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Q Where can operating partners add the most value?
James Markham, partner – portfolio management, Graphite Capital: In the lower to mid-market, an SME portfolio company may have grown in a certain way up to the point of our investment but now needs to evolve how it goes to market and how it executes its growth plan. The management team may not have been through that journey before. Operating partners, working with the management team and deal colleagues, can help appraise the operational capability of the business. They can bring their expertise of seeing many businesses of a similar size go through similar growth challenges and then find bespoke solutions.
Geoff Tomlinson, value creation partner, LDC: We back management teams rather than businesses. We know that working in partnership with an ambitious management team is the best way to help a firm grow and increase shareholder value. It’s why we have built a team of experts with an unrivalled breadth of real industry experience. Through the team’s deep functional and sector experience, our value creation partners support business leaders across LDC’s portfolio, helping them to identify pressure points and growth opportunities, and supporting the delivery of improvements in areas from sales and marketing to cash collections and working capital. We work in partnership with management teams to help create value throughout the investment to achieve long-term sustainable success. In order to maximise the value we can bring to bear, we have developed a significant partner support network who help us in specific projects across the portfolio to help both with the volume of improvements and also bringing specialist skills and experience where required.
Cory Eaves, operating partner, General Atlantic: At General Atlantic, operating partners engage across the entire deal lifecycle, from diligence, through on-boarding, building teams, driving specific value-creation initiatives, and onto the exit process. Our experience shows that we can add the most value by partnering closely with both our deal teams and our portfolio company management teams in two key areas: firstly, helping companies build great management teams by recruiting, coaching and optimising the organisational structure, laying the foundation for growth; secondly, working with the company to identify and execute targeted value-creation initiatives, often heavily supported by technology. By focusing efforts on the most important initiatives, impact can be achieved more quickly.
Q How important has ESG become in operational matters?
GT: We work with the management teams of our portfolio companies to develop strategy in a range of ESG issues, including environmental performance, workforce health and safety, governance and diversity. Our tailored approach helps to ensure that these companies address the ESG issues that can have the biggest impact, and ESG continues to rapidly rise up the agenda in terms of its importance. Operational efficiency means achieving maximum productivity and minimum waste. Savings in energy, water and waste can require an introduction of expertise or an injection of capital. Our ability to bring new resources to the table can help to improve a plant quickly. Our investments frequently result not only in greater efficiency for a portfolio company, but also measurable environmental gains.
JM: The ESG criteria that underpin responsible investing have a very natural and obvious overlap with general risk management. Managing risk is a key part of operational management anyway so the underlying ESG criteria have always been important. What has changed in recent years is that there is more direct measurement and reporting on this activity, partly influenced by increased LP engagement in ESG. This in turn has increased the level of accountability in the world of investing and has better ensured that fewer issues get missed.
Q What is a trend that doesn’t get enough attention?
JM: People. Historically, there has always been a focus from PE on the most senior people in the management team but typically it stopped there. The focus on the human element of a business has increased in recent years but more can still be done. The working culture and having an engaged, enthused and incentivised workforce with the right organisational design is critical to success. Private equity executives, sitting on boards, also need to be engaged in appraising these areas and offering solutions if required.
GT: Different private equity firms take different approaches. An increasing number are focusing on value creation through hiring in consultants to help drive change within the business. At LDC, our value creation partner model is different, more sustainable and more collaborative. Rather than only adopting a top-down strategy, our experts collaborate with management teams to guide the business through the growth cycle. By spending a significant amount of time onsite with businesses, working closely with the leaders of different functions, the highly experienced value creation partners become an extension of the management team, often taking a non-executive role on the board. This leads to a deeper relationship with the business and a more open approach, which in turn delivers more successful improvement and growth.
Q What is the biggest challenge facing you in the next few years?
JM: The pace of change and disruption through technological innovation is an enormous challenge. This impacts upon both the selection of what to invest in and how to grow existing portfolio companies. It presents both a risk and an opportunity, and the challenge for us is being on the right side of that.
GT: The biggest challenge for LDC’s value creation partners is supporting portfolio companies to best capitalise on opportunities so they can realise their full potential. This is both in terms of providing the right support at the right time and also for matching with the most suitable value creation partner and partnering with third parties to meet the demand. This is increasingly challenging for two reasons: firstly there are more opportunities to support our portfolio through a period of increasing uncertainty and identifying the opportunities this climate creates to help them grow; secondly, we are involved at more stages of the investment cycle so we are more in demand to support key initiatives with management teams throughout their journey.
Q How is the role of the operating partner changing?
CE: Over the past decade, I have seen the role of operating partner evolve to be more systematic, more focused on value creation, and more specialised. Early operating partner efforts were often a broad catch-all for managing diverse projects and industries. As best practices have come into focus, and individual operating partners have developed networks, skills, and experience, operating partners are increasingly developing specialties around certain industries or functional areas. Technology is also playing an ever-increasingly important role in value-creation projects, both supporting revenue growth and expense control. Finally, I believe the talent marketplace for operating partners has now become sufficiently mature in that private equity firms are able to recruit operating partners with the specific experience that meets their investment profile.
JM: The role didn’t really exist in the UK mid-market when I started but now most firms have some form of portfolio or value creation or operating partner role. As the private equity industry matures, the amount of capital to be deployed grows and pricing increases, then within a portfolio strategy there really is no alternative to building stronger and better businesses – with organic growth being a key component. That puts extra emphasis on operational delivery and the role of the operating partner is becoming more prominent as a result.
GT: We aim to support portfolio companies throughout the life-cycle of an investment – from pre-deal, through the growth strategy implementation and journey to exit, and possibly even beyond, if we reinvest in a business. This is a much broader responsibility for operating partners than has previously been the case, particularly in pre-deal. For example, in pre-deal the team works alongside management and the investment teams to help identify both growth opportunities and pressure points where improvements can be made to the business. During this due diligence phase, we work with the investment team to understand how the company operates, its position in the market, and the macroeconomic factors that affect the business, by gathering insights from customers, suppliers and other stakeholders. We help identify opportunities and potential areas of operational improvement. These are built into the deal and form the basis of the 100-day plan, which is critical to long-term value creation.