OPERATIONAL EXCELLENCE SPECIAL 2016€¦ · october 2016 operational excellence special 2016 1 Five years and counting When we first launched the Operational Excel - lence Awards

October 2016 privateequityinternational.com

A special supplement

OPERATIONAL EXCELLENCE SPECIAL 2016

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Supporter:Alter Domus

This year’s award winners Buy and build success strategies Digital ways to value creation The ultimate deal mechanic

...and more

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1october 2016 operational excellence special 2016

Five years and counting

When we first launched the Operational Excel-lence Awards five years ago, we really weren’t sure quite what to expect from the entries. The idea was simple enough. A chance to celebrate value creation by finding the best examples of GPs transforming portfolio companies to secure returns for investors.

Covering the private equity industry across the globe, we knew there was no shortage of operational excellence but even we were taken aback by the quality and quantity of the entries.

Five years on, and it’s fair to say that we still don’t know quite what we’ll find in the bulg-ing (electronic) postbag of submissions. From Algerian nappy and sanitary pad manufacturer CEPRO to UK wealth advisors Towry (see p. 22-37 for the winning submissions), the sheer range of the entrants for the 2016 awards was as mind-bogglingly diverse as ever.

Our expert team of judges had their work cut out to decide the outcome: “This year was far harder to judge than in the previous years,” said a clearly impressed Miles Graham, managing partner at the Operating Partners Group. But the gratifying thing is that the 12 eventual winners really do nail the myth that private equity ownership requires little more than clever financial engineering and massive debt piles.

The joy of this particular supplement, though, is that it also allows to delve deeper into the nuts and bolts of operational excel-lence, and exactly what is required to transform businesses.

We talk to GPs about the enormous oppor-tunities provided by digital innovation (p. 8), look into exactly what is required to pursue a successful buy and build strategy (p. 15) and highlight the crucial role that CFOs play in transforming portfolio companies (p. 44).

Our keynote interviews also provide some fascinating insights. On page 18 ECI Partners tells us how it managed to secure a stunning 4.5x multiple on the six exits from its ninth fund (sheer bloody hard work, by the sounds of it) and Jim Corey of Blue Ridge Partners explains why early revenue growth is crucial to boosting shareholder returns (p.11).

And what about the portfolio company executives who are under pressure to deliver on (sometimes over-) ambitious action plans? Our anonymous “secret squirrel” on page 52 sheds light on the travails of a financial control-ler at a PE-backed company.

There’s little doubt that operational excel-lence goes to the heart of the debate about how to achieve returns in a low growth era. A tough task, perhaps, but, judging by our award winners, this is one challenge the private equity industry is quite capable of meeting.

Enjoy the supplement.

Graeme Kerr

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GRAEME KERREDITOR'S LETTER

2 private equity international october 2016

CONTENTS

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4 Overview: Licence to boom Private equity owners really do grow their portfolio companies

faster than corporate owners, new research shows

8 Connecting the dots Digital innovation offers a huge opportunity for value creation

at portfolio company level. Ignore it at your peril

11 Keynote Interview: Blue Ridge Partners Kick-starting revenue generating opportunities early in the

investment cycle is critical to boosting shareholder returns

15 Buy, build and prosper The relationship between the GP and management is central

to the success of a bolt-on strategy

18 Keynote Interview: ECI Partners ECI Partners has finely honed its value-creation method,

and is delivering the returns to prove it

21 In pursuit of operational excellence Five things we learnt when the industry’s leading value creators

gathered for PEI’s Operating Partners Forum Europe

38 Expert commentary: RSM A growth framework can keep a 100 day plan on track by

providing valuable operational insights

41 The ultimate deal mechanic The insights we’ve gained from the last 12 months of examining

the art of adding value to secure a successful sale

44 The vital role of CFOs The chief financial officer of a portfolio company has an

increasingly crucial part to play in the exit process

46 Getting the harmony right The key to delivering strong returns is knowing just how much

to get involved, writes Jim Strang, a managing director at Hamilton Lane

48 Expert commentary: Alter Domus As regulatory requirements increase, a big concern is ensuring

that investment teams are not choked by administration

50 When labour falls short Joe Haviv, chairman of Protostar Partners, explores production

issues in assembly operations

52 Off the record An anonymous financial controller gives the inside story of

what it’s like to work for a portfolio company

OPERATIONAL EXCELLENCE SPECIAL 2016

22

22 Introduction and honour roll

24 Meet the judges

26 Americas

30 Asia-Pacific

34 EMEA

4

21

8

46


OVERVIEW

Over the years there has been plenty of research showing that private equity invest-ment at the fund level generally outperforms public markets. But a new study from the Private Equity Institute at London Busi-ness School in association with Swiss asset manager Adveq reveals that even down at the portfolio company level, private equity performs better.

The study – Value Creation in Buyout Deals: European Evidence – analysed more than 1,500 European buyouts from 1998 to 2014 and found that in the first three years of private equity ownership, relative to benchmark non-private equity owned firms matched by year, industry and other characteristics, private equity portfolio companies increase their leverage, operat-ing profitability, assets and sales.

Licence to boomNew research shows private equity owners really do grow their portfolio companies faster than corporate owners, going some way toward safeguarding the industry’s licence to operate, writes Isobel Markham

VALUE CREATION

This, the study claims, indicates that “while GPs are focused on growth they also generate significant operational improve-ments”.

The London Business School research found that private equity-owned companies more than double their sales in the first three years, compared to more modest growth in the benchmark groups, while EBITDA growth is also significantly higher (see chart).

“We are showing that private equity owners potentially contribute to the per-formance of these companies significantly more than other owners. Better sales, better EBITDA. It might sound pretty basic, but really there was no clear evidence before at the portfolio company level,” says Florin Vasvari, a professor of accounting at London Business School and one of the authors of the study.

“At least over the first three years, there are signs that [private equity] owners do much better than other owners. There is a sense of urgency, there’s an increase in sales, there’s improvement in EBITDA, investments, so obviously they’re shaking things [up] a bit.”

Total assets growth and fixed assets growth are also markedly higher, suggest-ing that “GPs increase leverage following acquisitions to pursue growth strategies through significant capital investments,” the study says.

The research also discovered that private equity buyers tend to pay less for portfo-lio companies than corporate buyers, by around 10 percent.

Sommers: the numbers only tell part of the story

HOW PRIVATE EQUITY OWNERS OUTPERFORM THEIR CORPORATE RIVALS

Source: London Business School/Adveq

The performance of PE-backed companies vs non PE-owned companies after the first three years of ownership

PE-owned companies

Non-PE-owned companies

All

Non PE-owned companies in same industry

Corporate M&A targets

Sales growth EBITDA growth Total assets growth Fixed assets growth

% growth


To learn more about how Riversidedrives results, visit www.riversidecompany.com.

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They buy businesses cheaper, then, and make them work harder, leading to better returns, and – potentially – a justification for the high levels of fees firms charge investors.

To conduct its analysis, the LBS team relied on a range of data providers and publicly-available information. Even today, private equity firms themselves are not particularly forthcoming with data – even when it paints the industry and the individ-ual firms themselves in a more positive light.

“One issue with this is they might be con-cerned that by revealing this data they show their competitors how they make money,” Vasvari says. “The solution in my view would be to be as transparent as possible. Investors, especially the very large investors, the pen-sion funds and the sovereign wealth funds, they need more information about how performance is achieved in private equity.”

Investors are placing ever higher impor-tance not just on the returns generated by firms, but the way these returns are gen-erated.

“Private equity investing is about repeat-edly building and developing companies and creating attractive returns,” says Jan Rådberg, head of private equity at AP Fonden 1, the first Swedish national pension fund.

“It is only possible to do this consistently if you have high ethical standards, a skilled team with strong industry expertise. Such teams typically build companies that will prosper after the ownership period ends.”

The LBS research makes a strong case to justify private equity’s existence. But as Mike Sommers, president and chief executive officer of US trade association the American Investment Council says, as useful as such evidence is to support the industry’s narrative of superior business ownership, to truly paint a picture of the benefits private equity can bring, one must go beyond the numbers.

“We also have to tell the stories, we have to tell the anecdotes about what private equity has meant for workers, those that actually benefit from private equity ››

The operational performance of private equity portfolio companies improves dramatically over the first three years

114%Sales

102%EBITDA

88%Assets

Source: London Business School/Adveq


OVERVIEW

investment,” he says. “There are 11 million American jobs that depend on pri-vate equity investment, and we constantly have to tell that story to lawmakers and the public.”

Unfortunately, the stories that make the headlines of most mainstream newspapers tend to be the ones where it all went wrong – City Link, EMI, Simmons Bedding. Our Operational Excellence Special is a chance to do the opposite, to draw attention to private equity firms who have excelled in transforming portfolio companies from humble beginnings to significant players, grappling with a host of challenges rang-ing from macro-economic turbulence to personnel issues and everything in between.

Across the globe private equity firms have taken great strides in transitioning from a model based almost entirely on financial engineering to one focused on driving growth through value creation ini-tiatives, boosting economies and employ-ment figures as they go.

Now in their fifth year, our Operational Excellence Awards show just how far the industry has come. But there’s still work to be done.

“Given the increasing importance of the private equity industry as business owners in many countries, I think the industry could benefit from being more open about its investments and value creation,” Rådberg says.

“I think that private equity has many good and successful stories to tell, which may not always come across to all stakeholders.” n

London Business School: its study is the first to compare private equity and corporate owners at portfolio company level

Private equity has many good and successful

stories to tell, which may not always come across to all stakeholdersJan Rådberg

SIZE MATTERS

Source: London Business School/Adveq Source: London Business School/Adveq

Small refers to buyout funds under $500m; medium are buyout funds between $500m and $1bn and large are buyout funds over $1bn

Small refers to private equity firms with one or two funds; medium are those with an average of four funds and large are those firms with an average of 10 funds

Small funds show the highest sales growth for portfolio companies…

…but the private equity firms with the most funds boast the biggest EBITDA growth

Sales growth over first three years of private equity ownership

EBITDA growth over first three years of private equity ownership

››

Small Medium Large Small Medium Large

% %

Developingcompanies

www.eqtpartners.com


In April, a group of 3i executives returned from a trip to Silicon Valley. The group, made up of individuals with experience in digitisation drawn from the firm’s sector teams, met with senior executives from digital game changers such as Google and LinkedIn down to innovative start-ups.

At a meeting in London that followed, 3i drew from the same network of digi-tal leaders to speak at a gathering of 11 companies in its consumer portfolio. The companies, which include UK retailers Hobbs and Agent Provocateur, heard from the likes of Facebook and Instagram about best practice engagement with those plat-forms, in this case to boost their customer acquisition processes.

Of 3i’s response to digitisation, partner Tom Salmon, who heads up its UK con-sumer division, says: “We’ve been quite big picture, thinking about trends and themes and macro drivers, and then quite granu-lar in terms of thinking about individual impacts on sectors in which we invest and what does ‘good’ look like within those sec-tors.”

