I’m at an operating partner dinner in Calgary and this provided a great background for a conversation on the wide variety of operating partner models. Interestingly our firm holds these dinners around the world from New York to Beijing, London, Toronto, Singapore and other PE centers. We have seen the operating models work great in full control situations in LBOs, in minority investments and even in models where the sponsors clearly have limited say on the board or in operations.
What we learned is that industry/operating expertise translates directly EBITDA improvements and increased EV and both GPs and management are eager to explore those avenues.
Not that the operating models have standardized much. There are a couple of common themes emerging that are of interest:
– Operating Expertise provide differentiation in deal origination
This is obvious for industry specialist firms but general process expertise (procurement, sales, distribution) do play a key role in gaining support from management or promoters to back a certain sponsor for a deal. Interestingly, this is an emerging theme in markets like Brazil, India and China where capital is perceived to be abundant (ignoring the obvious regulatory hurdles in all these markets). The owners desire to retain control over the business may be somewhat mitigated by the investor’s ability to expand management expertise. Especially in markets like China and Brazil where backing good management is an insufficient investment theses given the competition for top leadership talent. The investor’s ability to provide best practices and a steady hand is critical in the growth of the enterprise.
– It is critical to get early wins and then getting beyond leveraged procurement
Most firms we work with realized that the most reliable way to add value to the portfolio is through procurement programs (ignoring turnaround situations that obviously demand a series of working capital and cash flow management actions).
The great thing about leveraged procurement is that there always seems to be a way to get a better deal, more reliable supplier and expending that across even a modest portfolio provides immediate cash savings.
The issue becomes that of diminishing returns. Once the program is established, the suppliers aligned, the analytics and KPIs are in place – where does the operating partner add value next?
It seems to be fairly inconsistent both in approach and results. Sales is one obvious target and both due diligence and post-close activities focus on sales effectiveness, territory alignment and other programs. Improving sales seems to be a very industry specific expertise once operators get beyond the basic questions of coverage, account profitability, cost of sales and segmentation. Depending on the market, especially outside NA and mature EMEA – true expertise is harder to come by.
– Repeatability of success is dependent on operating partner coverage
Private Equity loves repeating success. If something worked in one company let’s do it again in our next acquisitions. From an operating partner perspective, again, leverage procurement is perfect for this as many purchasing categories (office supplies, telecommunication, IT hardware, employee benefits) work easily cross-industry. Coverage emerges as a key problem from two angles 1) how many portfolio companies can a partner cover to assess, develop and support these programs 2) how can they get beyond procurement without having to bring in a wide variety of specialty consultants for different processes and industries. The more players are involved the less likely that a repeatable lwo-risk thesis can emerge.
– Learn to influence when you are not in control
We work a lot with minority investors, some in the States but mostly in Asia. The control issue becomes both a major impediment and also a differentiator to successful operating models. One of the largest Asian firms has a captive in-house consulting arm that is used as a differentiator in deal cycles (as stated above) but also has the necessary specialist expertise in both the industries and the thesis of the GP. When the consulting team is offered by the sponsor to management, they have a clear edge over an outside consultant. In effect, the minority investor becomes both the trusted advisor but also the integral element in the value creation plan without compromising the proper governance of oversight but not overstep.