Last Friday Private Equity International (PEI) launched their first awards category for Operational Excellence in private equity. First I want to say, it is about time! Secondly, my biggest hope when I saw this was that these awards would help to show how successful firms are creating value through operational improvement rather than just select a winner based on the success of one portfolio company while the firm may not have a true focus on operational improvement. However after looking through the submission form and the metrics they are asking for it looks like we will get the latter. From my experience the top firms across the industry are all facing the same challenges with operational improvement. They are all grappling with the same questions; how many operating partners to have internally, what is the ideal profile, how should they work with the portfolio companies, how should they be incentivized, when to outsource operational improvement to specialized consultants, etc…. Many firms and portfolio companies could benefit from learning how other firms are approaching these questions, where they have failed, and what actually works. While I appreciate PEI’s new award category and think it is long overdue for firms to get the recognition they deserve for the value they create I feel the criteria for the awards miss the target on the most beneficial insight.
The submission form for the awards includes the following questions:
Private Equity firm name:
Portfolio company name:
Location of portfolio company headquarters:
Initial investment date (deal agreed):
Investment fully realised date:
Top-line revenue growth:
Employee numbers at entry & exit:
Market share growth:
Product number growth:
Exit multiple & IRR:
Average time per month spent with portfolio company (days):
The last question and the narrative portion just start to get at the heart of it. All the metrics are great for showing a business has improved over the period of PE ownership but not HOW or if the PE firm actually made a difference. It is also unclear if the winners of the awards will be judged on the success of one portfolio company or multiple portfolio companies (which would require multiple submissions). The biggest challenge with operational improvement is making it scale effectively with limited resources while adding value across a portfolio of companies. By adding questions that focus on how PE operating teams are structured and how they operate along with the performance data from the companies they work with we could begin to see which strategies and methods really work.
So, here are some suggested additional questions for next year’s submission form. These would begin to get at the heart of how PE creates value with operational improvement. Do you have any to add?
How many operating partners are fully employed by the PE firm
Are the operating partners aligned by industry or functional expertise
What percentage of the portfolio are the operating partners involved in
Typically who, beyond company management, is primarily responsible for the operational improvement plan at the portfolio company (company board, deal partners, operating partner)
How many operating partners typically get involved with a portfolio company, average time per month
Do the operating partner/partners have a specific expertise (lean, industry depth, IT, etc…)
Who do the operating partners report to (portfolio company board, deal team, the PE firm)
When do the operating partner become engaged with the portfolio company (due diligence, part of 100 day planning, drive execution during holding, prepare for exit)
Do the operating partners typically also sit on the board of the portfolio company
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What is this blog?
These are some of our insights along our value creation journey in private equity.
- Persistent Trends in Value Creation
- Macro Trends and PE Value Creation
- Why Can’t Management Outperform PE?
- Will China Transform Operational Value Creation?
- Green is the Color of Money
- Any Operating Model Could Work
- PE Group Purchasing makes Headlines
- Awards for PE Operational Excellence
- Great Books in Value Creation
- Opportunities for Cross Portfolio Improvement