Technological innovation, internet con-nectivity, increasing processing power, big data, the internet of things, social media, mobile platforms and advanced analytics are

among the digital forces reshaping the busi-ness landscape. Retail, telecommunications and financial services sectors have already been transformed, with digitisation now revamping more traditional industries, like construction and heavy industry.

Some GPs have responded more nimbly than others. “For some funds, this is some-thing they have been thinking about anyway,” says Aaron Cheris, Bain & Company head of Americas retail business based in San Fran-cisco. “It’s an evolution they are paying atten-tion to. For a lot of people, though, it’s going to be a revolution. We have gotten more calls than usual from funds saying come talk to us about digital, in a very broad, unstructured way. They know they have a problem but they don’t know what to do about it.”

The cost of not addressing digital change is high. “If you look five to 10 years ahead, you’re going to be completely out of the

market,” says Salmon. “As an investor you have to be alive to these trends and recog-nise that more traditional business models that were good investments five or 10 years ago don’t really exist.”

The impact of digitisation is vast, trans-forming a portfolio company’s business model, its products and services, its research and innovation capabilities, purchasing and production capacity, supply chain dynamics, marketing, sales and customer interaction, as well as back office functions.

One clear benefit of devising a response to digital disruption is the reduced risk of obsolescence. Digitisation can also lower operating expenses, increase output and efficiencies, improve flexibility in produc-tion and delivery, boost market responsive-ness through predictive analytics, improve customer interaction, and accelerate infor-mation sharing across the value chain. It also has implications for reporting and meeting compliance standards.

According to a PwC survey, industrial companies that have implemented a com-prehensive digitisation strategy expect to increase revenues by an average of 2.9 per-cent over the next five years and reduce costs by an average of 3.6 percent a year, with a significant minority projecting

DIGITISATION

Connecting the dotsDigital innovation offers a huge opportunity for value creation at portfolio company level. Ignoring it is an enormous risk, says Victoria Robson

››

They know they have a problem but they don’t

know what to do about itAaron Cheris

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Management of private equity investment funds(A registered investment adviser in Japan)

DRC Capital Ltd.

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strategy, innovation acceleration, and digiti-sation of workflows, to name a few.”

How a company gets started depends on the urgency and the business segment affected, says Cheris. “Is this industry instability, competitive position or is this a gradual move? What is most affected? Is it operations, the underlying offering, the customer pathway, whether it’s to or within the business that is changing?”

Prioritising a portfolio company’s digital direction differs from drawing up a typi-cal value creation plan, says San Francisco-based Elizabeth Spaulding, who is global

total revenue growth of more than 50 percent over five years.

GETTING STARTED

Devising a digital strategy goes much further than embarking on e-commerce. “That isn’t a digital strategy to me,” says Salmon. “A strat-egy is, here is a set of levers that are relevant to businesses in the new digital world and here is a business that can really take advan-tage of them. It’s easy to say that ‘we have a digital strategy as we have a great transac-tional website’, but it’s so much more than that, for example, a coherent omni-channel

THE DIGITAL CHALLENGE

EQT Partners' head of marketing technology Sven Törnkvist talks digitisation

DIGITAL INNOVATION

››

How significant is introducing digital

change to creating value?

Digital influences everything. Every value creation strategy can benefit and become a stronger play by using what the digital era makes possible. So while we don't find it meaningful to differentiate “digital” as a separate thing, we recognise the value of being digitally mature on an overall level.

A typical example could be when a company asks for help on their digital marketing strategy. There is no separate strategy for digital marketing – we should talk about the marketing strategy as a whole in the digital age.

Looking at how much better companies with a high digital quotient (across all functions) are per-forming financially, the long-term value is massive.

What are the biggest challenges of introdu-

cing digital transformation?

We have tremendous respect for the EQT portfo-lio companies’ management teams and do not aim to lecture them about their respective markets or disruption in their industries. Having said that, we can almost always identify gaps between the portfo-lio companies and best-in-class performance when it comes to, for example, utilisation of installed technology, approaches to innovation, testing-and-learning, leveraging data assets, marketing,

cross-functional collaboration and personal pro-ductivity.

Let’s take, for example, the value of having a modern, in-sourced analytics function. The value that such real-time customer insights can bring to any company’s R&D, marketing and sales is enor-mous. Given the overall maturity in the competi-tive landscape, excelling in this area typically yields significant advantages.

How difficult is it to recruit digital professio-

nals and build a team?

It is very difficult. While there is an abundance of people, consultants and agencies that label them-selves “digital”, few actually have the goods. There’s a very real shortage of competence in the talent market, but EQT can offer support in hiring and developing digital expertise.

We also think it’s important to create teams of adequate size that can have real impact. Often, companies hire individuals or, as we like to call them, “digital alibis”.

Very few individuals, even on the executive level, can single-handedly change the modus operandi of an existing business if said business is not in a crisis mode. We therefore advocate that companies plan for cultivating digital talent internally, as single external hires typically won't suffice. n

head of Bain & Company’s digital practice. “A lot of private equity has been about

continuous improvement and taking a dollar of equity and getting it to three by improv-ing various parts of the business,” Spauld-ing says. “That is all still true, but there is an elevated pace of change and innovation that is new and different and creates more disruption for private equity than others.”

As digitisation proliferates, GPs can be sure of one thing: in five years time, value creation is likely to look very different. Those already thinking about digitisation will be better equipped to exploit the change. n

Törnkvist: there’s a very real shortage of digital talent

There’s a very real shortage of competence in the talent market


KEYNOTE INTERVIEW: BLUE RIDGE PARTNERS

Private equity firms should not delay pin-pointing revenue growth opportunities and instigating change at their portfolio compa-nies, warns Blue Ridge Partners co-founder and managing partner Jim Corey. Here he explains why.

Why has Blue Ridge honed in on

revenue growth as a key driver of

shareholder returns?

Revenue growth has been the focus of our firm since we were founded in 2002 – that’s all we’ve done – and we selected this scope of practice for two reasons.

One is that revenue growth is the larg-est single driver of value creation over a five-year holding period. The second is that many management teams we see need help accelerating revenue growth.

The recent survey we sent out to oper-ating partners came back with an inter-esting statistic: they said only 24 percent of CEOs they worked with were highly capable and self-sufficient in accelerating growth. Frankly, it is a complicated topic. It’s a challenging set of issues CEOs have to deal with.

You say year one is crucial to value

creation. Why?

Many of the meaningful changes that accelerate growth take multiple years to implement. It’s not like a cost-reduction initiative where maybe in 60-90 days you can see those costs eliminated.

Imagine the lead-time selecting a new go-to-market channel or to use a new set of channel partners – it takes time. If you start

The non-invasive path to growth Kick-starting revenue generating opportunities early in the investment cycle is critical to boosting shareholder returns, Blue Ridge Partners’ Jim Corey tells PEI

SELF ASSESSMENT

Corey: revenue growth is the largest single driver of value creation

late, the benefits will be late and it might be outside the investment horizon of the GP.

Why is operating partner engage-

ment with management tricky in this

period?

Revenue growth is a delicate topic to raise. Typically, in year one the deal team is look-ing for safe ground to engage with the CEO and very often that does not include revenue growth. In many cases, it wasn’t included in the value creation plan, so it would be a left turn to talk about it.

Also, CEOs view revenue growth as their responsibility. They know the markets, products and the business better than the GP. All too often, unfortunately, we tend to be called in three or four years after closing when there has been some disappointment. We call those the lost years.

So, should you consider revenue

growth in due diligence?

I would argue even earlier, in the pre-bid period, and here’s why. Asset prices are very high. Most companies are sold through a competitive bidding process. A lot of GPs need to stretch their valuations in order to win the deal. Historically, investment com-mittees haven’t been willing to underwrite growth opportunities, and they don’t focus on them during this period. As a result, many firms are losing deals. We’re pretty active now in the pre-LOI [letter of intent] phase with a handful of private equity firms that recognise the importance of growth.

You're a 30-year veteran of the

business. What has your experience

taught you about what works and what

doesn't?

It’s a matter of finding the right levers and in every company those are different. ››

WHY REVENUE MATTERS

Source: Based on a survey of operating partners conducted by Blue Ridge Partners for the October PEI Operating Partner Forum in New York

Value creation sources in portfolios over next 3 years

Revenue growth

Cost reductions

Cash flow improvements

M&A and other

58% revenue growth

26%

11%

5%


growing while others in their industry were. In a diagnostic, we found three things were holding them back. They were too dif-fused over different products and geogra-phies. They needed to pull back and focus their time and capital expenditure on fewer areas and refocus on their core.

They had also lost track of market pric-ing. We discovered that in 80 percent of their markets, they were the low-price bidder. They thought they were mid-pack. They raised their prices and that made a big difference.

Thirdly, a number of their sales people didn’t have the right skill sets or motiva-tions. The company upgraded its talent pool. The valuation of that company tripled in 18 months.

Your operating partner survey asks

firms to rate their operating team's

ability to diagnose revenue growth and

identify the proper levers. How is that best

done?

It goes back to analysing data and getting market feedback. But study work is an inva-sive approach. If the CEO hasn’t accepted that they have a problem with revenue growth, it will be unwelcome. An alterna-tive that shines a light on where there might be opportunities is our self-assessment tool.

We examined the 400 companies we have worked with to find out what made the difference regarding revenue growth and included those 60 factors in the assess-ment. Wherever we could, we quantified the benchmark.

The tool can make a big difference to the way that operating partners function. They might already have a checklist they review with the management team. The feedback we hear from them is that the checklist is nowhere near as comprehensive as our self-assessment tool.

In general, getting sales and market-ing organisations to change is difficult. Successful sales people have their own formula and are change-resistant. There are a lot of great ideas that never ring the cash register because companies can’t get change implemented in their sales organi-sation.

The second thing that I have learned is that most sales organisations are doing too many things at the same time and getting grades of Cs and Ds. I’ve found it works better to focus on a few things and get A-grades, then pick up the next set and then the next, in waves of change.

Most companies, surprisingly, are also missing insights about their markets and how they are changing. Most sales organisa-tions are not highly analytical. If they did analyse the data, they would see things like the distribution of performance across the sales organisation, which would generate insights. And they don’t spend lots of time asking really hard questions of customers, like why do you buy from this competitor and not us?

INDIA ROUNDTABLEKEYNOTE INTERVIEW: ACTISKEYNOTE INTERVIEW: BLUE RIDGE PARTNERS

›› What problems do companies

encounter trying to accelerate

revenue growth?

Most lie in two areas. Sales people have a tendency to spend a lot of time with existing happy customers. If they under-stood better where to focus their time in the market and what message they should deliver, they would be more successful.

The other is sales force effectiveness – the tools that the sales force is given, whether they get the right sort of coach-ing, whether they have the proper skills and motivation to be successful. Sometimes it’s just a skills problem.

Studies also show the vast majority of CEOs lack prior experience in leading sales organisations. Sometimes they fear if they change something in sales there might be unforeseen negative results.

Can you give us an example where

you’ve navigated significant chal-

lenges?

