In the first post of our blog series on private equity value creation teams, we explored how value creation teams can drive successful engagement with the management team. In our second post in this series, we are examining the structure of value creation teams and sharing key drivers for increasing enterprise value and tightening the deal timeline.
A growing number of private equity firms are adding value creation teams to their organization, however, finding that designing the structure of these teams can be challenging. With many variations present in the market, building a strategy that fits the fund size and investment thesis, and compliments the investment team, requires thorough analysis and strategic vision.
As a retained executive search firm for private equity, we work closely with these value creation teams to recruit top talent. The following are insights and best practices shared by private equity value-creation leaders who are focused on accelerating shareholder value within their portfolios.
Understanding the Origin
In speaking with private equity leaders, the origin of value creation teams has been an organic evolution as opposed to a strategic initiative and is usually fueled by investors seeking to assist underperforming portfolio companies with meeting or exceeding target growth goals. Over time, firms found success in utilizing operating expertise in their investment strategy. From increased enterprise value to decreased transaction timelines and differentiation in the pitching process, the need grew. The outcome – an increased focus on growing value creation teams.
“One of our current GPs is a former CFO and an operator at heart. They naturally brought an operator’s DNA to the table, it worked. It was an angle that pure investors did not take, and it drove results. As we raised our next fund, we brought in additional executives to expand our operator expertise across investments. The need has continued to grow.”
Designing the Structure
Across the private equity industry, the structure of value creation teams varies significantly. From the presence of operating partners to former consultants, industry and functional experts, former portfolio company executives, etc. – the range of structure is broad. Depending on the firm, the mandate for the value creation team, resources dedicated, and buy-in from the partnership are heavy drivers in the size and scale of the team. However, as value creation teams continue to gain stride in the private equity ecosystem, firms that design a scalable structure are set up for longer-term success.
In our conversations with value creation leaders, there were four distinct profile types that appeared to be most sought after: The Generalist, The Specialist, The Consultant, and The Operator.
- The Generalist: These are individuals that support a select number of portfolio companies. Generalists offer dynamic expertise and have proven capable of driving value throughout the holding period. Often former consultants, CEOs, or other experienced executives, generalists can support their portfolio companies with a range of needs but lack depth in a specific function or sector.
- The Specialist: Adding a functional and/or industry specialist has emerged as a common key strategy. Often former CFOs, technology leaders, go-to-market experts, etc., specialists tend to work across a greater volume of portfolio companies with a narrower focus. Adding a specialist has proven highly beneficial within HR, finance, commercial and IT – where middle market companies tend to need more assistance during a period of high-growth. Engagement with the management team is not as consistent as a generalist approach but offers significant value in select areas.
- The Consultant: Many private equity firms are adding former consultants to their value creation teams. While consultants have limited operator experience, they are trained to handle multiple projects across a range of companies. They also bring significant client management skills, which is critical for interacting with management teams.
- The Operator: Tenured operators offer a unique perspective to the value creation team. With deep industry and/or functional knowledge, operators understand the management teams’ mindset and the day-to-day operations of businesses. At times, operators can get too in the weeds but offer a valuable set of skills and strategic understanding.
While all profiles offer distinct advantages and disadvantages, firms must make hiring decisions based on the needs of their fund, investment strategy, and value creation plan. There is no right way to build – it is important to find a combination that fits your distinct needs.
“Having a combination of team members ensures that we are able to bring in the right resources to get results and build management team trust.”
Engaging Third-Party Resources
Building value creation teams has substantially impacted how firms are engaging third-party resources, like search firms, consultants, and various vendors. Across the firms we spoke to, the value creation leaders have become focused on streamlining the processes associated with the identification, selection, and general usage of third-party resources. From building out preferred vendor lists to creating a central relationship touchpoint and deepening partnerships, value creation teams are changing how third-party resources and private equity firms interact. Generally, private equity firms are seeking to identify partners who align with their investment thesis. There has also been a growing desire for partnerships as opposed to more transactional and project-based third-party relationships.
“We have preferred providers that are best-in-breed for our needs. It makes it easy to have candid conversations, lets us plug in the best firm for a specific project, and streamlines the overall engagement process.”
Success for value creation teams is defined by the success of the portfolio companies they serve. Given the management team is the one executing, it can be a challenge to quantitatively measure the direct impact of value creation teams. In our conversations with PE firms, the following key measurements of success were shared: increase exit value and decreased hold time for portfolio companies served, satisfaction and feedback from management teams, and in some cases the implementation of a net promoter score (NPS).
“You have to be able to attribute value. You can apply objective measures and identify appropriate insight. By keeping track of the tangible impacts such as cost savings, increased enterprise value, etc. you can better serve the portfolio companies and drive results.”
Looking ahead, as private equity firms continue to add value creation teams to their organization, building a structure that aligns with firm goals should be at the forefront of decision making. The range of models present in the market is evidence that firms can strategically build value creation teams aligned to their needs that enable growth, value, and results.
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