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Driving operational excellence in private equity

With market valuations continuing to rise, in the mid-market as well as large-cap space, it is essential that private equity groups have the required model in place to drive operational excellence in their investments. 

This was a topic discussed in detail at last month’s International Private Equity Markets event ( in Cannes. 

Some PE managers choose to have operating partners, some do not, while others have highly developed networks of external consultants or advisors to help generate value creation. Ultimately, how a PE manager decides to transform a business it acquires depends on many different variables. Etienne Colas, Senior Managing Director, LBO France Gestion, said that they choose to work with six operating partners in the small-cap and mid-cap space. 

He said that there are some companies “with whom we have no operating partners”, where LBO France works directly with management teams. In other instances, said Colas, “we might advise them to hire some external experts. We support some initiatives with management teams and we always try to be pragmatic when we choose to use external support.”

Antoine Baudesson (pictured) is an associate at HIG European Capital Partners. Speaking alongside Colas on the panel, entitled “Helping your portfolio companies to achieve best in class performance”, Baudesson said HIG invests only in companies that are in need of operational improvement. In that sense, the deal team picks only those companies that it thinks have the most value creation for the fund. 

“Our model is basically that the deal team not only executes the deal and monitors the portfolio company but also oversees the operational improvement,” explained Baudesson. He added tongue in cheek that HIG’s owners expect the team to be ‘uber-investors’, not only finance experts but operational experts, legal experts and so on, and to be accountable for everything.

“That said, we do need help, which we draw upon from our network of advisors in each of the five European countries we invest in. We also use consultants but most importantly we rely on management,” said Baudesson. 

Value creation levers

Having an operational team in place can be used as an effective lever for value creation, especially, for example when doing a carve-out. This is made possible when a parent company decides to jettison a business that is no longer strategically important. Although they offer PE managers the chance to build value into the carve-out before selling it on at a higher multiple, carve-outs are notoriously risky and require solid operational expertise. 

According to Bloomberg, PE firms have undertaken 463 carve-outs worth USD68.5 billion over the last decade.

The panel said that when investing small or mid-sized companies, as part of a carve-out strategy, there are various aspects to transforming them that may go beyond the PE manager’s core expertise; for example, international expansion might require operating partners to help on the marketing or logistics side of the business. 

With respect to value creation plans, the general consensus was that having 100-day plans in place is unnecessary, broadly speaking. “We build on whatever business plan is in place. For the companies we acquire, we do not walk in and say ‘Hello, we are going to spend the next three months doing diagnostics and reviewing everything’,” remarked Colas. He said that setting out a sensible roadmap with the management team and reviewing it after 12 or 24 months to see if the business objectives have been met is critical. 

“We don’t consider 100-day plans per se, just because each investment we make is different,” confirmed Baudesson. “It doesn’t make sense to have too standardised an approach. Usually, we invest in companies whereby we know that we can move the needle in terms of EBITDA very quickly and that within the first year of ownership we have been able to deliver what we set out to achieve.” 

This requires having a clear view of the business, from an operational perspective, and knowing what levers to pull on from a cost perspective. By knowing this in advance, everyone should have clarity on the objectives and then it is a simply a case of execution.

Some PE managers will choose, for example, to put in place KPIs. When investing in companies that want to do primary LBOs, there will often not be a lot of standardisation, or clarity on profits and such like. PE managers need to know this because that is the only way the deal team can steer the business and measure improvement. 

One of the other operational aspects that has to be taken into consideration when driving excellence in portfolio companies is navigating the emotional aspect of the different actors involved; not least of which the CEO and/or chairman of the target company. 

They might be the founder of the company, or the second generation of a company that has been in the family for many years. Working with them to transform the business, and take it to the regional or international stage, can be a highly sensitive, emotive affair, especially  
when recruiting the right board members to really bring value and new thinking to the company. 

Finding the right people with the right profile is not easy and takes a lot of time.
“You need to find the right way to interact with the company founder and create a synergy; it’s a fine line that you need to tread. It’s important not to be seen to be micro-managing the business,” said Baudesson.

Part of the way around this is to identify the right topics that the company’s management team are struggling with, where the deal team can add value, either by themselves or through the use of external operating partners. 

The management team needs to understand that the PE manager is there to help and to add value and that it is a good investment for them. In that sense, it is vital to create trust with management. 

“There is a sensitivity (not to push too hard) and you have to ensure that your energy goes into the company that helps it to quickly grow,” said Colas. “In our experience, if you are not in full alignment with the CEO, and they are not exactly aligned with where you want to go, you’ve got a problem. 

“It is something that is difficult to manage, especially when tough decisions have to be made. You need to secure your roadmap by ensuring that the CEO and top management are as close to you as possible. That has to be the main focus.”

To conclude, Colas offered one example of operational success by referencing a carve-out. The company in question was Looping Group, a family of small regional leisure parks, which HIG sold to Ergon Capital Partners III SA investment fund (“Ergon”) in March 2016. 

“We had to bring in a management team, create a company, develop it and over the lifecycle of the investment we managed to increase the EBITDA by four times through multiple levers. It is now a company-led business with a good future.”

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