We worked with a US-based construction equipment rental company that wasn’t

THE BEST OPPORTUNITIES FOR GROWTH

Key: Circle size reflects self-assessed magnitude of opportunity

LowLow

High

High

Establish the essence of the growth strategy

Sharpen the go-to-market model

Enhance sales effectiveness

Create a productive sales environment

Get pricing right

Digitally enable the business

Enter new geographies

Sell into new end-customer markets

Add new products/services

Size

of o

pp

ort

unity

Relative ease of capturing opportunity

High potential opportunity


Jim Corey chairs a panel on factoring revenue growth into the traditional value creation plan at PEI’s Operating Partners Forum in New York this month.

How do you go about making chan-

ges based on the results of the

self-assessment?

One UK-based GP is working through the self-assessment at each of its dozen or so portfolio companies. We will summarise what we’ve learned in a cross-portfolio leadership workshop and outline any con-sistent issues across the portfolio that might need investment.

One company highlighted that growth was constrained by the slow pace of new product roll-out. They were known as being pretty innovative in their industry but they hadn’t released any new products in quite some time.

Looking closer, the new product team had become very bureaucratic, wasn’t con-nected to the market, and worked in an isolated laboratory environment. When they did release new products they were at the wrong price point or had the wrong functionality. We discovered lots of differ-ent issues with product commercialisation.

The firm emphasises the 'non-inva-

sive' nature of the self-assessment

tool. Why?

CEOs are concerned that someone is going to come in and shine a big bright light on things they haven’t been doing well. They are naturally resistant to that invasiveness. This tool involves self-discovery. And it doesn’t take a lot of time. n

KEYNOTE INTERVIEW: BLUE RIDGE PARTNERS

How does the self-assessment tool work?

The questionnaire is a non-threatening way to engage with a portfolio company CEO on issues related to revenue growth. It’s not like an intrusive study with data requests and interviews. Rather the CEO is asked to reflect on some thoughtful ques-tions to see where energy might be reallocated to accelerate growth.

The operating partner could sit down with the CEO and walk them through the self-assessment and discuss it. It’s also very informative for deal partners as a cheat sheet of questions they might ask the board. But the most common way is to have several people at the company and the operating partner fill it out and compare results.

We’ve organised 60 factors into nine areas that we call ‘the roots of growth’. Our back-end reporting shows how responses differ across those areas. Then you might see how the CEO is in a very different spot from the sales organisation and that may be worth talking about in a workshop facilitated by the operating partner.

The survey also asks about the potential impact of fixing these topics and how easy that would be. The key is to look for big impact changes that are relatively easy to implement. n

EXAMPLES OF SELF-ANALYZERTM QUESTIONS

EXAMPLES OF SELF-ASSESSMENT

FACTORS

STRONGLY DISAGREE

1 2 3 4

STRONGLY AGREE

5

DON'T KNOW

6

Sales and service channels are responsive to buyer values for the customer segments they are serving (direct sales, third-party sales, telesales, digital and others)

O O O O O O

The company is effective at generating leads for entirely new customers

O O O O O O

The productivity of the sales organisation (gross margin/total sales organisation cost) meets or exceeds industry averages

O O O O O O

At least 70% of sales reps are achieving quota

O O O O O O

Revenue forecasts prepared 60-90 days in advance are +/- 5% accurate

O O O O O O

The sales force knows how to sell value to avoid leaving margin on the table

O O O O O O

The company understands its pricing power and is able to capture premium pricing opportunities

O O O O O O

The pipeline of new products/services is robust and is likely to generate at least 25% of new revenues within 2 years

O O O O O O

CEOs view revenue growth as

their responsibility


Blue Ridge Partners is a specialised management consulting firm with a unique combination of strategic insight and prag-matic implementation expertise. We believe that knowing “what to do” for revenue growth is only 20% of the challenge. The other 80% is knowing “how to do it” so changes get implemented and stick.

We are often asked to start our work in evaluating the potential for accelerated revenue growth in the pre-bid period when valuations are set and then continue in due diligence and post close.

During the holding period, we assist portfolio companies with four primary services – assessing/developing the growth strategy, improving commercial effective-ness, optimising pricing performance and revitalising product and service portfolios.

About a year before exit (“T-1”) we help refresh growth plans and develop exit strategies.

We consider both organic and inorganic growth options for each business. Based on our experience with over 85 sponsors and 400 companies, we created an integrated, comprehensive suite of tools, called “Top Line”, for use by our teams to accelerate growth in a company’s Revenue EngineTM.

Two of these tools are available for use by our private equity clients. Deal and operations personnel can engage with CEOs and their management teams using the Self-AnalyzerTM tool early in the holding period. With minimal time demands, this non-invasive tool stimulates thinking about strengths, weaknesses, and revenue growth opportunities.

INDIA ROUNDTABLEKEYNOTE INTERVIEW: ACTISCOMPANY PROFILE: BLUE RIDGE PARTNERS

Helping companies grow fasterWe help portfolio companies accelerate profitable revenue growth by addressing issues with the company’s Revenue Engine® throughout the life cycle of an investment.

Sponsor and management teams use The Indicators of OpportunityTM, a com-prehensive yet simple tool, to examine the range of growth opportunities and levers available in the company, align thinking and define priorities for the most impact-ful levers to pull. Built around nine areas we call “Roots of Growth” such as the go-to-market model, sales force effective-ness and pricing, the tool also serves as a useful reference when preparing for meetings with the management team or Board.

With personnel in North America, the United Kingdom and Continental Europe, Blue Ridge Partners is positioned to serve the needs of global firms. We have earned high marks from private equity sponsors and CEOs for delivering material, rapid, pragmatic and cost effective results.

For additional information, visit www.blueridgepartners.com or contact Jim Corey, Managing Partner, at +1-703-624-0286 or [email protected].

TOP LINE ANALYTIC ENGINE

PRICINGOPTIMISATION

EXITPLANNING

("T-1")

PRODUCTPORTFOLIO

REVITALISATION

GROWTHSTRATEGY

POST-MERGERINTEGRATION

COMMERCIALDUE DILIGENCE

120-DAYPLANS

COMMERCIALEFFECTIVENESS


BOLT-ON STRATEGIES

General partners may insist that buy and build has always been popular, and is indeed central to the industry’s value creation proposition, but the level of recent activi-ty has been particularly robust.

In the third quarter of 2015, platform companies executed 125 add-on transac-tions in Europe, the highest in a quarter since Q2 2008, and 404 add-ons over the year, up on 2014, according to Silverfleet Capital’s report European Buy & Build in 2015.

The reason is clear: performance. A Boston Consulting Group (BCG) study, which describes buy and build as the “PE value creation strategy of choice”, shows investments in which a portfolio company acts as a platform for further add-on acqui-sitions outperform standalone deals. Buy and build transactions generate an average internal rate of return of 31.6 percent from

Buy, build and prosperA buy and build strategy can generate significant value. The relationship between the GP and management is central to its success, writes Victoria Robson

ACQUISITIONS

entry to exit compared to 23.1 percent for standalone deals, according to BCG.

BOLTING-ON VALUE

Among value drivers, consolidating a frag-mented sector through M&A promotes cost and revenue synergies, accelerates scale and operational improvements – including the acquisition of new capabilities, products or technology – grabs market share, and facili-tates rapid geographical expansion, with the additional promise of growth through future acquisitions.

And the price impact of add-ons is appealing. The potential for favourable post-synergy adjustments on the entry multiple is always attractive to investors. In the cur-rent high price environment and abundance of dry powder, add-ons provide GPs with a route to deploy capital into smaller busi-nesses, typically through a proprietary

process and at more competitive values than bidding on larger targets in an auction.

Add-ons are usually less risky than a stan-dalone deal, notes one European GP. “You have a management team you’re already comfortable with [at the platform company] who can help you with the strategic ration-ale for the add-on, in an industry where you’ve already conducted due diligence because you own [the platform]. The deci-sion is much more likely to be focused in the right areas than if you’re buying a platform.”

Developing a relationship with the man-agement team executing the investment thesis is critical. “Management can usually do a pretty deep dive on what the synergies might be, which ones make more strategic sense, which are operated in a way that will be complementary rather than destructive to their own structure,” says the GP. “If you have a bad relationship with management, then doing M&A and allowing them to stay in charge is quite risky. It’s very important for them to think you bring something. If they begrudge you as an annoying share-holder who just analyses their performance, that relationship doesn’t work.”

With many add-on targets too small to be sourced by advisors, firms are typically dependent on management to generate deal flow. “Buying through your portfolio com-pany, you rely quite heavily on management to have the connections within that sector and bring the transactions,” says Ashurst partner Nick Rainsford. “It’s important that they are well-known in the market and alert to the opportunities.”

Management teams with an acquisition track record are therefore very appealing. “If the CEO and CFO of a portfolio company have already done an acquisition or two, got it under their belt, and had the experience of integrating it, that is very positive because it’s no longer idle chat,” says Silverfleet Capi-tal managing partner Neil MacDougall. ››

Bigger is better: add-on acquisitions outperform standalone deals


“If you’re a regular acquirer of businesses, you are more likely to get them right because you’ll have learnt the key things to look for and you would have adopted some of the disciplines that stop you doing things that are too difficult or too dangerous.”

One way to ensure management engages with the strategy is to give them ownership of the M&A process, he says. “That means the CEO, CFO and whoever is in charge of production and sales absolutely need to be completely involved and the deal has to be theirs. It is one of the things some cor-porates get wrong, the idea that there is a strategy and you [simply] delegate it to man-agement to make it happen. It rarely works.”

But, the European GP warns, the private equity firm needs to monitor the process and ensure management does not get “starry-eyed” at the prospect of running an enlarged business and misjudge opportunities.

In the face of other tasks competing for attention, the GP’s role is to ensure the management team stick with the M&A strategy in line with the value creation vision. “When we review portfolio progress on a quarterly basis, one of the key ques-tions is: where are you getting to in terms of implementing your value creation strategy, which in many cases means those bolt-ons you wrote about in the investment paper, and have we made any progress in making them happen,” says MacDougall.

BOLT-ON STRATEGIES

››

Just over a year ago, Cinven took a major step in the execution of plans to create a pan-European clinical laboratory group. In August 2015 it acquired French labora-tory group Labco, followed in October by the acquisition of Synlab, based in Ger-many. The two companies operated in a large, fragmented market that promised economies of scale. They both come com-plete with solid M&A track records and complementary geographical footprints. These elements meant, post merger, the platform was ideally sited to pursue further significant bolt-ons and oppor-tunistic buys.

“By putting Labco and Synlab together we have created by far the market leader in the sector with complete continen-tal coverage,” says Cinven partner Alex Leslie, who sits on the healthcare sector team. “We’re transforming the businesses, changing their geographical, business and product reach. The combined enterprise, from a multiple perspective, is worth more than each of the sum of the parts.”

One of the significant operational changes already made at the combined entity, Synlab, was the creation of a single

He adds: “You have to remain disciplined and when due diligence [of a target] turns out to reveal things you didn’t expect to find, you need to be able to walk away.”

