LPs demand focus on operations

Investors want GPs to focus on the operational improvement of a portfolio company, according to a recent survey by Deloitte.

Limited partners believe their general partners are not doing enough to make operational improvements on their investments, according to a survey by accounting firm Deloitte.

About 57 percent of the LPs included in the survey said they would like to see GPs do more to make operational improvements. The survey examined 53 private equity firms with $729 billion in assets under management. 

Investors are seeking far more from their GPs than pure financial engineering, a trend which has been exacerbated by the credit crunch

Jason Caulfield

Additionally, nearly three-quarters of LPs (71 percent) in the survey believe managers are not giving enough attention to improving a portfolio company once a deal has closed.

“Investors are seeking far more from their GPs than pure financial engineering, a trend which has been exacerbated by the credit crunch,” said Jason Caulfield, an operational due diligence partner at Deloitte, in a statement.

Private equity houses have responded to demands by adding in-house operational expertise to help support management teams, Caulfield added. Indeed, over the past five years 30 percent of respondents have established an operational team.

Operational teams typically consist of industry specialists and management consultants that work alongside portfolio company management professionals.

However, in-house teams could be too heavy a burden on a fund's balance sheet, especially for sector agnostic or small to mid-market firms, according to a 2009 study by business school INSEAD.

There is also the risk of deal partners clashing with the efforts of an operations team, the study noted. It may be the “deal team does not want to admit they have encountered problems that the operating partners might be able to solve” or that the operations team perceives deal professionals as acting too interventionalist.

Private equity houses will have to balance the advantages an in-house operations team brings in value creation and in satisfying LP demands with the aforementioned risks, the study warned.