Pushing the boundaries

Looking across today’s private equity landscape you would be hard pushed to find a firm that did not make any mention of operational capabilities in their value creation manifesto.

“Everyone today, at least on the surface, proffers some operational capability,” says Graeme Gunn, a partner at SL Capital in Edinburgh.

John Gripton, a managing director and chairman of the global investment committee at Capital Dynamics, sees a vast change in the last decade, spurred by a tougher environment for investing.

“It’s gradually improved and there has been much more focused on operational work, especially as growth has been much more difficult to achieve. Managers are looking to maintain the level of return for limited partners and clearly their carry also depends on it,” he says.

“If you are going to grow a company – and growth is essential if you’re going to make the returns we’re looking for – then I think a private equity manager has to have that expertise to offer the management of a company, so that they can work with them and move the business forward.”

In August, EQT closed its seventh buyout fund on its €6.75 billion hard-cap. Christian Sinding, a partner and head of equity at the firm, says EQT’s so-called “industrial” approach to private equity, focusing on long-term growth and deve-lopment of companies, is a key selling point to investors.

According to the firm, almost all of the return on EQT’s investments is attributable to operational improvements such as increased sales and efficiency gains.

“Investors are looking for a value creation model that is replicable, that you can explain and that makes sense,” Sinding says, adding that the era of hands-off private equity is over.

“There is too much at stake for you to just be able to leave the company there to fend for itself,” he says.



In today’s post-crisis world, the combination of low growth and high prices means “there’s no free lunch”, says Francesco di Valmarana, a partner at Pantheon focused on European primary and secondary investments. Some element of operational capability is a “must-have”.

“The companies that are able to be bought by private equity firms today at a price that is interesting de facto come with requirements for heavy lifting, either internally or externally, in terms of assis-ting with sales and distribution and market penetration for instance,” di Valmarana says.

Gunn also refers to operational capabilities as a must-have, pointing out that private equity firms need to work their companies harder than ever to create solid returns.

“If you’re looking for a weighting, I would say it’s as important as a group’s track record for us, that they can demonstrate a real operational capability,” Gunn says.

“It’s all very well in an upcycle; you buy something, sell it for a bigger multiple, and everybody’s happy. But the real proof has been around when things get tougher for the company and for sectors as a whole, how does that business respond? Does the operational work that the manager has instigated in its portfolio really allow the fund to be able to achieve good returns even in a down cycle?”

Operational capabilities are not just attractive to investors; management teams also look for backers that are going to provide the best value-add, says Gripton.

“If you’re the management team of the company and you’re able to influence which private equity manager you’re going to partner with for a buyout, then you’re going to look at a manager who has demonstrated they can support companies to generate growth. You don’t want a manager who is just involved in cost-cutting.”



With investors seeking to consolidate their manager relationships, the pressure on GPs to differentiate themselves is increasing. Just adding operating partners to a team is no longer enough; along with incorporating operational capabilities, managers need to show that they’re pushing these capabilities to the next level.

“The one area that we are pushing people on a bit is there’s a lot of disruptive business models out there now, the Ubers the Airbnbs,” says Gunn. “We have seen a few funds focusing on this, bringing in strategic people on deals to ask, ‘Is there a disruptive technology here that’s going to kill my company in three to five years?’ We’re interested in that as a concept and as an investor.”

At the Operating Partners Forum Europe in London in April, EQT managing partner Thomas von Koch told delegates that thanks to these disruptive technologies and business models he’s “not sleeping too well at night”.

“The world is changing now. And I’m too old to see it,” Von Koch said, citing the example of EQT portfolio company Scandic, a hotel chain in the Nordics, which has seen its top line come under threat from online accommodation booking site Booking.com. The firm has since brought a number of experts in disruptive technologies into its network of industrial advisers.

“They see it, and all the guys around them see it,” Von Koch said. “That’s actually a necessity for us to succeed in the future. Paranoia, unfortunately, is one of the first things we have on the top of our whiteboard.”

Another strategy that interests SL Capital is European funds establishing networks in Asia to help grow and expand their portfolio companies.

They’re creating relationships with an individual or establishing a small group of their own in China, or Singapore, to provide access for their companies into the region. We think that is another operational effectiveness point that can be quite interesting,” Gunn says. “We’re seeing this moving into the mid-market groups as well, where they’re building relationships for their companies, to source, manufacture or sell there.”



Private Equity International’s Operational Excellence Special is an opportunity to celebrate those firms that create true value in their portfolio companies, who contribute to the societies in which they operate by building stronger, more sustainable businesses. But this celebration shouldn’t be limited to once a year; firms that are making a real difference need to do their part for the industry and shout about it, says di Valmarana.

“One thing we all can do in the private equity industry is demonstrate the results of this operational excellence,” he says. “Show to the broader market those companies that had 200 employees and a 10 percent EBITDA margin when private equity invested, but when the private equity firm exited had 400 employees and a 30 percent EBITDA margin.”



Von Koch, long an advocate of greater transparency in the industry, has called on several occasions – including at this year’s Operating Partners Forum Europe – for the industry to reflect on why it historically has had such a poor reputation. GPs have the means to refute this, and they owe it to the industry to do so.

Di Valmarana echoes these sentiments: “My constant frustration is that we as an industry don’t do enough and are not very good at convincing the world at large that aside from a few bad apples, most of these private equity firms really are creating employment and improving the companies and doing a good thing, and they’re taking the risk for doing it.”

Last year Von Koch told attendees at the European Private Equity and Venture Capital Association conference in Vienna that there’s nowhere to hide, and he was right.

Today’s private equity world is older and wiser. Just providing great returns to investors is no longer enough. The focus is – and should be – shifting to the way those returns are created. If you have a great private equity value creation story to tell, then tell it. Your industry needs you.