PEOPLE ISSUES

Beyond picking the right targets, the post-acquisition integration of businesses – including of management teams – will determine the success of a buy and build strategy and the possibility of value crea-tion, GPs say. Management inexperience, lack of bandwidth and a clash of business cultures are all elements that can sabotage the integration process.

“Whether or not your management team can deal with all the social issues around managing a larger organisation post-acqui-sition is a risk that belongs to the GP rather than management,” says the European GP. “Management come in different shapes and sizes. Some can be unused to buying smaller companies and bolting them on, and some-times they can adopt an attitude that alien-ates people. You have to make sure you keep them on a straight and narrow.”

Losing key talent can be hazardous and is likely to be value destructive unless accounted for in the business plan. “The thing you’re after is the people,” says Mac-Dougall. “It’s their know-how, their con-tacts, their experience, their track record, their customer relationships. As long as you remember that’s really why you bought the company and you go out of your way to make sure you hang on to it, then you’re likely to make a successful acquisition.”

To skilfully manage the relationship with senior executives, GPs emphasise the advantage of having a buy and build track record themselves. What firms know intuitively is supported by data. Frequently acquiring firms generate average IRRs of 36.6 percent on deals, compared with infre-quent acquirers with IRRs of 27.3 percent, according to BCG. Experience, in this case, creates value. n

Through buy and build, Cinven has created Synlab, a market leader in the European clinical laboratory industry

Under the microscope

MacDougall: a CEO with a record of acquisitions is more attractive


BOLT-ON STRATEGIES

Alex Leslie Immo Rupf

Strong pipeline: Synlab averages more than one deal a month

management team and a number of new senior roles. These include a new chief operating officer, chief commercial officer (CCO) and chief strategy officer, who over-sees its cross-border buy and build activity.

Aligning management to its operational structure “has taken some time, but we are starting to feel the benefit of that on the ground. The role of the central functions is to support each country team to run their business,” Leslie says.

Another significant priority “is to streamline operations in the practical sense”, says Cinven portfolio team partner

Immo Rupf. This encompasses procure-ment and suppliers, the location of equip-ment, and the organisation of laboratories. “We established a view on what a lab should look like for a target operating model.”

A third has been to develop an IT “blue print” for the company in place of pro-prietary systems developed by individual laboratories. A fourth is to percolate com-mercial best practice through the group, with the help of the new CCO, involving “choices about how we acquire new cus-tomers, avoid customer churn, in-sourcing or out-sourcing specific tests,” says Rupf.

Equally important has been the crea-tion of a “bolt-on machine” run by man-agement using a template developed by Cinven’s portfolio team. The template outlines the way management presents opportunities to the board’s investment committee; tracks the delivery of syner-gies within each bolt-on; and “simplifies decision-making as much as possible so we don’t become a bureaucratic block on the ability of the company to execute on its strategy,” Leslie says.

“There will be targets for the year, but the origination, execution and integra-tion of them is done by management,” says Rupf. “In Synlab’s case, origination is often at the local level.”

A year on, Synlab has already com-pleted a number of bolt-ons and has a strong pipeline of deals, averaging more than one transaction a month. It cur-rently operates in 35 countries and is eying expansion into emerging markets, especially Latin America.

“A lot of M&A at the moment is focused on investing in labs with genetic capabilities, or anatomical pathology,” says Leslie. This in turn promotes organic growth where Synlab can partner with pharmaceutical companies to enter into the companion diagnostics market, or work with other med-tech companies to launch new genetic testing,” he says. n

We established a view on what a lab should look like

Immo Rupf


helping on the integration. Experience tells us that one of the biggest risks of an acqui-sition is that it can divert attention away from the core business to the acquisition and the underlying business can suffer as a result. We’ve seen management teams do an acquisition and think it will take care of itself, and before they know it they’re driving halfway across the country to look after the acquisition and the core business stutters.

I can think of a lot of examples where with something like international expansion or new markets or pricing, it would just be a project that management wants to do but they don’t have time to get round to. A lot of bigger businesses above our investment size have teams dedicated to corporate develop-ment – they have strategy teams, they have process change teams, they have operations teams. The vast majority of our companies don’t have that. An acquisition takes a lot of time so we can help support them and provide that bandwidth.

LB: The aim of our team is to take the list of growth ideas and earnings improvements and work through those, indentifying the ones that are likely to really materially move the needle for the business either in terms of earnings growth or multiple expansion. Getting clarity and focus around the key initiatives is important but it doesn’t stop there. We then get involved and start taking the initial steps with the team, identifying partners, bringing people on board such that we can actually get some real data on the potential. Often that then translates into investment by the company in hiring and building out the business in that area – new products and markets often require that. If we can help nurture that idea, get it going, measure the results, invest behind it if we get traction, then we see that as success.

When UK mid-market firm ECI Part-ners was in the process of raising its ninth buyout fund in 2008, both the firm itself and its investors recognised that although ECI had proven itself time and again to be a great buyer and seller of businesses, there was a need for something more substantial in between.At that time, Lewis Bantin joined ECI to start what became the Commercial Team and has since grown to four members. Set up to offer CEOs and management teams tailored support and a collaborative delivery style, the team serves as a catalyst to help portfolio companies bring more of their growth ambitions to life.

And the approach clearly works. The Commercial Team has worked on all 15 investments in the ECI 9 portfolio and the five investments to date in ECI 10. So far, ECI 9 has exited six portfolio companies and has delivered a total multiple of cost of a staggering 4.5x (see sidebar).

Private Equity International caught up with Bantin and Garrood to find out more about ECI’s winning value creation formula.

What’s the Commercial Team’s goal

in a nutshell?

LB: We’re trying to help the management teams we back do more and do it faster. It could be turning M&A from a pipedream into ‘here’s a list of targets we’ve met and profiled that we think would fit’. Or develop-ing a strategy for getting into the US market – who would we do that with, how would we do it, what’s it going to be worth? It’s all about taking great ideas the businesses have,

INDIA ROUNDTABLEKEYNOTE INTERVIEW: ACTISKEYNOTE INTERVIEW: ECI PARTNERS

Our businesses are small, they’ve all got

unique opportunitiesJoe Garrood

Well-oiled machineHaving just completed its 100th mid-market exit, ECI Partners has finely honed its value-creation method, and is delivering the returns to prove it, say partner Lewis Bantin and investment director Joe Garrood

VALUE CREATION

picking the ball up, running with it, seeing whether there’s really something there, and then backing it up with resources and investment to take it forward.

We’re finding in the PE market that the pressure to do more and be more assertive about what we do has increased. When we sit in front of the investment committee as the case team, we need to believe we can achieve better yields on pricing, drive new organic sales better, that there is an M&A strategy we can put in place. We’re more and more looking at those upsides, and rather than just being paper ideas, we have to really put a bit more meat on the bones and deliver.

If management teams are behind

the expansion ideas, what does the

Commercial Team provide?

JG: Ultimately all the businesses we invest in tend to have good headroom to carry on doing what they’re doing already, and we want first and foremost our management teams to focus on achieving that.

If you take acquisitions. By definition, we are functional specialists in that area: what we do for a living is sourcing, diligencing and doing deals. But with a couple of the add-on acquisitions at Citation, we were able to be involved both pre- and post-deal,


How does the team function

alongside the deal partners?

JG: There are a lot of private equity firms in which the investment team owns the deals, but then halfway through the deal, or at some time after the deal, someone from the operations team will come in. At ECI, we form a combined case team and start building the management relation-ship early. The management teams that choose to work with us have bought into the overall team from ECI and that includes the deal partner and Commer-cial Team individual. From the moment ECI thinks a deal is interesting – and it can be quite early on – one of us will join the team and, together with the deal partner, spend the early phases getting to know management.

Management teams like to buy into people and know who they’re dealing with. It’s good to feel like you build a relationship with people over time and they can pick up the phone to you, whereas if there are too many faces it just unsettles people and they don’t feel they can build that relationship and trust. A big part of a private equity transaction is trust and we want to make sure that the management team and ECI case team have built a solid foundation upon which to work together.

LB: One of the aspects of the Commercial Team model at ECI that is genuinely unique is the embedded and integrated role that we have both in the deal and post investment. We have our area of focus around com-mercial and operational diligence, building a relationship with management, etc., but in the end we sit down as a team and recom-mend the investment. I think that is still a unique and compelling feature relative to the models we see competitors use in the market.

Garrood: management teams like to buy into people

Bantin: ECI strives to make the most of its three to five year horizon

100 Number of ECI’s mid-market exits

4.5x Total multiple of cost delivered by ECI 9’s six exits

Exit Date

Portfolio Company

Revenue CAGR%

EBITDA CAGR %

Multiple of cost

IRR %

Apr 2014 CarTrawler 41 55 5.7x 88

Oct 2014 XLN 3 10 3.0x 35

Feb 2015 Wireless Logic 27 31 6.1x 68

Jul 2015 Fourth 27 26 3.5x 35

Mar 2016 Citation 26 32 5.4x 72

Aug 2016 R&M 11 14 3.4x 27

Weighted avg 23 29 4.5x 54

Source: ECI

ECI 9’S SIX EXITS TO DATE SINCE APRIL 2014

Successful exit: the sale of Citation delivered a 5.4x return for investors

KEYNOTE INTERVIEW: ECI PARTNERS


INDIA ROUNDTABLEKEYNOTE INTERVIEW: ACTISKEYNOTE INTERVIEW: ECI PARTNERS

The pressure to do more and be more assertive

about what we do has increasedLewis Bantin

Why did ECI choose not to have

functional experts?

JG: If we only invested in retail businesses that always wanted to internationalise then it might make sense to have an international guy or a retail industry veteran. But our businesses are small, they’ve all got unique opportunities, so having someone who’s in a box isn’t that efficient.

We’ve all got many years of experience working with businesses as they grow and develop. At the small and mid-cap end of the market, companies are transitioning from a position where the CEO can wander round the office and knows everyone’s name to being much bigger businesses. Getting to the next level is going to mean bringing more people on board, letting go of the reins a little, expanding the product range and markets served. That’s what we’re good at helping our companies do, but you can only really do that if you’re there all the way through rather than being brought in on a specific functional topic.

LB: We have toyed with the idea of func-tional expertise but have concluded that you need a lot of scale to make that work. Inevitably if you build that kind of specific capability, you risk forcing that as your solu-tion when there may be a more appropriate path for the company. For now we have focused on building a team that is focused on what each of our investments needs and who can then harness our resources and network effectively to help them grow.

How has the ECI network directly

benefited portfolio companies?

JG: Employment law and health and safety solutions business Citation (sold to HgCapi-tal in 2016) is one where we not only put people into roles that existed already but also created roles that didn’t exist, and I think that’s something ECI is quite attuned to. Growing businesses get to a certain stage where they need a sales and marketing

director, they need a CTO. The ECI net-work came in quite nicely there.

We hired CEO Chris Morris, who we knew and trusted, and he knew and liked working with us, liked our style and approach having worked with us at Late-Rooms (sold to Tui in 2006 for a 9x return). He then brought in a sales and marketing director, also ex LateRooms. As a board we felt that an HR director was important to shift and improve the performance culture at the business so that was a relatively early hire but one that came from the broader network. Then we also had a CTO who was from another ECI investment, Clarity Blue (sold to Experian for an 8x return).

