Five minutes with Anna Dayn

LPs are increasingly digging deep to figure out how firms they back or are considering backing manage operational improvements, says Anna Dayn, head of LP consultant Dayn Advisors.

With more PE firms claiming to be operational improvers, how can LPs tell who is actually doing what they’re saying? 

Although value creation through operational improvement is not a novel concept in private equity markets, its significance has increased over time, which is why more private equity firms are emphasising this skillset. 

LPs employ various tools in the due diligence process to screen for operational prowess. One way is to dissect how value creation was accomplished by studying the financials of exited portfolio companies. By analysing enterprise value at the time of purchase with the value realised upon exit, clear patterns can emerge showing how much value was created as a result of deleveraging, multiple expansion or Sales and EBITDA improvements. 

Further, LPs pay attention to operational improvement practices in day-to-day dealmaking done by the GP, from the expertise available on-hand before committing to deals to the execution of value creation plans throughout the ownership process. 

What kind of proof do you expect from fundraising GPs who claim to be operational experts?

Anna Dayn

We aim to have transparency into GPs’ track records and access to portfolio company executives, past and present. It is critical to find evidence that the GP takes an active role in the portfolio company, drives transformative projects side by side with management and has meaningful influence on portfolio companies. 

Sometimes you uncover a hands-off style with limited influence beyond providing capital, which suggests little operational skill. All things being equal, we prefer private equity firms that can show dependable and consistent capability in improving the operations of their portfolio companies, as these abilities maximise value at exit for everyone.

What kind of model do you think works best for private equity – CEOs on retainer, or some other way?

There are many ways that PE firms can organise operational capacity – one way is to have operating partners (former consultants, CEOs/managers or industry experts) in-house, another way is to have a network of experts on retainer, and a third way is a model where the industry experts are not part of the firm but can easily be brought in for a particular transaction. 

We see more firms establishing in-house operations teams, which are also sometimes called value creation

All things being equal, we prefer private equity firms that can show dependable and consistent capability in improving the operations of their portfolio companies, as these abilities maximise value at exit for everyone.

teams, portfolio support groups, portfolio teams or simply operations teams. The particular distinction is that these professionals are employed directly by the firm, so they are not external consultants or advisors. While there are many obvious benefits of having such a team on-hand throughout the due diligence and ownership process, this internal capacity can also be expensive for the GP, especially since these experts are usually seasoned senior executives.  

Another reason why having an operational team in-house may not be the best use of resources is around the need to match specific sub-industry expertise to the particular deal. For example there may only be a handful of external executives who may know a particular target company best; it is nearly impossible for in-house operators to be experts in all potential subsectors. Sometimes outside experts can be the best bet with companies with specific geographies or industry dynamics. 

Some private equity firms can be very involved operationally with their portfolio companies without having an in-house operations group. These firms may be sector specialists with deal teams which include a mix of operating and dealmaking experience, or generalist firms who are able to create and maintain strong external CEO-affiliated networks. Finally, practically all firms, even those with the largest in-house operations teams, still augment their internal resources with external professionals such as management consultants and industry experts.

There is no optimal model for organising operational expertise, and which approach works best really depends on the culture and strategy of the PE firm. Whatever the model, LPs appreciate seeing GPs increasingly involving and motivating more operationally focused professionals, whether they are a part of the GP, external, or some combination of both.