Mazars conducted a study on how PE investors contribute to the performance of their portfolio companies.
Consulting organization Mazars surveyed a panel of pan-European private equity investors (PEs) about the performance of their portfolios and their influence on it.
On average, 70 percent are satisfied with the performance of their investments. Reasons for dissatisfaction are related to strategy, management teams and operations. There are three main areas where PEs try to focus their contribution to performance.
Three causes of underperforming companies
According to the research, 73 percent of portfolio companies perform as expected or better after three years. The image below shows the three reasons that PE investors point to as the cause of underperforming assets.
The main reason, market declines, is not predictable and you cannot do due diligence on it. To mitigate this factor, PEs' primary focus is on protecting revenue growth. They do this in the following ways:
1. Support international expansion and build-up
PEs tend to be strong in identifying fragmented markets to carry out consolidation and diversify/spread their risks and revenue sources across different markets and economic cycles. In these build-up transactions, the PE firm brings its technical expertise, while, as highlighted by a Dutch PE familiar with cross-border build-ups, the platform firm will carry out the integration because they are aware that “the better the cultural match, the more value is created.”
2. Strengthening sales and marketing teams
Management in family businesses or small and medium-sized businesses is usually product-oriented and lacks the required skills and experience in sales and marketing. PEs can help attract talented sales directors or they can provide temporary experts. “We have an expert in-house who is a former marketing director of a Coca Cola-like multinational”, says one of the PE investors interviewed. “Every time we introduce him to our portfolio companies, he hits the mark.”
3. Open doors thanks to the PE network
PE firms also contribute to sales development by providing access to their own network. Some even encourage commercial relationships between their portfolios. It can take the form of a customer-supplier relationship or of cross-marketing and cross-selling.
Execute the operational plan
In addition to the focus on revenue growth, improving operational performance is also high on the PE agenda. The research shows that 'Support in the implementation of the revenue plan', 'Retention of key people' and 'Operations' are the three items that have the highest potential for improvement before the signing of the deal.
An interviewed French boutique investor explains that in the DD phase they assess management's capabilities to successfully execute the operational plan. On this basis, they either provide limited operational support or fully guide the company hands-on in the implementation up to and including replacing members of the management team.
Intervene in the management team
Having the right and fully aligned management team in the company is the third factor that PEs influence. Mazars' quantitative research has shown that poor alignment between PE and company management can be fatal. Alignment with the founders and management team is critical, but the right alchemy “doesn't fit into an Excel formula”, as one French investor puts it.
All companies interviewed admitted that the lack of building personal relationships has been the cause of their funds' failures. No matter how trivial it sounds: “You don't sleep with someone you don't know well.”
In any case, a must-have is a good CFO. He/she will be able to track performance, create reports and achieve quick or obvious successes, for example in improving debt management. For a Dutch PE: “Investing in management, management and management is the best recipe for success. There should be no hesitation if you feel there is a gap in the management team or that some members do not fit what you expect.”
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