So in conclusion, the build-out of the Citation team was a combination of utilis-ing our network, hiring a CEO who got our way of thinking, and then him and us filling out the key positions.

How do you ensure the whole

company — and not just the

management team — buys in to the value-

creation plan?

LB: After every investment we run an open-book strategy day, where we’ll get not only the executive team but maybe one or two levels down, and we’ll spend some time speaking to them about what they see as the opportunities, the challenges, the frus-trations, and what could be done better. We will put our perspective clearly on the table, ‘these are the things that we thought from the outside as an investor, but this is also what the team thinks’. An output from these sessions is a plan for how we want to take the business forward as a group, where we want to be at the next investment event, and how we measure our progress. That then acts as a roadmap where we as ECI can help unlock a particular opportunity or take away a barrier.

From our perspective it’s helpful if we do work at multiple levels within the busi-ness as it helps our understanding of where we can focus to drive growth. I remember

with Car Trawler (sold to BC Partners for a 5.7x return), one of the projects our col-league Caroline Dent worked on was work-ing through how Car Trawler on-boarded its new clients. She was doing brown-paper process diagrams for how they hand over a client from A to B and how the pricing and customer services are set. This is a quite deep operational process review, working collaboratively with the team and people in the business to unlock an opportunity.

JG: We don’t rush change. If we have views and we think there are opportunities, we don’t just come in on day one and say ‘right, here’s a list, please get on with it’. We’re collaborative. We give management teams time to breathe.

Value creation can feel like your inves-tors come in and tell you what’s going on. We absolutely don’t do that. If you’re back-ing management, which we do, you are pro-viding support and guidance, helping them make the most of the opportunity.

LB: We are backing the CEO and are there to help them grow and develop their busi-ness, and communicate with their people. We have a three to five year horizon, but we want to make the most of that and ensure we have turned over the stones and properly evaluated the options and opportunities. That’s been a theme since we founded the Commercial Team and one that we will be continuing throughout our 10th buyout fund. n


OPERATING PARTNERS FORUM

Private Equity International’s Operating Partners Forum has fast become the pre-mier meeting for value creators in private equity. At the fifth annual Operating Part-ners Forum Europe in London in March, more than 150 of the industry’s leading operational experts met to discuss how to develop and implement operational models. Here’s a round-up of some of the best advice we heard during the forum:

1 OPERATORS ARE GETTING MORE

INVOLVED PRE-DEAL

Operating partners at industry giants KKR Capstone, CVC Capital Partners, BC Part-ners and Cinven all emphasised that they are getting much more involved with port-folio companies during due diligence. The operating team “is about making the GP a better buyer and a better owner”, one panellist said; the most important decision a GP makes is asset selection, and therefore operators should have an influence on that.

2 INVESTORS ARE DIGGING INTO

THE VALUE CREATION DETAIL

When assessing the operational capabilities of GPs, investors go all the way down to the portfolio company level to draw their con-clusions (and will make a point of seeking out management teams at poor performing assets). They want to understand the types of businesses the GP wants to buy and why; they want to see repeatable models; and they want to understand, regardless of the operational model the GP chooses, how it is actually applied. The same is true for co-investment; rather than focusing solely on the company, investors are zeroing in on whether that company is a natural fit for that particular manager.

In pursuit of operational excellenceFive things we learnt when the industry’s leading value creators gathered for Private Equity International’s Operating Partners Forum Europe. By Isobel Markham

DOs AND DON’Ts

* The PEI Operating Partners Forum New York 2016 is held on October 19 and 20. For more details visit www.privateequityinternational.com

3 THE NEED TO CREATE BALANCE

IN THE BOARDROOM

Portfolio company boards can be one of the best levers of value creation, if they are given what they need to succeed. The board should be periodically reviewed and firms should be prepared to switch out members so its composition mirrors the value crea-tion plan for the business.

Above all, it must be a balance of experiences, opinions and perspectives. Referencing two of English football’s star strikers, Advent International’s head of board development Conor Boden said: “The team can’t comprise entirely of Harry Kanes and Jamie Vardys; you do need some midfielders, defenders and even goalkeepers.”

4 IF YOU CRAVE THE LIMELIGHT,

DON’T BECOME AN OPERATOR

There is no glory in being an operating partner, but there is quiet satisfaction. Unfortunately it’s virtually impossible to quantify the contribution of the operat-ing partner to the success of a portfo-lio company; there will always be those

that say the deal team just bought really, really well. But it’s the operating partners that turn dealmakers’ dreams into real-ity which, many might argue, is priceless, and, more often than not, the real key to value creation.

5 AT THE END OF THE DAY,

IT’S ALL DOWN TO PEOPLE

It may sound like Private Equity 101, but it really does bear repeating; people are the key. More often than not, when a deal fails it’s down to people, be it the wrong management, the wrong chairman, or just poor communication between all parties.

Conversely, when a deal outperforms, it’s likely the result of the right people working together and communicating effectively. Some words of wisdom from a former CEO of a private equity-backed company at the Operating Partners Forum: “Never stop talking.” n

Seeking value: operating models were under the microscope at the London conference


Welcome to Private Equity International’s fifth Operational Excellence Awards — our annual celebration of the industry’s best value creation stories of the last year


The best value creators in the businessJust how do you successfully add value to a portfolio company? It’s a question that gets to the heart of the private equity world — now more than ever before. With opportunities for financial engineering severely limited and economic growth rates mired at rock bottom levels, delivering stellar returns depends increasingly on securing operational improvements at portfolio companies.

That’s why GPs worldwide have made huge efforts in recent years to bolster their operational arsenals in an effort to get the best out of their businesses. Some efforts, it would be fair to say, have been more success-ful than others.

This is where our Operational Excellence Awards come in. Now in their fifth year, we introduced these awards to try to answer a question that’s become increasingly important to LPs: who are the best operators in the industry?

To find out, we asked GPs to submit any investments either fully or partly realised since 1 June 2015 that they felt were a particularly good example of their ability to deliver operational value as owners.

Entrants were asked to provide specific details of the changes and the initiatives they had undertaken, from product development, to acquisition activity, to supply chain improvement, to management enhancement.

And they were also asked to provide tangible evidence of how these initiatives created value, whether that was in terms of topline sales growth, productivity or capacity building. Impressive exit numbers were clearly a plus, but the main thing our judges were looking for was some genuinely transformative work.

Entries were invited from three regions — Americas, Asia-Pacific and Europe, Middle East and Africa. We then divided them into four categories, according to the deal’s entry price — large cap (greater than $500 million), upper mid-cap ($150 million to $500 million), lower mid-cap ($50 million to $150 million) and small cap (less than $50 million).

Next, we convened a distinguished panel of judges in each of the three regions; they were tasked with analysing the short-listed entries, debating their worth and reaching a consensus on which represented the best example of operational excellence in each size category.

It was a far from straightforward task. The range of entrants was mind-bogglingly diverse — a real testament to the incredible range of private equity-backed businesses — and the judges had their work cut out to pick a winner from the high quality of the submissions.

As Steven Kaplan, professor of entrepreneurship and finance at the Uni-versity of Chicago’s Booth School of Business, put it : “This was a much more difficult year than any of the previous years. Almost all of the nominated deals would have been winners in previous years.”

Miles Graham, a former 3i executive and now managing partner at the Operating Partners Group, agreed: “I found that this year was far harder to judge than in the previous years.”

A hearty congratulations to all the winners, but most of all a sincere thank you to all the GPs that entered. It’s pleasing to see that, despite its critics, private equity is delivering true value creation across a vast range of industries around the globe.

Winners

AMERICAS

Small capSerent Capital — Optimal Blue

Lower mid-marketThe Riverside Company — Eemax

Upper mid-marketKPS Capital Partners — Motor Coach Industries International

Large capPermira — Intelligrated

ASIA-PACIFIC

Small capDRC Capital — PayDesign

Lower mid-marketNavis Capital Partners — Golden Foods Siam

Upper mid-marketNewQuest Capital Partners — China Hydroelectric Corporation

Large capActis — Plateno

EMEA

Small capMediterrania Capital Partners — CEPRO

Lower mid-marketPalamon Capital Partners — Towry

Upper mid-marketEQT Partners — Atos Medical

Large capKKR — Alliance Tire Group


XXX

Americas

Asia-Pacific

PAUL FUHRMAN EY

Paul Fuhrman is partner at EY Trans-action Advisory Ser-vices, specialising in value creation. His practice focuses on post-deal opera-tional restructuring and performance

improvement. Based in Boston, Fuhrman previously served as senior vice-president at Celerant Consulting for five years, and as president and managing director of Ameri-cas at Collinson Grant for three years.

VERONIQUE LAFON-VINAIS Hong Kong University of Science and Technology

Veronique Lafon-Vinais is associate professor of business education at Hong Kong University of Science and Tech-nology, where she is associate director of both the undergrad-

uate and World Bachelor in Business pro-grammes, and a project director of the MSc in Global Finance programme. Lafon-Vinais is a seasoned financial market professional with over 20 years of banking and capital markets experience. She has worked in all the major financial markets and has exten-sive experience in all major debt markets.

LIAN HOON LIM AlixPartners

Lian Hoon Lim is a managing director with AlixPartners. He has 24 years of experience in all aspects of opera-tions improvement, including sales and distribution, manu-

facturing, procurement, product develop-ment, overall supply chain management and transportation operations. He has consulted to the automotive, electronics, consumer goods and chemicals industries and held management positions in elec-tronics, shipping and logistics industries in South-East Asia and Greater China.

STEVEN KAPLAN University of Chicago Booth

Steven Neil Kaplan is the Neubauer family distinguished service professor of entrepreneurship and finance at the University of Chi-cago’s Booth School of Business. His

research focuses on private equity, ven-ture capital, entrepreneurial finance, cor-porate governance and corporate finance. He is co-creator of the Kaplan-Schoar PME (Public Market Equivalent) private equity benchmarking approach. A Fortune article referred to him as “probably the foremost private equity scholar in the galaxy”. He co-founded the entrepreneurship programme at Booth, helping start its business plan competition, the New Venture Challenge.

MICHAEL McKENNA Alvarez & Marsal

Michael McKenna is a managing director of Alvarez & Marsal’s Private Equity Perfor-mance Improvement group. He works with private equity inves-tors across the trans-action lifecycle to

identify and execute transactions, acceler-ate portfolio company performance and provide a smooth investment exit. His pri-mary area of focus is finance operations, driving improvements in working capital management, accounting and treasury operations, and reporting and analytics. Before Alvarez & Marsal, McKenna was senior manager at BearingPoint and prin-cipal at Arthur Andersen.

IVO NAUMANN McKinsey & Company

Ivo Naumann is a partner with McK-insey & Company where he leads the Recovery and Trans-formation Services practice in Greater China. Naumann has more than 20 years of

experience in supporting shareholders and management to restructure and drastically improve performance of underperforming businesses in Asia. He has acted in multiple interim management roles and served on various boards of director for companies in China, Japan and South-East Asia.

