Value creation: Generalists with a twist

Of all the events that Private Equity International runs, our Operating Partners Forum held twice a year in London and New York is the one that drills deepest into the mechanics of value creation. This year’s London conference saw more than 200 of the industry’s leading experts share their insights into what operational approaches work best. Here’s are 10 things we learnt about value creation from the forum:

1 MOST OPERATORS ARE GENERALISTS WITH A ‘TWIST’

When asked to describe their firms’ approach to hiring operating partners, the majority of panellists described themselves along the lines of ‘generalists with a twist’ – that is, a team of generalists, each member of which has a focus or capability in one particular area, such as procurement, sales force effectiveness, human resources or buy-and-build.Most operators are generalists with a ‘twist’

2 DUE DILIGENCE IS BECOMING A CORE PART OF AN OPERATOR’S NETWORK

“A quarter of what we do is late-stage due diligence, underwriting critical elements of the investment thesis,” said Immo Rupf, a partner at Cinven and co-leader of the global portfolio team, adding that during this stage his team also evaluates potential investments for things like buy-and-build potential. In today’s competitive dealmaking environment, the operations team is increasingly getting involved pre-deal to help evaluate potential investments.

However, one panellist pointed out that for firms with a relatively modest operations team, it can be a challenge to find the right balance between allocating resources to businesses already in the portfolio and to due diligence on potential investments that might not come to pass.

 

3 THE VALUE CREATION PLAN IS ADJUSTED MORE FREQUENTLY

“We call it the 100-day plan because we review and, if necessary, update it, every quarter,” said KKR Capstone managing director Juan de Ochoa who, at last year’s forum, claimed KKR “invented the 100-day plan”.

“As the environment is changing much quicker than it did in the past, the adjustments are more frequent. There are a number of technological challenges that make our companies have to not fully change course but at least slightly move the course based on what the competition is doing and what technology is doing.”

4 DIGITAL IS KEY

Riccardo Basile, a principal and member of the portfolio group at Permira, said that as well as launching digital transformation programmes in its consumer-facing portfolio companies, the firm has been launching a large number of these programmes in business-to-business companies.

“The buyers of B2B services are actually becoming more and more consumer-like,” he said, referring to internet-based research into products and services. A company’s website, therefore, is critical.

“The second reason is technology is actually affecting the way even more traditional industries operate,” he added, using the example of Permira portfolio company Netafim, a drip irrigation provider which digitally connects farmers to irrigation systems for continuous monitoring and optimisation.

5 OPERATING TEAMS ARE BECOMING MORE AND MORE IMPORTANT TO LPs…

The survey found that the operational capabilities of a private equity fund manager have significant influence on an LP’s decision to entrust capital to that firm. More than half – 52 percent – said LPs were often or very frequently asking questions about the operating team, 44 percent sometimes ask about it, and only 4 percent rarely ask about it.
Prior to a panel on the evolving relationship between operating partners and LPs at PEI’s Operating Partners Forum Europe in London, a survey was sent out to GPs and LPs pre-registered for the session.

What’s more, 39 percent said the expertise and approaches of a firm’s operating team were either ‘very influential’ or ‘pretty influential’ when it came to LP fund allocation decisions, while 23 percent said it had very little or no influence.

6 …BUT LPs STILL DON’T REALLY UNDERSTAND WHAT THEY DO

Despite the clear emphasis LPs put on GPs’ operational capabilities, most LPs still don’t have a firm grasp of what a GP’s operations team is actually doing.

The survey found that just 30 percent of the 45 respondents thought LPs understood the work of a firm’s operations team ‘reasonably well’. More than half – 55 percent – said they ‘somewhat’ understood, and 15 percent said they either had very limited understanding or none at all. No respondents claimed they ‘thoroughly’ understood the work of the operations team.

7 DON’T TREAT OPERATORS AS SECOND-CLASS CITIZENS

Panellist Mirja Lehmler-Brown, a senior investment manager at Aberdeen Asset Management, told delegates that operating partners should not be treated as “second-class citizens” within private equity firms, but as equals with members of the deal team – including sharing in the upside.

Fellow panellist Jim Strang, managing director and head of Europe at Hamilton Lane, agreed.

“There’s an element of conflict between operating teams and deal teams. There needs to be better understanding of operating partners by the deal side, and I think that’s starting to develop,” he said.

One delegate commented that it was “sensible” for deal teams and operating teams to be paid and incentivised at similar levels, which is often not the case currently.

8 ARTICULATE YOUR APPROACH AND WHY IT MAKES SENSE FOR YOU

Strang’s top advice for GPs when pitching their value-creation capabilities was to be able to clearly articulate your firm’s approach and explain why it makes sense for the types of businesses you’re buying.

Fellow panellist Lukas Bucher, a managing director in the industry value creation team at Partners Group, said around 80 percent of discussions with clients on value creation is educational, explaining how the firm will go about creating value in portfolio companies. “There’s no one model in the industry in the way that it’s done, therefore they really need to find out why your model is the right one for what you do in order to achieve these consistent returns that clients are looking for.”

9 THE ROLE OF OPERATING PARTNERS IS CHANGING

Panellists agreed that operating partners play an increasingly crucial part in adding value – and say the role will continue to evolve over the next five years, especially at mid-market firms: “There’ll be more of them,” said Strang. There will also be more specialists, said Lisa Stone, partner at HgCapital, as the debate continues over whether GPs should build their own teams in areas such as human resources or technology or rely on external providers.

10 TALENT IS THE NEW BUZZWORD

“People issues are probably the least understood part of the toolkit for private equity firms,” said Andrew Priest, a director in the origination team at Inflexion. Priest believes many in the industry remain “uncomfortable with the term HR” and that is limiting their ability to build high-performing teams. “It’s about talent management,” he says.