Friday Letter: Good to great

Our OpEx awards salute the best value creators in the business. But we shouldn't underestimate how difficult this stuff is

“Growth is hard.”

That was perhaps the overriding thought to emerge from PEI’s Operating Partners Forum in New York this week. Cutting costs, making processes more efficient, finding new supply chain partners; all of these things are the “first 100 days low-hanging fruit” on which a lot of GPs have been able to make their name. In a moderate to high growth economy, it’s easy enough to make a middle-of-the-road company look great on paper by picking off some of these issues and making a hasty exit.

However, the real skill comes in times like these when growth isn’t assured – and investors who have been hungry for yield for five years are already looking at every expense line. Being able to take on the turnaround stories, or even making businesses go from good to great, involves a deep understanding of talent management, market opportunity, pricing, and salesforce development. Relatively few GPs can genuinely claim to be good at all of that.

Of course, when private equity gets it right, the results can be truly impressive – and we celebrate some of these successes in our latest Operational Excellence Awards, the result of which we announced thus week. As always, there are some great value creation stories in there.

Over the course of our two-day forum this week, we heard from a wide range of speakers and delegates, talking about everything from talent to technology. The most common theme was the importance – above all else – of finding a compelling business. For the GPs that realise significant growth in their portfolio companies, there has to be a unique market position. It is increasingly difficult to find that or cultivate it in middle-of-the-road companies.

Operational excellence isn’t a financial engineering story. Leverage isn’t going to get you there. Slotting in a new CEO and hoping for Mary Poppins-like results rarely works out either. As you can see from our Operational Excellence award winners, sometimes it means taking over companies and running them right alongside your own firm. In other cases, it means making hard decisions about what stores to close, what business lines to cut, and what to add on. Maybe it means taking one idea and re-orienting the company. All of these things take time and effort. For the firms that are truly good at this stuff, they can replicate it year after year, and the proof is in the companies they leave behind.

The story in the market since 2013 has been cheap financing, a rally in public equities, and a bumper crop of M&A activity. GPs have paid eyebrow-raising multiples to get in on that action, banking on platform acquisitions or some form of macro growth to see them through the exit. Yet in the past few weeks we’ve seen a pullback. The next chapter of this story will be finding out which GPs have the operating know-how to make good on their bets – especially if the recent slowdown turns into a full-blown correction.