Meet the judgesAn influential panel of industry experts from around the world assessed the relative merits of the submissions


XXX

EMEA

MILES GRAHAM Operating Partners Group

Miles Graham is managing partner at the Operating Partners Group, an advisory firm provid-ing operating partner solutions to mid-cap and large-cap private equity funds. Previ-

ously, he was president of John Hardy, a 3i portfolio company, which he restruc-tured and sold to L Catterton. He has been in private equity for 20 years, serving as director and head of active partnership at 3i Group, where he oversaw operational improvements across a $6 billion portfolio of 100 companies, five years in McKinsey & Company’s private equity practice in London and 10 years as a CEO of various private equity-owned companies.

KATJA SALOVAARA Ilmarinen

Katja Salovaara has been a senior PE portfolio manager at Ilmarinen since Janu-ary 2000. Ilmarinen is a mutual pension insurer based in Hel-sinki, managing €36 billion. Currently

6 percent of the assets are invested in pri-vate equity. Before joining Ilmarinen, she worked at the Shell UK Pension Fund in London analysing private equity funds and monitoring a global private equity portfolio with over $1 billion of commitments. Prior to that, she was an investment analyst in the European team at private equity specialists Pantheon Ventures.

THOMAS PÜTTER Ancora Finance Group

Thomas Pütter is chairman and chief executive of Ancora Finance Group, which is involved in a range of activities in the consulting and alternative asset investment spheres.

He holds board and advisory positions with a number of companies. Pütter was chief executive and chairman of Allianz Capital Partners until 2010. For six years Pütter was chairman of the German PE and VC association.

LUDOVIC PHALIPPOU University of Oxford

Ludovic Phalippou is lecturer in finance at the Saïd Business School, University of Oxford. He special-ises in private equity funds and focuses on issues such as risk management, liquid-

ity and measurement of returns. Phalippou’s research in this area has been published in leading academic and practitioner journals such as the Journal of Finance, the Review of Financial Studies and the Journal of Eco-nomic Perspectives.

Antoon Schneider is a senior partner at The Boston Consult-ing Group and leads the Principal Inves-tors & Private Equity practice in London. He has advised leading principal

investors and more than half of the 50 largest private equity firms globally on a range of deal sourcing, due diligence and firm strategy projects. He has also worked extensively with their portfolio companies on 100-day value creation plannning and operational improvement projects, and has deep experience in corporate strat-egy and M&A.

ANTOON SCHNEIDER Boston Consulting Group

This was a much more difficult year

than any of the previous years. Almost all of the nominated deals would have been winners in previous yearsSteven Kaplan


PEI Operational Excellence Awards 2016 AMERICAS

Serent Capital: Optimal BlueWINNER — SMALL CAP

When Serent Capital acquired Opti-mal Blue in late 2012, Larry Huff, co-chief executive of the company, made it clear that working with a capital partner had always been in the plans for the mortgage techno-logy company, which was founded in 2002.

“We have a long-term view, and given our current growth tra-jectory and strong position in the market, this was the opportune time to partner with a firm that brings many additional resources to Optimal Blue,” Huff said at the time in a statement announcing the acquisition.

Just under four years later, Serent not only delivered on its promise of helping the company through its next phase of growth by support-ing management in enhancing value to customers, extending market reach and broadening Optimal Blue’s products and services range, Serent also secured strong returns for its investors.

“The partnership with the Opti-mal Blue has been highly success-ful,” said Kevin Frick, a co-founder and partner at Serent. “We are very fortunate to have partnered with Larry, Ivan [Darius, Optimal Blue co-founder and co-chief executive], and the entire Optimal Blue team. The company’s performance speaks for itself.”

Developing new products was a priority, with Serent assisting the Plano, Texas-based company in cre-ating data and analytics and compli-ance services.

This allowed Optimal Blue to diversify its revenue base from its core, proprietary product eligibility and pricing engine.

“This product diversification, along with the sales process re-engineering, allowed Optimal Blue to grow organic revenue by 25 per-cent each year during Serent’s invest-ment period,” Darius noted.

Growth was also achieved through consolidation and product acquisitions conducted by Serent and Optimal Blue’s business devel-opment team, ultimately leading to the acquisition of LoanSifter in December 2013.

To bolster existing products, Serent worked with management to redesign and grow the sales team. This included improving sales train-ing for new reps, introducing a more efficient system for processing sales

8xCash multiple

81%Gross internal rate of return

25%Revenue growth a year

Optimal Blue: mortgage technology firm yielded impressive returns for investors

and recruiting a senior executive to lead the sales organisation.

“Improvements in sales pro-cess and sale team structure drove a nearly 2.0x increase in existing product lines, while the development of new product offerings created a more stable revenue base,” said judge Michael McKenna, a managing direc-tor at Alvarez & Marsal.

Serent’s team also worked closely in supporting the development of its executive team, adding a human resources function to support Opti-mal Blue through organisational change, a chief financial officer to augment the controller, leaders for two new business units, a new chief commercial officer, and establishing a board of directors with two external independent directors.

When Serent sold the company to Chicago-based GTCR and mortgage technology executive Scott Happ in June, it realised an 8x cash multiple and an impressive 81 percent gross internal rate of return.

“Serent clearly helped Optimal Blue improve markedly in a short period of time,” said Steven Kaplan, a professor of entrepreneurship and finance at University of Chicago Booth and a judge in the Operational Excellence Awards.

“The company more than dou-bled organic revenue through better sales processes, better pricing and new products. And, it is impressive that they sold the company at such a high value to another private equity firm, GTCR, which itself has a strong track record.” n



The Riverside Company: EemaxWINNER — LOWER MID-MARKET

Eemax, a manufacturer of electric tankless water heaters, was gene-rating an EBITDA of just under $2 million when the Riverside Com-pany acquired it in September 2008. At the time, Eemax was No. 1 in the commercial market for electric tankless heaters, but lagged in the residential and industrial markets.

By the time Riverside exited in December 2015, the Connecticut-based manufacturer was market leader in all three segments, with EBITDA of more than $9 million.

At the time of the acquisition, Riverside saw big growth poten-tial for Eemax’s energy efficient products, but believed it needed operational support for both its infrastructure and team.

“Eemax’s revenue had been grow-ing about 20 percent per year,” said Riverside principal Joe Manning. “It was very clear they were going to out-grow their current facility over the next couple of years, but didn’t have sophisticated manufacturing pro-cesses or quality-control processes.”

To increase production capacity, Riverside moved Eemax to a new 45,000 square feet plant, more than double the size of the original.

Improving the product range was a key priority. For the industrial market, it began manufacturing water heaters for eye-wash stations and safety showers, following a three-year R&D project.

In the residential market, Eemax secured top spot helped by the add-on acquisition of Miami-based EcoSmart, which produces energy-efficient

tankless water heaters for home use. New sales channels via retailers such as Home Depot and Lowe’s boosted revenue. Popular products include a tankless auto-booster that can be retro-fitted to traditional, tank-based water heaters to meet new energy efficiency standards.

Central to the strategy was the expansion of its design team from one engineer to seven. Three-quar-ters of Eemax’s product range are either redesigns or new products developed by this team.

Senior management was bolstered with the addition of a new chief executive, chief financial officer and vice-presidents in engineering and marketing – all filled within the first 18 months of Riverside’s ownership. Riverside also upgraded three of the four existing senior management positions to build what Manning describes as a “true executive team”.

The sale of Eemax to Rheem Manufacturing in December 2015 was a testament to the success of

$2mEBITDA at time of acquisition

$9mEBITDA at exit

75%Of product range either new or redesigned since acquisition

Eemax: expansion of its design team and a new factory proved crucial

its strategy, said Riverside operating partner Mike Eblin.

“It validates the teamwork between Riverside (the operating partner, transacting partner, and financial directors) working with the man-agement team. For me, I’m incredibly honoured to receive this award; it’s an acknowledgement of a lot of hard work by everyone involved,” he said.

The returns were especially strong given the investment was made before the financial crisis, said judge Steven Kaplan.

“Riverside did a great job with Eemax. They helped turn a niche player in one segment into a market leader in three. Riverside upgraded the team, made big investments in R&D and engineering, increased capacity, and improved the sales process. Very impressive,” he said.

“A major investment in R&D (funded by Riverside), an add-on acquisition, and the implementation of a new sales toolkit were key ena-blers,” said judge Paul Fuhrman. n



KPS Capital Partners: Motor Coach Industries

WINNER — UPPER MID-MARKET

KPS Capital Partners’ work with Motor Coach Industries Interna-tional is a great example of turning around a company by focusing on improving its operations rather than financial engineering.

When the New York-based pri-vate equity firm acquired the spe-cialty vehicle company in August 2010, MCI was emerging from bankruptcy, operating in default of its credit agreement and under severe liquidity constraints. KPS purchased MCI for an undisclosed sum using no third-party leverage, a rare move in the industry.

Five years later, the firm had sold the company to New Flyer for $479 million. By then, MCI had increased revenue by 50 percent to $647 million and EBITDA shot up from a negative $12 million to a

$76 million gain. KPS and investors realised a 2.9x cash on cash multiple and a 27 percent gross internal rate of return on total capital invested.

“We are very proud of MCI’s incredible turnaround, executed at the low point of the North America motor coach industry cycle and at the height of the financial crisis,” said Jay Bernstein, a partner at KPS.

“The success of our investment in MCI demonstrates KPS’s ability to see value where others do not, to buy right and to make businesses better. In 2010, we acquired a failing, deeply under-managed business and transformed it into a thriving, highly profitable, and growing business.”

To achieve such a result, KPS rolled up its sleeves, hired a new chief executive and a new senior management team whom they

2.9xMultiple

27%IRR

($12m)EBITDA on entry (loss)

$76mEBITDA on exit

MCI: won the industry’s largest single coach order for 12 years

worked with closely, implement-ing a new organisational structure, transforming the company’s manu-facturing operations and focusing on quality and customer services among other improvements.

“During a five-year holding period, the turnaround encompassed every aspect of MCI’s business from sales to manufacturing and after-market services,” said judge Paul Fuhrman.

A key turning point for MCI was the equity-based strategic partner-ship with Daimler AG. As part of the partnership, which began in 2012, MCI acquired exclusive rights for high-end Setra motor coaches and after-market parts in the US and Canada. In return, Daimler received a minority interest in the company.

A transformational 1,104-unit 45-foot coach order from the NJ Transit, the single largest order in the coach industry in the past 12 years, was also no small feat for MCI.

As a result, KPS saved more than 1,500 premium industrial jobs. Meanwhile, the sale to New Flyer created one of the largest, most diverse bus companies in the world.

“Motor Coach Industries Inter-national is the best example of pure operating improvement,” said judge Michael McKenna. “KPS acquired a distressed asset in restructuring and without relying on acquisitions to ‘buy EBITDA’ or realise synergies, they transformed a cash negative business into a profitable business.” n



Permira: IntelligratedWINNER — LARGE CAP

When London-based Permira came across package distribution and sort-ing provider Intelligrated in 2012, it was quick to spot growth opportuni-ties. The Ohio-based firm sat at the heart of two of Permira’s favoured investment sectors: industrials and technology.

