Creating Value with Operational Intervention
by Francesco Liistro of GILDE Buy Out Partners
Private equity has gotten a bad rap throughout the years, thanks in part to the popular image of an uncaring operator who buys and sells companies without concern. For a truly successful modern PE company that accomplishes high multiples through attention and care, that couldn’t be further from the truth.
In practice, a great private equity fund is one that meets investor needs with a full appreciation and understanding of what makes these companies tick. Portfolio company CEOs make a choice. You can be remote and uncaring, buying and selling without true involvement in the day-to-day and hope your changes work. Or you can roll up your sleeves and do the work necessary to create real benefits. That’s more than opening up the hood and taking a look around; it’s a deep dive into a portfolio company’s everyday workings. It’s a process known as operational intervention.
A full investment
It’s not a secret, I’m happy to share it with anyone who cares to listen. The transformative ability of these methods doesn’t lie in some arcane formula; it only depends on your willingness to implement it completely. That’s where the difference lies.
Private equity investment managers, take note: you will never add value without fully investing yourself in the task. Operational intervention, as its essence, starts with learning by fully weaving your work into the business you’re intervening in. You wouldn’t drive a car by sitting in the backseat! Only by first performing the groundwork of assessment followed by insightful changes can you deliver the value that your acquisition promised.
The big obstacle to this work, for many in the field, is the sheer effort and exertion that it requires. Things weren’t always this way. Traditionally, underperforming companies have been served by a temporary consultant who flies home on the weekends, staying only until their initial set of goals has been met. Today’s environment simply doesn’t accommodate that style any more.
Implementation is now a 360-degree process. Successful private equity operations need a holistic assessment of what’s going right and what needs work, and that can only be accomplished by getting down into the details. That includes knowing not only what the company needs, but who it needs, and installing a new CEO who can guide them to greater heights of profitability and value.
Boots on the ground
Often, a strong portfolio company CEO is not sufficient on their own: the company being intervened in lacks professionals experienced in making the necessary changes, and that needs to change…fast. That is why smart operational PE funds build a highly effective team of specialized professionals around their Portfolio Company CEOs, people specialized in different fundamental fields. It’s what I like to call the task force.
While I’m doing the heavy lifting as CEO, the task force attacks the details. Made up of experts in the niche the portfolio company in question inhabits, their experience and knowledge make them crucial to the job. Talented task forces are the best weapon in my arsenal: precise, powerful, and thorough.
Frame of mind
There’s a certain attitude that underlies all of this as well. A driving force that ensures we deliver the best results. Process alone won’t get great results–it also takes the right mindset.
A trend I’ve seen that’s truly disconcerting is a shyness among PE funds when dealing with portfolio companies. They’re more concerned about stepping on toes than with doing what they’re expected to do: add value. They’ll call themselves a “sparring partner” to the management team rather than take on the full responsibility of rejuvenating an underperforming company. Worse yet, some will stake out a spot on the board of directors, one voice among several, and feel as though their work is done.
Half-measures don’t work for creating value in a portfolio company. It’s not rude to step in and make your opinions heard–that’s what your investors are paying you for. They say that fortune favors the bold, and finding a fortune in private equity comes from a similar boldness: one that’s backed up by all the groundwork you’ve done.
Another misconception is that operational intervention is only for struggling companies. In truth, the work pioneered by turnaround specialists has generated a streamlining process that can work for any company seeking improvement or growth.
In the end, successfully positioning a portfolio company to perform at its best requires you to excel as well. With the proper preparation and research, followed by thoughtful implementation, operational intervention can position PE funds at any level for their next big jump.
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