improvement initiatives can help to de-risk and accelerate these transformations in the wake of COVID-19. There are some clear ‘fundamentals’ emerging:

  1. Clear management team commitment to the value creation plan:  Management teams must dedicate time to delivering the initiatives.  Most, if not all, of these initiatives should be considered management’s “day job”, not a cause of distraction from running the business.  The Chief Transformation Officer (CTO) role can help to bring the required management team focus and is becoming more prevalent especially for larger portfolio companies with more complex value creation plans.
  2. The right improvement team: The size of the team and the mix of inhouse and external resources will differ based on various factors including the investment strategy, approach to value creation and fund size.  However, it appears that inhouse improvement teams are growing and taking more accountability, working in partnership with external advisers and operating partners. 
  3. Clear roles and responsibilities: PE firms hold management teams accountable for delivering the Value Creation Plan (VCP) but operating partners and inhouse teams can provide expertise, guidance, tools and manpower, as required.  With different players in the mix, it is crucial to be crystal clear on where the buck stops.  Importantly, the most effective operating partners do not impose directions but rather build trusting partnerships through value-added work.
  4. Aligned incentives: To reflect the shift towards value creation through performance improvement, operating professionals should be incentivised in the same way as investment professionals, with equity in specific portfolio companies and/or with carried interest in the fund when their impact cuts across the portfolio.
  5. Standardised tools: GPs have developed and fine-tuned tools like value creation plans and checklists for different stages of the deal cycle (e.g. onboarding, exit planning).

We also see new ‘best practices’ emerging among leading GPs. These help to institutionalise a more structured approach, reducing execution risk and further accelerating impact.

  1. Hands-on board members: Leading GPs are selecting board members who not only have deeply relevant industry expertise but can also directly oversee specific improvement initiatives. Board incentives are sometimes aligned to these specific initiatives, not just to overall financial performance.
  2. Standardised playbooks: These ensure that no one ever starts empty-handed, help portfolio management teams get out of the starting blocks quickly and enable greater standardisation in terms of approach and results. These are increasingly prevalent in common functional areas like finance, procurement and IT, and for different stages of the deal cycle like onboarding and buy-and-build integration. 
  3. Disciplined project management: Detailed action plans are developed, and individuals are held accountable.  Programme management office (PMO) structures provide visibility at the fund and portfolio company levels and an early warning system when value creation plans aren’t tracking satisfactorily.  Embedding a robust benefit tracking framework is another critical element of disciplined project management.
  4. Formalised external network: Enabling GPs to find experts more quickly in any situation, better scope projects and manage costs.  These networks also provide a pipeline for portfolio management talent.
  5. Hard commitment to the soft stuff: Especially in more complex transformations, leading GPs recognise that 20% of success is down to choosing the correct path, while 80% is attributable to building trust through diplomacy and tact, navigating organisational complexities and “re-wiring” to embed change.

The combination of these best practices can accelerate the desired operating cashflow improvements by 6-24 months due to faster portfolio company onboarding, a more urgent focus (from management especially) on the activities which drive equity value and the elimination of the “stop and start” which plagues many portfolio companies improvement efforts.            

Historically, GPs bombarded portfolio company CFOs with financial queries and analytical requests.  Now GPs are going several steps further by changing the board and assigning operational improvement teams to drive portfolio businesses forward.  The best practices discussed above certainly move in the direction of greater fund oversight of portfolio company management.  This must be balanced with funds backing the leadership teams they’ve invested in and not over-extending their reach into daily business operations. 

To be successful, it’s critical that each portfolio company’s transformation is treated as unique.  PE owners and management teams must be extremely selective, defining only a handful of the most potent improvement initiatives.  GPs’ operational teams must then bring additive expertise and resources to help expedite and de-risk the implementation and avoid bringing unwelcome bureaucracy.  In this way, trust between the parties will be maintained and value creation plans can be realised more rapidly and with less execution risk.