Driving growth and competitive advantages through private equity investment
Private equity firms are known for providing the capital growing businesses need to reach the next level of maturity, but that is just the beginning. The best private equity partners also leverage their social and human capital to collaborate on new operational roadmaps and targeted improvement plans that safeguard long-term growth.
In this blog post, we review the tools and strategies top PE firms utilize to reshape the strategic direction of portfolio companies, and guide them towards pre-established goals and objectives. Baselining, talent optimization, and operational enhancements are among the pillars supporting this balanced approach to controlled growth.
Beginning with the end in mind
As the poet Maya Angelou once said, “You can’t really know where you are going until you know where you have been.” For a business working with a private equity partner, this means baselining company health and performance in a variety of categories to determine the key gaps and opportunities. Roadmaps, value blueprints, and business plans are among the tools used to assess the current status, then create metrics and strategic initiatives that align with the unified vision.
This planning and discovery phase is essential to define the private equity strategic direction, since it allows teams to identify the business strengths that need to be preserved, along with weaknesses that must be addressed to support sustainable growth. With so much financial, operational, sales, and leadership information to review and analyze, identifying initiatives with the most ROI potential is imperative.
Operational excellence and efficiency
New tools and systems are also key pieces of the puzzle, since they provide opportunities to improve productivity, reduce waste, strengthen collaboration, and minimize errors. This includes software tools like accounting platforms and customer relationship management (CRM), as well as systems and practices like lean manufacturing and Six Sigma that promote operational efficiency as well as quality.
With so many options to choose from, the planning phase is instrumental in determining which new tools are necessary, how they will be integrated, and how much long-term value they can bring. Tools and systems to drive growth strategy are likely to include:
- Right-sized enterprise resource planning (ERP) platforms to manage and integrate procurement, inventory management, and other key business functions.
- Digital sales and marketing systems to enhance demand and brand awareness.
- Advanced financial software to streamline reporting, forecasting, and auditing.
PE active management helps businesses identify the right tools and systems, based on years of experience building operational excellence, and a keen understanding of system interdependencies and scalability.
The strategic advantage of talent
The human capital enhanced by direct PE involvement is also essential in reshaping the strategic direction of the business. The baselining process should include a top-down review of talent and job fit, including any vacancies or deficiencies in company leadership. Private equity involvement can also influence the company culture, so strategic additions to the management team should ensure all employees remain motivated to leverage their talents and abilities.
Ongoing training and education of employees and leadership teams provides additional opportunities to reinforce the strategic vision. The power of the portfolio can be instrumental in establishing valuable mentoring relationships, roundtables, and workshops within and outside the organization. Training opportunities that support upskilling, leadership, and new tool deployment also improve employee engagement and retention.
Exit strategy planning
Knowing what good looks like and beginning with the end in mind are useful ways to think of the eventual exit as a milestone rather than a finish line. In other words, the strategic direction of the private equity partner should be translated into concrete goals that will be achieved prior to exit. While selling the business to a strategic buyer remains a dominant exit strategy, additional options include:
- Management buyouts (MBOs) where the company leadership teams purchase (or re-acquires) a majority stake from the PE firm.
- Recapitalization strategies where equity is replaced with debt, or new equity is issued to a new set of investors.
- Initial public offerings (IPOs) where privately held companies go public by issuing shares on a stock exchange. IPOs can provide substantial returns under the right circumstances, but also come with strict regulatory requirements.
Active vs. passive management
The tools and strategies utilized by the best private equity firms highlight the key differences between PE active management and passive investment strategies, where partners take a hands-off approach. The pitfalls of the latter approach can be seen in examples throughout history, when a lack of involvement and oversight led to misappropriation of capital, rather than bottom line growth and expansion. Warren Buffet lists his failed $443 million investment in Dexter Shoe Company among his greatest missteps, with limited research and an absence of oversight allowing for the catastrophic failure.
At the opposite end of the spectrum, investments accompanied by active management, such as the Valesco acquisition of Drug Free Sport (DFS) in 2017, demonstrate how PE guidance through the business and operational evolution can lead to monumental changes. The growth strategy collectively developed by Valesco and the DFS management team resulted in increased revenue of 138%, a key add-on acquisition in Europe, and the integration of a new ERP system before exiting 7 years later.
Conclusion
Active investment strategies provide a win-win for PE firms and their holding companies, with the combination of capital and hands-on guidance leading to predictable growth. The planning and long-term vision established at the outset provides a foundation for the private equity strategic direction, revealing opportunities to increase ROI through the optimization of personnel, systems, and tools. Active private equity partners accelerate this evolution, using their experience and connections to find the right solutions at the right time. Countless passive vs. active investment examples highlight the value of research and oversight, along with the infusion of human capital and wisdom only experienced partners can bring.