Maine Pointe: operating partners can drive private equity value creation

25 October 2018 5 min. read
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The private equity industry is more and more relying on operational value creation following an investment or acquisition. Bringing in an operational partner on board for support, from due diligence through to deal integration, is a key success factor for successful execution.

Spending by private equity firms is booming. Combined, the globe’s 8,000+ registered investment firms currently hold $2.8 trillion of assets under management, up from around $1.5 trillion in 2008. Lifted by a favorable economic and deal making climate, private equity firms are seeing their investment vehicles grow on the back of mounting interest from large capital stakeholders, such as sovereign wealth funds and pensions funds, looking to generate strong yields – the industry has in recent years outperformed other major asset classes.

Against a backdrop of the industry’s growing financial muscle, private equity firms however too often fail to achieve the benefits they aim for, with the largest ‘value gap’ in the execution phase. A study by US-based operations consultancy Maine Pointe found that a majority of executives in the industry are seeing a major gap between targets for cost reduction, cash flow, and/or growth and the actual value derived following roll-out of private equity-driven roadmaps and action plans.

Dan Ginsberg, Executive Vice President of Private Equity at Maine Pointe, said that a lack of appropriately skilled and qualified resources, time constraints, and difficulties getting CEO/management co-operation are the main barriers preventing private equity firms from driving more value in cost reduction and cash flow. Over the last decade, this has sparked the trend for private equity firms to either develop in-house capabilities, or look outside of their own organization for the operational expertise they require to achieve rapid, measurable results. “Approximately 50% of middle market and larger private equity firms utilize operating resources internally and most are working with various third parties to achieve improved operating results,” said Ginsberg.

Operating partners can help private equity firms drive value creation
He added that the growing focus on operational excellence and execution is a significant shift in thinking from past practices where cost reduction and supply chain and operations process improvements were not generally viewed as high priorities when a portfolio company wasn’t performing as planned. “Increased reliance on operational value creation in recent years has required private equity firms to diversify from their traditional ‘financial engineering’ role.”

Besides the value gap, another reason for the growing focus on operations lies in the sometimes ‘hidden’ potential that can be unlocked. The role of technology herein is a major force. Prior to today’s digital revolution, excellence was all about optimizing processes and lean operations; now, technology can be used to drastically rethink entire value chains. Leveraging intelligent automation, a supply chain cost reduction coupled with artificial intelligence during the execution phase can be a highly effective means of quickly generating cash, EBITDA improvements, and ultimately, bottom-line savings. The changing approach is becoming visible in many deals closed by investors, said Ginsberg: “Topics such as supply chain improvement or continuous improvement plans are increasingly being seen as a priority in the 100-day plans of integration leaders.”

Operating partners

The role of people to drive integration benefits remains key, however, while at the same time forming one of the main challenges for private equity leaders. “Finding the right talent and skilled resources continues to be a significant concern for many private equity firms trying to drive more value and improved operational performance.” As one expert in the field said to Maine Pointe’s researchers, “Resource constraints, both at the company and within our firm, are barriers preventing us from driving more value in cost reduction and cash flow as an operating group.”

Using an experienced operating partner with the management experience required to drive improvements is a means to overcome this. “Bringing in an operating partner at due diligence and continuing with the same partner post-acquisition means supply risks can be resolved, new value creation opportunities found, and previously identified opportunities implemented, all within an accelerated period,” said Mark McTigue, Vice President, Industry Partner, Private Equity, Maine Pointe. Ginsberg added, “Executives increasingly recognize that they lack the in-house operational expertise, and as a result are more open to the idea of bringing in operating partners.”

McTigue continued, "The importance and value of operating partners continues to grow within the private equity marketplace and it is clear that operating partners are driving value. However, while an increasing number of firms are coming around to the idea of using operating partners to drive value, there is a distinct lack of clarity around what model is the most effective. Investors demand results and want to know how the private equity firm plans to deliver them. Do they have an operating partner and, if so, what value are they driving? The challenge is finding the right individuals with the right experience on the ground.”