Forum: Marrying talents within a firm is ‘key challenge’

Combining the differing skillsets of operational and dealmaking executives is the key challenge facing private equity firms in today’s marketplace, argued panellists at the PEI Operating Partners’ Forum.

As private equity shifts its focus from ‘buying low, selling high’ to an approach based around value creation, marrying the talents of traditional dealmakers with operational specialists is one of the key challenges facing private equity firms.

Panellists at the PEI Operating Partners’ Forum in London on Wednesday spoke of the need to ensure remuneration structures were designed to reward both types of executives equally, acknowledging the important part both played in the value creation process.

Make sure that operations-focused team members work in perfect step with those on the deal side

Vincenzo Morelli, EVCA

It matters too to limited partners that a GP is united, argued McKinsey & Company director Conor Kehoe, who also noted the broadening of private equity’s skillset: “Private equity firms always brought something to companies – it’s just that it used to be only M&A capabilities. Now they bring far more than that. But it’s critical how well the various teams within a firm operate together. Getting the ‘one firm’ feeling is important, and getting compensation schemes and internal status right is very much part of that process.”

Miles Graham, head of active partnership at 3i Group, explained how his firm had erased the distinction between deal and operational teams. “We didn’t want an ‘us and them’ mentality,” he said, “and as a smaller firm it wasn’t practical to have two separate groups. But we did force all the deal guys to do some operational training, which made them appreciate what the operational specialists do.”

Advent International follows a similar “one team” approach, albeit “functionalised”, according to Brian Murphy, a senior director in the firm's portfolio support team.

“In some firms, when the deal guys throw a company over the wall to the operational guys and things later go wrong, there’s a lot of finger pointing and passing the buck. We try very hard to minimise that,” he said.

Sometimes, you could have Jesus on your team and still not be able to save a bad investment

William Cornog, KKR Capstone

William Cornog, head of KKR’s European-based in-house operational improvement unit Capstone, said: “You need people who can take a step back, look at an asset and see whether it’s stable before plotting a course. If you’re on the Titanic, you can work out whether it’s salvageable. But sometimes, you could have Jesus on your team and still not be able to save a bad investment.”

Cornog stressed that such investments were extremely rare, however, highlighting the vital role operational experts play in turning around struggling businesses, and improving healthy ones.

Vincenzo Morelli, partner emeritus at TPG Capital and the chairman elect of the European Private Equity, earlier delivered a keynote address in which he highlighted the need for a symbiotic relationship between the two types of private equity executive.

“You must make sure that operations-focused team members work in perfect step with those on the deal side. Operators and financial guys need to work in partnership from due diligence all the way through to exit. Put egos aside and recognised that while deals are the crux of private equity, your LPs must be able to see that you have added value.”