Cinven’s portfolio team has grown from one Hong Kong-based founding member in 2008 to seven based across offices in London, New York and Hong Kong, including partner Immo Rupf and managing director Ivan Kwok. Today’s team, say Rupf and Kwok, is the optimal size for working with Cinven’s portfolio companies, of which the firm has between 20 and 25 at any one time – large enough to have a significant impact, but small enough to be flexible and fully integrated.
Rupf and Kwok talk Private Equity International through how the firm’s operational capabilities make it uniquely placed to take on the challenges of today’s private equity world.
What are the qualities you look for in portfolio team members?
IR: We want senior experienced people who can quickly win the trust of our portfolio company management. We also want the flexibility to bring in third-party resources. If we had a lot of junior staff, there’s internal pressure for them to be working on portfolio company projects even if they don’t necessarily have the right experience. If I’m working with Germany-based CeramTec on product innovation, I want to have the best person or consulting firm that has significant product innovation expertise in the healthcare/industrials market in Germany. I don’t want to be under pressure to volunteer a Cinven person because he/she happens to sit on our payroll.
IK: We’re not going to replace the CEO or run the business. It’s more complementary. When I worked with Gondola on PizzaExpress, we provided an additional skillset and experience to management: in this case, expanding the business into Asia. If you had a team of individuals who could replace the CEO and CFO anytime, it would inevitably risk undermining the management team and how open-minded they are towards us.
Why have you developed areas of functional expertise within your portfolio team?
IR: It has to be a scalable model. If you’re a sales force effectiveness expert but you’ve never done healthcare and you don’t speak any French, that’s not very helpful if we do a sales force effectiveness project for Synlab in France. We don’t think it’s necessary or useful having limited specialists in-house. We want flexibility.
We have nevertheless, through long, practical experience, built up areas of functional expertise including buy and build, cash, digital disruption, internalisation, pricing and sales force effectiveness. This makes us knowledgeable and credible when engaging with any CEO in order to understand the nature of the business opportunity. Then we try to deliver the best resource possible.
IK: A lot of CEOs and CFOs will tell you, it’s not that they want you to crack an IT problem per se, they probably know who to call. But they would like to work with someone who has overseen a similar transformation project before, as we’ve done recently with Premium Credit who transformed their IT platform.
What’s your level of involvement during the investment period?
IK: Most of the time is spent during our first year of ownership, which we call on-boarding. We’re consistently applying the discipline of the value creation plan (the ‘VCP’) which we put together at the outset. We introduced the VCP in 2014. It’s a more structured and enhanced management business plan for each company – going far beyond the traditional 100 day plan. The VCP reflects the fact that our role nowadays has evolved from a supporting and monitoring one towards active facilitation and collaboration with management. We see our role really as strategic architects with the VCP the ‘blue print’ for that company to drive performance.
We also get involved pre-deal and with exit planning. We’re involved in shaping the business commercially in order to help it fit for the next buyer.
IR: The VCP is not necessarily our incoming plan or the management’s plan. It’s typically slightly different, because once you’re inside the business you see more, you can discuss areas in more detail with management and there are no holds barred. And then we align everything – the incentives, our team, our planning – into that one, joint road-map
How do you measure the portfolio team’s impact?
IK: Often when management comes up with a sell-side information memorandum, the case is fairly aggressive. So when we underwrite it, we form a plan below the one in the IM. Through the development of the VCP we then identify further ways of driving performance.
Ultimately, it’s about the return to the investor. If we underwrite 2x for most investments, but the value creation plan gets us to 2.5x money, then net-net, the whole fund will generate a higher return for our LPs. We also monitor what earnings enhancements and cost savings have been delivered for individual projects; and in Fund 5, the portfolio team has been directly involved in more than €1.4 billion of value creation.
IR: We have the original investment case which we closely track, as well as the value creation plan. The latter is how the portfolio team is held to account.
How much are LPs digging into how value is created?
IK: It’s definitely an increasingly important topic. Very few investors committed to our fund saying they didn’t need to meet any of the portfolio team. It’s a key part of their due diligence. They also try to dissect how we operate and where we make a difference. They understand it can be very difficult to quantify, but we give them a lot of examples. They also want to talk to the CEOs and CFOs of our portfolio companies to understand how value is created.
IR: LPs really want to understand what we’re doing to sustain EBITDA growth, because unless we really do something substantive, the business will not perform. LPs naturally say, ‘It’s great that you have great management, but what do you do to support and accelerate their efforts?'
How does Cinven’s operational capabilities help it transact in today’s tough market?
IK: We’re increasingly more involved in due diligence to make sure we can support the investment team to underwrite certain assets that are core to our capabilities. For example, before we invested in SLV, the German-based lighting company that we recently sold, we had already undertaken extensive work on product sourcing in Asia.
This approach has continued but there is now a greater imperative to undertake pre-deal due diligence in a far shorter timeframe to ensure we can extract the true value from our investments.
IR: We’re working even harder today because it’s a competitive environment. What we can offer in terms of practical support and experience is in strong demand. In a secondary transaction or a carve-out, we need to be able to predict the value in our investment thesis to win the deal in the first place, but then also execute and ideally exceed that prediction.
What are LPs looking for today?
IK: LPs want GPs to really work hard to earn their money. This is one message we consistently hear. LPs want you to sweat. Blue collar, this is how we describe our work. This is how we create value and we believe this is the most sustainable model going forward. One of the reasons why Fund 6 attracted such demand is not only Fund 5’s performance to date, but LPs seeing that we can continue to do that. We have a tried and tested approach that we’re able to adopt repeatedly. This is what LPs are buying into.
IR: There’s a lot of value in having a consistent model. When we raised Fund 6 a lot of LPs wanted to talk to our portfolio company CEOs to validate our approach and evidence where our input has materially benefitted their businesses.
This article is sponsored by Cinven. It appeared in the Perspectives 2017 supplement published with Private Equity International in December 2016.