“The company was poised to ben-efit from the growth in e-commerce,” said Permira partner Richard Carey, co-head of the firm’s industrials sector team. Carey found willing allies in Intelligrated founders Chris Cole and Jim McCarthy, who had been searching for suitable partners who understood the importance of continued investment in software.

Permira bought a majority stake in Intelligrated from Gryphon Investors for $500 million in 2012 through its fourth fund, Permira IV. At the time, Intelligrated’s enterprise value was $515 million.

Permira quickly identified five growth areas to focus on.

One was Intelligrated’s aftermar-ket business that offers repairs and software upgrades once a product has been purchased. The addition of a 17-strong sales team helped Intel-ligrated’s aftermarket revenue grow by 26 percent in 2015.

Intelligrated increased its capac-ity by acquiring an automated storage and retrieval system, and developed a warehouse robotic platform that increased accuracy in package deliveries.

Permira’s global reach helped Intelligrated to expand into two growing e-commerce markets: Brazil and China. Despite the mac-roeconomic slowdown in these two countries, e-commerce was still a hot sector that gave Intelligrated room for growth.

The company won big new e-commerce customers, such as UPS, Amazon, Walgreens and Nor-dstrom. These new accounts ensured that over 40 percent of Intelligrated’s

5xMultiple on exit

96%Growth in revenue

120%Growth in EBITDA

Intelligrated: the firm combined two of Permira’s favoured investment areas

sales pipeline comes from new cus-tomers and capabilities. In the pro-cess, it created a full parcel product as a supplier to UPS.

In terms of software development, Permira made an add-on acquisition in 2013 of Datria, a software enabling workers to connect with their com-puters using their voice.

The firm also appointed Greg Clark, CEO of cybersecurity com-pany Blue Coat, to the board of advisors and provide guidance on growing a software business.

These five areas of expansion led to a 96 percent revenue growth during Permira’s four-year owner-ship. Intelligrated’s EBITDA, and research and development also grew an impressive 120 percent, and employee headcount from 1,900 to over 3,000.

On July 1, Permira announced its plans to sell Intelligrated to Honey-well for $1.5 billion, for a more than 5x multiple in terms of euros. Intel-ligrated’s enterprise value at exit was $1.5 billion, up 191 percent from the value at entry.

“Permira realised a 5x cash-on-cash multiple with their investment in Intelligrated by strengthening the management team, enhancing system capabilities to enable new product offerings, driving sales growth through geographic expan-sion internationally, and acquisition of targeted very large customers. Permira used its knowledge of the technology sector to support sys-tems and software improvements,” said judge Michael McKenna. n


PEI Operational Excellence Awards 2016 ASIA-PACIFIC

DRC Capital: PayDesignWINNER — SMALL CAP

Tokyo-based electronic payment services company PayDesign, then called Design Check, had a net loss of ¥1.8 billion ($18 million; €16 million) when Japanese turnaround private equity firm DRC Capital acquired a 25.8 percent stake for ¥500 million in September 2008. Instead of growing its core business, the company had started publishing collections of celebrity photos and developing hardware for payment processing terminals – an endeavour which DRC chief executive Hideo Aomatsu characterised as a “poor diversification of the business and into a completely different domain”.

As a consequence, PayDesign incurred extraordinary losses, man-agement time was being diverted to support non-core businesses and staff morale was sinking, Aomatsu added.

To complicate matters fur-ther, the company had a disparate shareholder structure that pre-vented rapid decision-making and a

management team that was unpre-pared for a turnaround.

With these key problems clearly identified, DRC was quick to act in what it termed a “shrink-to-grow” strategy. First, it led a full withdrawal from the non-core and unprofitable businesses. PayDesign pulled away from the established mass settle-ment businesses where big players such as PayPal and Square were dominant, and instead zeroed in on specific customer segments to drive results. It expanded into home rental payments – unusual in Japan where rents tended to be paid in cash. The company also shifted away from large businesses towards small and mid-sized, which ushered in a new set of customers.

“The pinnacle of our efforts was the introduction of credit card pay-ments for rent. Once the system was imposed, it worked so well – the transaction volumes more than doubled, from ¥50 billion in 2012 to ¥117 billion in 2015,” Aomatsu said.

3.4xReturn multiple

29%Gross IRR

¥181mEBITDA on entry

¥276mEBITDA on exit

PayDesign: a ‘shrink-to-grow’ strategy yield impressive results

DRC also launched a share buy-back programme in 2012 by inject-ing ¥873 million of capital into the business. This dramatically reduced PayDesign’s investor base from nearly 4,000 shareholders to just 10 institu-tional investors, thereby increasing DRC’s stake to 87.5 percent, giving it full management control.

To bolster the management, DRC hired Masaaki Nakajima, a former banker at Sumitomo-Mitsui Banking Corporation as chief execu-tive. Nakajima expanded the sales force and the system development maintenance team, and started an organisation-wide “corporate identity” project which is credited with boosting both staff morale and operational efficiency.

By April 2016, DRC decided to realise the investment through a strategic sale to Tokyo-listed fintech company Metaps for ¥2.5 billion. The transaction generated a gross money multiple of 3.4x and gross internal rate of return of 29 percent.

Judge Ivo Naumann said that the intervention by DRC addressed all of its shortcomings and led to a highly successful outcome. “In particular, the ‘shrink-to-grow’ strategy is something owner and managers often shy away from, but has been highly fruitful in this case. This initiative, combined with a strengthening of the manage-ment team and a clear strategy to address the corporate culture, are the fundamental components of this success case. It is these kinds of bold decisions that often are the decisive moments in a turnaround.” n



Navis Capital Partners: Golden Foods Siam

WINNER — LOWER MID-MARKET

When Kuala Lumpur-based Navis Capital Partners acquired a control-ling interest in Golden Foods Siam (GFS) in September 2009, the com-pany was one of Thailand’s largest fully integrated chicken processors focused on both raw and cooked added value products.

The long-term prospects of the business looked good as poultry pro-duction was big business around the world. But GFS mainly exported to Japan and the UK – developed mar-kets with slower growth rates – and had failed to enter new geographies in Asia. GFS was also operating a single cooking plant that was fully utilised and bought all of its chicken feed from third-party suppliers.

To improve profitability and drive growth, Navis embarked on a five-year plan. Its first strategic initia-tive was to reduce the proportion of fresh meat sales, which has high

price volatility compared with the more stable and higher margin CAV business. To develop more interest-ing products for the company’s customers, Navis focused on new and more complex product offerings and pushed to expand GFS branded product Grabits – cooked chicken on a stick – which increased sales by 47 percent since 2010.

Navis also worked with manage-ment to drive operational improve-ments in key areas. One was labour efficiency. The company’s more than 9,000 employees were a major cost item, especially after the Thai gov-ernment increased the minimum wage by 40 percent in 2012. Navis addressed this by increasing auto-mation in production processes and enhancing labour productivi-ty, an initiative which resulted in a 7 percent cost cut per kg from 2012. The new cooking facility, opened in

3.6xReturn multiple

25%Gross IRR

12% Top-line CAGR revenue growth

Golden Foods Siam: new cooked chicken products boosted revenues

2011, also further expanded its pro-duction capacity.

New market entry was another key priority. Aside from increas-ing GFS’s customer base in its core markets, the firm targeted new geog-raphies such as Korea, the Middle East and among the Association of Southeast Asian Nations, generating more than 60 percent CAGR from 2011 to 2014 in these markets.

The firm also strengthened GFS’s management team and brought in a senior executive with an agricultural background from one of its inves-tee companies, who played a critical role when GFS bought a feed mill in 2015. The state-of-the-art facility in the province of Lopburi meant that 100 percent of the company’s feed requirements were brought in-house.

“I liked the vertical integration of the company by adding a feed mill which ensures supply chain resiliency, and a new cooking facility to improve the evolution towards higher value added products away from raw sales,” said judge Veronique Lafon-Vinais.

With strong financials, Navis started the exit process in 2015. It hired an advisor, launched a global search and received interest not only from many protein players from various parts of the world but also private equity firms. Early this year, Navis sold GFS to Brazil’s second largest food company BRF SA for $360 million, generating a 3.6x money return and 25 percent IRR. n



NewQuest Capital Partners: China Hydroelectric Corporation

WINNER — UPPER MID-MARKET

Adding operational value can be an acrimonious process, as NewQuest Capital Partners, a Hong Kong-based direct secondaries firm, discovered when it bought a 24 percent stake in China Hydroelectric Corporation in 2011.

At the time, the New York-listed CHC, which operates 25 hydroelec-tric plants in China with 506MW of capacity, had a very high cost base due to rapid expansion. General and administrative (G&A) expenses were rising sharply and it had a $100 mil-lion liquidity hole.

NewQuest decided in the summer of 2012 – when the stock price was its lowest and management had destroyed most of the company’s value – that it needed to be in the driver’s seat. “Unfortunately, that meant engaging in a very public and contested battle for control of the

company’s board,” said NewQuest managing partner Darren Massara. Obtaining control was a complex pro-cess lasting over three years, replete with SEC filings, back and forth with management, as well as a battle to gain support of its shareholders.

When the fight was won, New-Quest began leadership changes, replacing the CHC board and senior management. To reverse the liquid-ity shortfall, NewQuest cut costs, reducing G&A expenses by over 60 percent, through the office clo-sures and headcount reductions.

NewQuest “rescued China Hydroelectric Corporation from massive shareholder value destruc-tion”, said judge Lian Hoon Lim.

“Plant utilisation was improved from 28 percent to 40 percent, resulting in revenues increasing 62 percent over three years. Combine

113%EBITDA growth

62.1%Top-line revenue growth

3.7x Exit multiple from NewQuest Fund I

41.4% IRR from NewQuest Fund I

Hot water: NewQuest fought ‘tooth and nail’ to take control of CHC

this with G&A improvements and lower debt costs from refinancing resulted in EBITDA improving by 113 percent over three years, making CHC the winner in this category,” Lim said.

After NewQuest bought 55 per-cent into CHC, it took the company private, which saw NewQuest boost its stake to 95 percent in 2014. “Post the take private transaction, we antic-ipated that it may take another three years to fully realise our operational value addition initiatives. However, after about a year as a private com-pany, most of our objectives had already been reached,” Massara said.

The sale process, which gar-nered interest from 20 parties, half of which were Chinese state-owned enterprises, took six months, with Shenzhen Energy acquiring the com-pany in a deal worth $542.6 million.

“Most control-oriented investors would have acquired a majority stake through a single transaction, estab-lished an operational plan from day one, implemented that plan over the course of several years, and then suc-cessfully exited,” Massara said.

“In our case, we had a passive stake at the outset and had to fight tooth and nail over several years to gain operational control of the company. We then took the extra step to take the company private and ultimately were able to achieve the value addi-tion goals we set out at the beginning, generating meaningful returns.” n



Actis: Plateno Hotel GroupWINNER — LARGE CAP

Plateno Hotel Group’s position as one of China’s leading economy and mid-tier hotel operators was cemented this year. In February, shareholders, including London-based growth investor Actis, sold a combined 81 percent stake to Chi-nese market leader JinJiang Hotels for an enterprise value of more than $1.5 billion.

