Private Equity: A New Approach

This article originally appeared in Business Insider

The markets have opened up enough that deals are getting done, but challenges remain for private equity investors looking down the road and asking the obvious question: how to generate attractive returns in this environment?  Increasingly the answer has been a heightened focus on operations.

This pivot from the traditional (though somewhat dated) view of private equity as being an industry composed of senior deal makers and junior model monkeys has been driven by a number of developments:

• The diffusion of key deal-making skills has eliminated any competitive advantage based on deal-making / financial engineering acumen (at least in mature private equity markets).
• As Adley Bowen at Pitch Book has noted, there are currently 4,500 private equity portfolio companies.  Many of those companies are not alone in their niche but find themselves competing against other well-funded private equity portfolio companies.
• The recession of 2008-9 forced many private equity firms to implement significant operational changes in their portfolio companies.  This trying experience instilled an appreciation for the centrality of an operations focus in an entire generation of private equity professionals.

Private equity firms are managing this dynamic in different ways.  Larger firms such as KKR have developed in-house units, as KKR has done with Capstone.  Across the PE spectrum the role of operating partner has become increasingly common.  And of course advisors are often relied on to either provide this core competency or supplement private equity firms’ in-house resources.

In the face of low-growth in developed economies the impact of boring but impactful initiatives such as book of business analyses, centralized purchasing, increased IT infrastructure, etc. has shown itself to be a significant driver of value.  Growth stories are more exciting, and it is always nice when the blocking and tackling of performance improvement can be combined with a return to growth, but sometimes that is not possible.

At the end of the day, style points matter less in investing than returns, and returns generated from making portfolio companies leaner still count.

About the Author

David Johnson (@TurnaroundDavid) is Founder and Managing Partner of Abraxas Group, a boutique advisory firm focused on providing transformational leadership to middle market companies in transition.  Over the course of his career David has served as financial advisor and interim executive to dozens of middle market companies.  David is also a recognized thought leader on the topics of business transformation, change management, interim leadership, restructuring, turnaround, and value creation.  He can be contacted at: david@abraxasgp.com.