Successful private equity firms tend to see massive profits when buying and selling companies. And historically, they’ve been able to achieve those profits through buying and selling alone.
That’s not the case today. In the current economic climate, the model of flipping companies isn’t enough to generate massive profits — or, at least, generate them as quickly as investors would like.
Enter value creation teams. Through the power of human capital, these teams accelerate the value and profitability of portfolio companies, leading to fast, large returns for private equity firms.
A value creation team is a group of experts who work together to transform a company acquired by a private equity firm. The team’s primary goal is to accelerate profitability and growth during the holding period, making it possible for private equity firms to see larger profits faster.
The exact nature of what a value creation team does will depend on the industry. But in general, these teams can deploy a range of initiatives to improve their companies:
Determining whether a given value creation team is successful or not is relatively easy: if the value of the particular company increases, the team has been at least somewhat successful.
That being said, if you’re bringing in a team, make sure you have a good idea of the company’s baseline. You’ll also want to choose appropriate KPIs to track. There’s nothing wrong with making a quick, qualitative assessment of the team’s work to start. But in an endeavor as complex as this one, you need a way to quantify your results.
The job description of a value creation team member is often nebulous. Likewise, the makeup of these critical teams can differ significantly depending on the particular firm.
Most private equity firms will outsource the formation of their value creation teams to talent experts. But across industries and company sizes, many teams tend to be made up of four distinct personality types:
Consultants who have previously worked with private equity firms tend to be in high demand when it comes to value creation teams. That might seem surprising — after all, consultants don’t usually have much experience running a business from day to day.
However, consultants offer a couple of distinct advantages. The first is that even though they don’t have much operator experience, they are often trained to manage a wide variety of projects. Second, they usually have excellent client management skills. These skills are essential for value creation teams who will be working alongside existing management.
Consultants might not have the knowledge and experience needed to run the relevant type of company. Operators do. These team members often have the industry know-how that the team needs to develop effective protocols and procedures. They also understand the management team’s concerns.
In some cases, this particular personality archetype can get so focused on smaller details that they may lose sight of the bigger picture. Fortunately, this focus can be balanced out by the rest of the team.
If you were assembling a value creation team for a specific business, you might prioritize finding people with industry experience. That’s not a bad thing, but most value creation leaders also prefer to include a generalist or two. These people have demonstrated an ability to successfully grow a company during the holding period.
Many generalists are former executives who have the general ability to drive value, so their perspectives are often welcome on value creation teams. However, because generalists don’t have specific industry knowledge, you’ll want to ensure you have a few other types of people on your team.
A specialist — someone who has extensive experience in the relevant industry — might not necessarily have much operational experience, but their industry knowledge can be incredibly valuable when you’re creating a strategy.
It might seem as though adding a value creation team to a portfolio company is a way to override the authority of the management team. But that couldn’t be further from the truth. Successful value creation teams know that forming a partnership with management is the best way to quickly increase a company’s value.
With that being said, not all management teams are receptive. In many cases, the value creation team needs to prove its worth. Once members of management see that the team is working in the company’s best interests and that it’s not simply there to override management’s authority, they’ll be much more likely to work alongside them.
In the coming years, some private equity firms may downplay the importance of talent in value creation. It’s true that talent isn’t the only ingredient when it comes to building value. But if you think you can build meaningful value without talent, you may not have thought of how you’ll implement plans to drive value.
As firms move forward into this new era, it’s important not to downplay the importance of talent when generating returns. While formulating new growth strategies can be difficult and time-consuming, the potentially massive profits make it worthwhile.
If you’re part of a private equity firm, cultivating value in recently acquired companies is vital. And if you’ve been in the business for a while, moving away from the old ways of doing things can be easier said than done.
Ultimately, the rise in value creation teams points to a single crucial truth in the new landscape of private equity firms: Talent has long been an underutilized resource, and value creation teams know how to use that talent to transform companies and profits alike.
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