Private equity firms look for companies that have the potential to grow much bigger than their current size. For whatever reason, the existing company isn’t maximizing its full capabilities. Many times, the problems are financial.
With an additional monetary boost and qualified advice, these organizations can increase their market share and meet growth expectations.
In the current market, there’s a lot of competition among private equity firms to find organizations primed for growth. It’s grown harder to locate undervalued companies that can provide broad-reaching returns from a financial investment. Instead, private equity firms end up paying more — and putting more operational effort — into the organizations they invest in.
Many private equity firms realize they can obtain a return from their equity investment more quickly if they deploy operational consultants to help a fledgling portfolio company. Functional consultants are typically experts in their field. They can assist in a consultant capacity or join the organization full-time until it realizes its success.
Private equity firms use several models to maximize their portfolio companies’ operational performance.
One of the most common operating models is a functional one. The private equity firm develops a set of best practices to use across the board at all of its portfolio companies. A private equity firm that has found success with this model is Argosy Private Equity.
Argosy Private Equity invests primarily in lower middle-market companies with an EBITDA of up to $10M. At each of its portfolio companies, management receives a playbook of best practices in five different areas, including human capital, strategy, operational excellence, transactional excellence, and growth.
Argosy uses three partners to assist its portfolio companies with implementing the new practices. Each company’s success is measured using specific KPIs and progress reviews. Management frequently meets with the partners to ensure they’re on track with Argosy’s expectations.
In some cases, Argosy will bring outside functional experts to provide additional assistance. Often, these experts work directly with the company’s board, CEO, or chairman.
Another company, LLR Partners, uses a similar value-creation model for its portfolio companies. LLR Partners currently has 23 experts who work with growing companies in functional areas including finance, strategy, product, human capital, and sales. Each portfolio company receives lots of assistance from its partners, allowing management to focus on maximizing its performance at every level.
Like Argosy, LLR Partners employs an ongoing review process, ensuring that LLR and each of its portfolio companies collaborate through each growth stage. There’s no need for management to raise their hand when problems arise; instead, LLR remains an ongoing partner in the organization’s daily affairs.
Another operating model used by some private equity firms is industry verticals. In the industry vertical model, the private equity firm organizes the operational functions by industry sectors. One example of a private equity firm that uses this model well is Berenson Capital.
Berenson Capital looks for executives with experience in specific industry sectors relevant to the companies it invests in. Most of Berenson Capital’s portfolio consists of B2B technology sector companies.
Depending on the focus of the growing portfolio company, Berenson will identify executives with relevant industry sectors, such as life sciences or compliance.
Berenson finds that bringing on executives with prior sector experience helps with deal sourcing and strategic planning. The company also looks for executives with previous experience as a CEO or leading various functional teams.
Smaller private equity firms can employ a different approach to their operational strategies. For instance, Lion Equity, an investor in three active portfolio companies, combines engaging experienced professionals with individuals with broader experience.
At Lion Equity, consultants are brought on board to coach specific areas, including human resources, strategy, and operations. Lion Equity also has several individuals who take on the active CEO role at its portfolio companies. All the CEOs have prior experience in the CEO role in various industries.
The approach works well for Lion, which invests in companies in multiple industries. Since the company invests across sectors, a broader knowledge skill set proves helpful. This model is also incredibly adaptable. Since there’s no established playbook, consultants and CEOs can try different approaches. If one method fails, they simply try out a new one.
Some private equity firms are less willing to give up specific controls to operational partners. Instead, they seek to handle the majority of decisions and organizational changes themselves without the assistance of outside partners.
SFW Capital Partners is an example of a private equity firm that prefers to retain control. Rather than keeping partners on its payroll when they don’t have the right company to assist, they maintain an active database of executives. Their database is comprehensive and identifies each executive by their experience and background.
When SFW Capital Partners finds a new investment, they’ll contact the executives they feel are a good match to run the company. Usually, they’re able to find a good fit within a day.
Private equity firms realize that it makes no sense to wait around to earn the return they’re looking for from their investment. Instead, they must begin improving company operations during the diligence period.
Most of the time, private equity companies begin their research and plans for organizational change when they identify a potential investment likely to accept their offer. They’ll get a broad understanding of the company’s market and current issues and determine how the private equity company can make its investment a success.
While speed is a crucial factor in realizing a return, the emphasis on gaining the trust of the portfolio company’s management team is also paramount. Without the team’s confidence, the investment can easily flag. There must be an authentic positive relationship between the private equity firm and the target company’s management.
With the right structural improvements, the appropriate speed, and a willingness to execute the private equity firm’s vision for the company, private equity firms and portfolio companies can realize substantial benefits.
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Private equity firms no longer rely on financial backing and minimal operational improvements to maximize their potential. Increased competition within the industry is pushing talent as the sole differentiator between successful and struggling firms.
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Finding a proven executive search company is a critical step toward connecting with the incredible team of experts who will drive your company’s future growth.
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