In pursuit of operational excellence

More than 150 of the private equity industry’s leading value creators gathered this week for Private Equity International’s fifth annual Operating Partners Forum Europe.

With clear operational capability considered a must-have in today’s private equity landscape, panellists and delegates focused on the practicalities of developing and implementing operational models.

Here’s a round-up of some of the best advice we heard during the forum:

1. Operators are getting increasingly involved pre-deal

Operating partners at industry giants KKR Capstone, CVC Capital Partners, BC Partners and Cinven all emphasised that they are getting much more involved with portfolio companies during due diligence. The operating team “is about making the GP a better buyer and a better owner”, one panellist said; the most important decision a GP makes is asset selection, and therefore operators should have an influence on that.

2. Investors are digging into the value creation detail

When assessing the operational capabilities of GPs, investors go all the way down to the portfolio company level to draw their conclusions (and will make a point of seeking out management teams at poor performing assets). They want to understand the types of businesses the GP wants to buy and why; they want to see repeatable models; and they want to understand, regardless of the operational model the GP chooses, how it is actually applied. The same is true for co-investment; rather than focusing solely on the company, investors are zeroing in on whether that company is a natural fit for that particular manager.

3. Create balance in the boardroom

Portfolio company boards can be one of the best levers of value creation, if they are given what they need to succeed. The board should be periodically reviewed and firms should be prepared to switch out members so its composition mirrors the value creation plan for the business. Above all, it must be a balance of experiences, opinions and perspectives. Referencing two of English football’s star strikers, Advent International’s head of board development Conor Boden said: “The team can’t comprise entirely of Harry Kanes and Jamie Vardys; you do need some midfielders, defenders and even goalkeepers.”

4. If you crave the limelight, don’t become an operator

There is no glory in being an operating partner, but there is quiet satisfaction. Unfortunately it’s virtually impossible to quantify the contribution of the operating partner to the success of a portfolio company; there will always be those that say the deal team just bought really, really well. But it’s the operating partners that turn dealmakers’ dreams into reality which, some might argue, is priceless.

5. At the end of the day, it’s all down to people

It may sound like Private Equity 101, but it bears repeating; people are the key. More often than not, when a deal fails it’s down to people, be it the wrong management, the wrong chairman, or just poor communication between all parties. Conversely, when a deal outperforms, it’s likely the result of the right people working together and communicating effectively. Words of wisdom from a former CEO of a private equity-backed company: “Never stop talking.”