Friday Letter: Operating to the max

On Blackstone’s second quarter results call this week, Tony James was in typically ebullient form. James told his audience that he saw no reason why the “spectacular returns” produced by the firm’s private equity investments over the past few months would not continue to be, well, spectacular for the foreseeable future.

Yet while Blackstone has revealed undoubtedly impressive numbers, not everyone in the private equity firmament shares James’s optimism that the good times will continue to roll in quite the same way as they have done. There is a widely-held view that the days of double, triple and even quadruple digit returns on investment are well and truly behind the sector. 

That’s not to say IRRs won’t continue to be solid of course. They are likely to remain ahead of those produced by other asset classes, but wherever PEI has travelled in recent months, the idea that private equity needs to work harder to yield even these more modest returns has been all pervasive.

In the current issue of our magazine, PEI’s Germany roundtable panel talked at length about how the days of buying assets, leveraging them to the hilt and selling them on two or three years later would just not wash anymore.

The global financial crisis was the beginning of the end for such a model, and being able to demonstrate the ability to produce genuine value creation through operational improvement was now the biggest game in town.

At PEI’s Hong Kong Forum in May, an AlixPartners survey of more than 100 GPs with investments in the Asia-Pacific region ranging from $300 million to more than $5 billion, revealed that for 73 percent of the respondents operational improvement was now the most important value creation lever.

The point of all this is that many of those GPs who entered the Asian market riding on the back of a growth wave got a rude awakening when the market changed. Building an effective operations team has become one of the single most important criteria for any PE firm wanting to get ahead, or even stay with, the competition.

We at PEI realise that building operational expertise and creating value is one of the best – but also one of the most challenging – things to get right.

That’s why for the fourth consecutive year, our Operational Excellence awards will celebrate those firms that do it most successfully. And it’s not just about the multiple achieved on exit. Our distinguished independent panel of judges will want to see proof of genuine value creation and a future proofing of portfolio companies.

As with last year’s awards, the categories are split into companies of four sizes, and between Asia, Europe and the Americas. We want to hear from GPs with an impressive – or partial – exit story to tell from the past 12 months that demonstrates true operational excellence

Operating excellence has become an ever more important weapon in a GP’s armoury so prove to us that you have it in yours. We’re looking forward to hearing from you by 7 August.

All the details and criteria can be found here – so you can get right on it.