In today’s market, buying and selling companies is not sufficient to generate the magnitude of returns sought after by private equity firms. To stay ahead of the competition, a growing number of private equity firms are forming value-creation teams that are designed to accelerate the growth and profitability of portfolio companies. Working closely with the portfolio company management teams, value-creation teams serve as a key differentiator for private equity partners throughout the deal cycle.
Paramount to their success is building strong relationships with their portfolio. As a retained executive search firm for private equity, we work closely with a range of industry operators, value creation teams, and private equity deal teams to recruit talent. We recently reached out to some of our private equity partners to understand how their value-creation teams work to drive value and optimize engagement with portfolio executives.
The following are insights and best practices shared by private equity value-creation leaders who are focused on accelerating shareholder value within the portfolio.
Engage Early & With Transparency
Value-creation teams are engaging with management teams earlier and with more defined roles within the deal cycle. For some firms, value-creation teams have become part of the pitch when first engaging with a prospective acquisition – enabling the management teams to best understand how the private equity firm will engage during the holding period. It has also become a key differentiator and distinct advantage for attracting target investments.
“When you can show that you can provide a differentiated level of expertise and resources – especially to smaller companies which oftentimes do not yet have a fully-built-out c-suite – it can help win deals, identify issues early, and optimize returns. We saw the opportunity to disrupt how prospective management teams and our PE deal teams engaged in these processes and decided to double down. It has since become our calling card.”
For others, designating value-creation team members to portfolio companies during the due diligence process and immediately post-acquisition can help setup both the PE firm and management team for growth, and ensure collaboration as key strategic initiatives are defined. For some private equity firms, this means working with the deal team and operating team through the due diligence process. From IT diligence to talent assessment, the goal is to have conversations with the management team before the PE firm commits, so they can drive value and support key initiatives from the start with alignment from the operators
Occasionally, management teams can be resistant to the involvement of value-creation partners. One key to overcoming this challenge is to set expectations early on around the role of value-creation team and expected collaboration to ensure stakeholders can reach alignment quickly.
Lead With an Operator’s Mindset
The management teams are the day-to-day operators of the business and are responsible for business performance. Their mindset, perspectives, and commitment to initiatives ultimately drives the success or failure of the company. Ensuring they are aligned with the overall strategy, growth goals, and mission is key. Additionally, they bring a deep understanding of the strengths and areas of development of the business that may go unobserved by those sitting outside of day-to-day operations.
“It is important to remember what management teams can and should do for themselves, and that we can help. Whether that is us leading specific projects, facilitating strategy sessions, or adding functional expertise – the management team’s perspective on how to utilize our team is critical to success.”
When developing the value-creation strategy, all stakeholders should take an operator’s mindset to have the best outcomes.
Developing a partnership and building trust with portfolio company management teams is a core component of a successful value-creation process. Our PE clients have shared that value-creation teams have faced a spectrum of receptivity – from very engaged to reluctant. As a learning, PE firms are focused on ensuring the management teams walk away understanding the value of the combined team, recognizing they are there to support versus judge, and ensure full alignment on vision and strategic goals.
“When it comes to building rapport with the management team, you must first earn your reputation by showing value. However, client handling is also a critical component to success – you can do it the wrong way. There is an art to it. It is a key attribute we look for when hiring for our firm and value creation team.”
Particularly for investors working with founders, being transparent about the goals and intentions is crucial. For many founder-led businesses, exposure to more formal consulting arrangements may have been limited due to size, scale, and financial constraints. To navigate this scenario, private equity firms may place a heavy focus on client handling skills when hiring individuals to join their team. Value -creation team members should have this attribute as a core skill. The consensus across value-creation leaders is that once management teams see the positive impact of value creation teams, they become increasingly receptive.
“Ultimately, we are aligned around a common goal, to grow the business, and there is no world where [the PE firm] is successful and the management team is not.”
Focus on Outcomes
Measuring success is different for each portfolio company, and often changes throughout the holding period. Likewise, the make-up of value-creation teams can differ significantly across private equity firms. As a result, the definition of success can vary, yet the goal is the same – to efficiently drive operational initiatives that create value for the portfolio company, the PE firm, and its Limited Partners (LPs). Focusing on outcomes and tracking progress on key initiatives is crucial, regardless of whether a value-creation team is comprised of functional experts, generalist resources, or both.
Whether it’s hiring the executive team, integrating an add-on acquisition, or enhancing cybersecurity – driving value through the implementation of growth and operational initiatives is key to a successful partnership between the value creation team and management team. While the management team executes on the day-to-day, value-creation teams help keep communication lines open with the investment team and ensure all parties are held accountable for their role in driving success.
“At the end of the day, there is no better measure of success than a (portfolio company) CEO ‘knocking on the door’ for assistance on new initiatives after a successful outcome.”
For private equity value-creation teams, strong alignment with the management team results in better outcomes, successfully executed value creation plans, and enhanced communication. Portfolio company leaders and investors that focus on optimizing engagement and collaboration of all stakeholders will be best positioned to generate value and optimize investment returns.
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