Much has changed in the decade since Private Equity International launched its Operational Excellence Awards. As the private equity asset class has matured, so the challenges around enhancing value have intensified, necessitating the recruitment of much larger operating teams, more hands-on senior advisers and additional experts in a growing roster of value-creation levers.

“We probably got to this a little earlier than others, certainly in the mid-market,” says Wiet Stokhuyzen, director for origination, investors and portfolio at European mid-market manager Montagu. “We’ve had operating partners since 2007, and that was a real change that saw us shifting from sitting on the board empowering management and hoping good things happened to moving towards being more hands-on.”

Today, Montagu portfolio businesses employ 16,000 people and generate €3 billion in annual revenue, and all are given access to the firm’s Full Potential Plan to help them realise growth. “In essence it’s a best-practice playbook for how we interact with every single business in a standardised way, acknowledging that a different plan will come out of that process every time,” says Mark Dunfoy, who is responsible for value enhancement at the firm.

The team has identified seven value-creation levers it believes really move the dial. These are sales execution, new products and services, new geographies, technology enablement, operational effectiveness, carve-outs and M&A.

“Our journey over the last 15 years has taught us that you have to get the hard things right, like how you do due diligence and how you spot the right initiatives,” says Stokhuyzen. “But you also have to get the soft things right, like making sure the plans are owned by the management teams and they are empowered. We spend a lot of time making sure something is properly owned, sponsored and implemented by management. We look to provide the right support in the right way to make them successful.”

As operating partner teams have grown – with teams a third of the size of the investment team no longer uncommon – the relationship with management teams has undoubtedly transformed. Gone are the days when an investor took a seat on the board and no one but the chief executive had much to do with the company’s private equity owners. Now, operating teams can be plugged in across a portfolio business to support improvement in everything from pricing strategy to marketing and digital transformation.

Andros Payne, founder of Humatica, which works with PE sponsors and their companies to enhance organisational effectiveness, principally through behaviours and management processes, says the relationship between operating teams and management is critical.

“It can be very productive or very disruptive,” says Payne. “So much depends on the clear governance set up between the management and the operating team, but it also depends on the personalities and competencies of those involved. There are times when there’s a lack of clarity on the governance and that’s a recipe for disaster.”

A broader talent agenda

Then comes identification of the value-creation levers that will drive change across the business. Human capital has always been high on the list here, but organisations like Humatica seek to move that beyond a focus on simply hiring key senior personnel. “Obviously a lot is driven by senior leadership,” says Payne. “But we look deeper, into the quality of behaviours within an organisation that enable it to collectively make the right decisions and implement them quickly.”

The number of firms hiring senior talent professionals into their operating teams has increased significantly over the past 10 years. “Initially their job was recruitment and was very transactional,” Payne says. “Steadily, they have migrated into a much more holistic understanding of operational improvement, including knowing when a reorganisation needs to take place.”

Matt Brubaker, CEO of human capital strategy business FMG Leading, says: “We are focused on human capital strategies, and that’s not human resources but rather aligning the people-related systems of a company with growth strategies.”

The conversation on people has moved on, says Brubaker: “People that really care are now asking what the employees care about, what the customers care about and what drives their experiences, in order to align their businesses around that. Investors are having to get really clear on what actually matters.”

Data deep dive

Digital transformation and the use of data is another theme speeding rapidly up the value-creation agenda. Andrew Lawley is an operating partner at Three Hills Capital Partners, a minority investor specialising in growth capital for founder entrepreneurs that want to remain invested in their businesses.

Lawley says: “For us right now it’s all about digging the data. Lots of businesses are looking to scale quickly and for us that’s often a digital transformation conversation around making sure the customer experience online is as good or better than the offline alternative.

“Associated with that is data analytics. As businesses become more digital, they capture a lot of data and with the right architecture they can store, analyse and use that data to bring consistency and precision to their decisions. Those are fundamental challenges that we are typically seeing in portfolio businesses.”

