Operation Value-Add (Part One)

As the private equity industry matures, PE firms bat around terms like “operational expertise” and “value add” as a way to distinguish themselves from the sea of competitors, and also justify their existence. (If you’re not adding something, what exactly are you all doing?)

But what do those terms even mean? And further, how do you execute on them? I went to Capital Roundtable’s “Adding Value to PE portfolio companies” Masterclass to find out.

Some questions posed: Is a 100-day plan necessary? What is the optimal number of full time employees to have per portfolio company? How do you deal with tension between managers and the operations people? How long does a deal partner stay involved after the deal closes?

Note: I wasn’t given permission to quote anyone specific, so I’ll have to attribute these insights to nameless panelists, presenters and attendees at the event.

So. Operations guys face a few challenges: One is winning over the current management team. The other is being taken seriously by the dealmaking team. To address the former, conference speakers suggested building a strong relationship early on. “Tension is going to exist,” the person said, “because if you’re thesis is ‘there’s improvement to be made,’ then by nature you’re criticizing management.” Yet at least 40% of managers stay on after a buyout. One suggestion: have the operations partner work on the deal (in tandem with the deal team) from the start. That way the operations partner has a better sense of what’s achievable with the company, and can establish a personal relationship with the managers early on. If starting with the deal team isn’t possible, then use the pre-close period as a time to bring them on board.

As for being taken seriously, several conference-goers specializing in operations said they often felt like “second class citizens” at the firm. The best solution is to offer carry to the operations partners. The next is to hire people possessing a degree of authority. A soft touch is necessary for winning over management, but operations partners must be able to make tough decisions, and “call the baby ugly if it’s ugly,” one speaker said, in reference to bad management.

Next question. How many full time employees should you appoint per portfolio company? One speaker suggested ½ to one full time employee per sub-$1 billion company, and certainly one full timer for $1 billion to $5 billion companies. Beyond $5 billion, appoint one operations person for each strategic initiative in the plan.
And now that we’ve established that operations people should start earlier, how long should the deal team stick around? Answers to this one varied, but the consensus seemed to be, have them continue to check in and stay in contact with managers throughout the ownership period.

In the next edition: How do firms place their operations people within the organization?