“There’s going to be, over time, more and more integration between operating teams and deal teams”
Mark Dunfoy

The use of data can also enhance the human capital piece, says Brubaker: “Data has the ability to make all this more sophisticated, recognising that there is a way of aggregating data about people, trends and behaviours that absolutely drives value.”

Rob Hetherington, operating partner and head of Milestone Performance Partners, the portfolio optimisation capability in European growth investor Bregal Milestone, says the transformational potential of tech is now being recognised much more by value-creation teams. “Ten years ago, private equity investors would do due diligence on the technology capabilities of an asset they were buying and then leave it up to the portfolio company management team to develop that appropriately, with little interface or understanding of those parts of the business.”

Now, says Hetherington: “None of us that invest in technology-related or driven businesses leave the transformation of those capabilities completely in the hands of internal management. We all get more involved and pay greater attention. We employ and develop our own technology expertise to assist management teams and we are much more cognisant of the problems, issues and risks in those functions.”

He points to cybersecurity as a current hot topic, where he says operating teams are scrambling to make sure companies have proper systems, insurance and expertise lined up to support them.

ESG is an additional lever gaining increasing traction with operating teams. “It just makes sense to be more focused on climate issues, employee engagement, diversity and inclusion, operational risk, board composition and so on,” says Hetherington. “We spend a lot of time reviewing those with portfolio companies, working on action plans and helping them execute. The market values this and places a premium on companies that manage it successfully.”

Stefanie Kneer, head of ESG and sustainability at Three Hills Capital Partners, adds: “Managers are realising ESG is something that can be extremely beneficial in terms of both commercial and impact benefits. We are working with our companies to understand where to focus, what are the upsides, and how we can boost revenues, cut costs and mitigate our carbon footprint, for example. The sustainability agenda is fundamentally part of value creation.”

Cross-portfolio collaboration

ESG is also an area where private equity owners are getting more sophisticated about sharing best practice across their portfolios, and that horizontal alignment is only set to increase for value-creation strategies moving forward.

Payne says: “Increasingly, funds are investing in leveraging the management competence in their portfolios across the portfolio. They are pulling together their portfolio company leaders in specific areas like sales, procurement, finance and beyond, both exchanging best practice and investing in the development of the leadership competencies of their portfolio company leaders.”

The pandemic, which placed unprecedented stress on some businesses, accelerated this cross-portfolio approach. Lawley says: “The big issue affecting all our portfolio companies right now is the supply chain, which has become incredibly complicated and messed up post-covid. We are working very hard to collaborate and share best practice through the supply chain right now.”

On the procurement side, Richard McIntosh, managing partner at Procura Consulting, says cross-portfolio leverage could be the next big theme.

He says data can help identify cross-portfolio opportunities and there can be quick wins to be had by trading inside the portfolio, as buying and selling goods between portfolio companies generates revenues and keeps cash within the portfolio. Identifying common suppliers, common requirements and common categories of spend can also allow portfolio companies to compare and harmonise pricing, negotiate based on volume and put relationships and frameworks in place that create value across the portfolio.

“Few firms are exploiting this horizontal leverage right now but working across the portfolio to supply each other and exploit economies of scale, underpinned by data, is certainly something we expect to see more of in the future,” says McIntosh.

Such innovative approaches serve to further highlight the emergence of value-creation teams as a differentiator for management teams as they sell their story to ever-more discerning targets.

Bregal Milestone offers its portfolio companies access to a proprietary data engine to deliver insights they can act on, a team of seasoned operating partners, and a network of senior advisers.

Hetherington says: “It definitely has won us deals; there’s no question it’s got deals over the line, though not in every case. At the very least, the fact that we have these capabilities demonstrates to investees that we put our money where our mouth is when we say we want to partner. It gives them some comfort that there are people in the business that have been on their side of the table who they can access if they need to. We don’t charge for this, it’s part of the proposition.”

At Montagu, Dunfoy adds: “There’s going to be, over time, more and more integration between operating teams and deal teams. That’s inevitable, because value creation is such a big part of the success of a fund.”