Over the course of Actis’s more than seven-year investment in Plateno made through Actis Emerg-ing Markets 3, the company – for-merly known as 7 Days Inn – was transformed. It grew from a single-brand operator with 160 budget hotels in 28 cities to one with more than 20 brands – including Portofino Hotels and Lavande Hotels – operat-ing more than 2,500 hotels in more than 300 cities. In 2014, it ventured internationally, opening hotels in Thailand and Malaysia.

Judge Ivo Naumann described the hotel group’s expansion as “more than impressive”.

“It was the deep understand-ing of consumer preferences and megatrends within growth markets that provided the foundation for this case,” Naumann said.

Amid what Actis described as “explosive growth” in demand for budget and mid-range accommoda-tion in China generated by domestic business travellers and tourists, the GP made its initial investment in 2008 in the rapidly growing hotel group. It backed the founder and existing management team in its strategy to develop a “lease and operate” model.

Over the next five years, with significant investment into the hotel membership scheme that connected it to online customer services and an electronic and mobile book-ing system, the group expanded its 800,000-strong loyal customer base to a membership programme of 70 million.

Actis committed additional capi-tal in 2013 when Plateno de-listed from the New York Stock Exchange. The move coincided with a shift in strategy to respond to increased demand for mid-range accommoda-tion. This resulted in the develop-ment of new mid-tier brands and an upgrade in décor and design in existing hotels. Among other oper-ational improvements, it closed

61%CAGR from 2008-15

250Hotels at time of acquistion in 2008

2,500Hotels at time of exit in February

70mMembers of loyalty programme by exit

Plateno: transformed the 7 Days Inn group

underperforming hotels; centralised purchasing activity that increased the group’s buying power; and stand-ardised products and services.

In line with Actis’s commit-ment to ESG, in 2010 management introduced a Green Hotel scheme that discontinued supplying one-use amenities such as toiletries and encouraged guests to bring their own or purchase re-usable items. The firm also worked with man-agement to formalise health, safety and environmental policies across the group, including fire safety and food hygiene compliance, as well as licensing.

By exit, the group’s model had shifted from lease and operate to franchising the bulk of its proper-ties with a centralised membership programme and booking system, resulting in a boost to profit margins and return on equity.

The company reported revenue CAGR of 61 percent from 2008-15, and EBITDA from negative to more than $120 million on exit.

“I was impressed by the focus given to operational excellence throughout the journey. The com-bination of efficient service, clean rooms and value for money – pric-ing – requires strong processes along the entire value chain,” Nau-mann said.

Actis exited the company with it positioned for further growth. Future plans include the roll-out of 500 hotels under the Hampton by Hilton brand across China over the next eight years. n


PEI Operational Excellence Awards 2016 EMEA

Mediterrania Capital Partners: CEPROWINNER — SMALL-CAP

When Mediterrania Capital Partners invested in CEPRO, a manufacturer and distributor of disposable baby diapers and sanitary pads based in Algeria, in 2009, it sat down with the company’s management to draw up an ambitious growth plan to take the business to the next level of profit-ability in a market with increasing potential.

Mediterrania acquired a signifi-cant minority stake in the business using capital from its €63 million first fund. The firm worked with CEPRO to conduct a product profitability analysis across all of its lines, aiming to increase efficiency and double down on the best-performing prod-ucts, which turned out to be diapers.

Over the course of the investment, annual sales of baby diapers increased by 400 percent to 600 million sold in 2015.

Mediterrania also reached into its extensive network to help CEPRO access a number of Spanish suppliers of raw materials, who offered better conditions than the company’s origi-nal suppliers. The firm also helped CEPRO identify the best technology providers of production lines, which were in Italy.

During the holding period, CEPRO tripled its factory size from 10,000 square metres to 30,000 square metres, and made additional investments in production capacity. Product packaging and company branding were modernised, and new marketing activities helped increase product brand awareness in Algeria and abroad.

Judge Thomas Pütter noted evi-dence of “clear operational focus, improvement in supply line and investment in state of the art pro-duction capacity”.

During Mediterrania’s holding period CEPRO grew its annual revenue by 580 percent, from €10 million in 2009 to €58 million as at December 2015.

“A six-year hold period with 50 percent CAGR in EBITDA and an almost 6x in revenue growth cou-pled with a market share increase from 5 to 24 percent evidences a clear strategy and clear focus,” said Pütter.

“Productivity improvement of 13 percent from 84 to 97 percent is part of the clear success of this investment.”

In 2012 Mediterrania helped the company implement an SAP system to streamline processes across the whole business. During the hold period it also launched its export

400% Rise in diaper sales 2009-15

600mDiapers sold in 2015

19%Increase in market share

50%CAGR in EBITDA over six years

CEPRO: improved on all key metrics

business, selling its products to several countries in sub-Saharan Africa, including Mali, Mauritania and Nigeria.

On the governance side, the firm helped CEPRO to strengthen its board of directors and in establish-ing business and financial reporting as best management practices, as well as putting in place additional improvements around corporate governance and transparency.

Mediterrania ultimately sold CEPRO to emerging markets powerhouse The Abraaj Group in January 2016 in a deal generating a substantial return and a double-digit internal rate of return for the firm’s investors.

“They increased market share by 19 percent with an expansion into sub-Saharan Africa,” said judge Ludovic Phalippou. “They managed to provide a double-digit return, and improve on all key metrics in a chal-lenging emerging market.” n


PEI Operational Excellence Awards 2016 EMEA

Palamon Capital Partners: TowryWINNER — LOWER MID-MARKET

During its 13-year hold period, Palamon enacted a buy-and-build strategy at Towry so ambitious – and successful – that the business ultimately sold in 2016 bore little resemblance to that acquired in 2003.

“PE can have a reputation for being short-termist. Palamon’s involvement is the opposite,” said judge Miles Graham. “There is no doubt that the business they exited was operation-ally at a whole different level to the one the made the commitment to at the start.”

Palamon originally invested in the UK’s highly fragmented independent financial advisor industry following thesis work that showed significant changes underway which would open up opportunities for the crea-tion of a new national leader.

The first acquisition was Buck-inghamshire-based John Scott & Partners, a player with 13 advisors and an EBITDA of £900,000. Unlike its peers, this business had an inte-grated model combining financial planning and investment manage-ment. It also operated a fee-based

model instead of working on com-mission. The firm then embarked on an accelerated acquisition pro-gramme, completing 16 add-on acquisitions in total during the hold period, including the reverse takeo-ver of Towry Law in 2006.

As well as institutionalising the management team – bringing in a CFO, an operations director, a head of advisors to manage the advisor pool, a head of proposition to make sure the client offering was struc-tured and standardised, and a head of HR – Palamon worked with the company to establish a board. This attention to governance stood the business in good stead when it came to applying for change of control approval from the Financial Con-duct Authority, which was required every time the team made an add-on acquisition.

Palamon also worked hard on honing its integration process, investing in extensive training pro-grammes to help advisors adopt the Towry financial planning and client fee-based model. “A very impressive

16 Add-on acquisitions in 13 years

£250mAUM on entry

£9bnAUM on exit

27%Revenue CAGR 2003-16

Towry: a whole different level

buy-and-build story reflecting a deep understanding of industry dynamics and a clear execution strategy against a well anticipated changing market environment,” judge Thomas Pütter said. “A 27 percent revenue growth CAGR over 13 years and resultant efficiencies in scale evidenced by a 36 percent CAGR in EBITDA over the same period are nothing short of very remarkable.”

The work was critical in posi-tioning Towry as the leading indus-try consolidator when the FCA announced its long-awaited Retail Distribution Review in 2011 which abolished commission-based advisor fees and forced the industry to adopt a fee-for-service model.

“In a regulated environment the challenge of creating institutionalised management with scalable capacity and maintenance of quality and com-pliance is significant,” Pütter said.

When Palamon sold Towry to Permira-backed Tilney BestInvest in April, the company’s assets under management had increased from £250 million on entry to £9 billion, its enterprise value had shot up from just £9 million to £600 million, and EBITDA had mushroomed from £900,000 to more than £36 million.

“Towry is a remarkable case of the power of operational excellence and active private equity ownership,” said judge Katja Salovaara.

Antoon Schneider added: “Towry is the perfect proof that having a clear investment thesis and execut-ing against it diligently is at the heart of PE success.” n


PEI OPEX Awards 2016 EMEA

EQT Partners: Atos MedicalWINNER — UPPER MID-MARKET

It was the growth figures for Atos Medical under the ownership of EQT Partners that impressed the judges in the EMEA upper mid-market category.

Revenue almost doubled in the five years following EQT’s acquisition of the Swedish medical device manufac-turer from Nordic Capital in 2011.

Atos is the global leader in voice restoring devices for patients that have had a laryngectomy to remove their voice boxes following surgery. Atos is seven times larger than its nearest competitor in the laryngec-tomy market and the only global player – a position bolstered by EQT’s relentless focus on expansion. Since 2011, its global sales force has expanded by 70 percent and it has established a direct sales force across 11 new countries, including Japan, Brazil and Italy. The Malmo-based company now has the largest dedi-cated ear, nose and throat sales force in the world.

“The partnership between Atos Medical and its owners EQT Capital has been a very fruitful one,” said judge Antoon Schneider. “The com-pany almost doubled in size over the five years ownership by EQT, and its EBITDA margin rose impressively from 28 percent to 40 percent.”

This success in creating genuine value was noted by another of the judges Miles Graham.

“What stood out for me with Atos is the clear value-creation bridge. This was a very successful investment for EQT, but as their value bridge tes-tifies, it really was entirely based on the operational delivery of the busi-ness, not due to returns boosted by QE-induced multiple expansion or cheap debt,” he said.

The growth strategy encom-passed a raft of operational changes, including a new direct sales model involving an innovative direct-to-consumer model. This gave Atos direct access to the end-customers

28%EBITDA margin in 2011

40%EBITDA margin in 2016

70%Expansion in global sales force since 2011

Atos Medical: seven times larger than its nearest competitor

to manage their ordering and re-imbursement process and to help best practice.

Product launches included a new hands-free speaking valve and a new innovative coming home kit, which helped Atos Medical win a prestig-ious Red Dot Award for excellence in design and innovation.

EQT also brought in new senior staff as part of a generational shift, including a new chief executive and chief financial officer.

Production efficiencies and a reduction in back-office operations helped boost the EBITDA margin.

EQT is delighted its efforts have paid off.

Åsa Riisberg, partner and head of healthcare at EQT Partners, said: “Atos Medical has developed into a true global market leader, which we are immensely proud of. With a focused growth strategy, Atos Medi-cal has continued to penetrate the white space in the laryngectomy care market, improving the quality of life of its patients.”

Atos Medical was sold to private equity firm PAI Europe in May 2016, yielding “impressive” double-digit returns, according to Schneider.

“These results are a combination of various strategic and operational measures in which EQT played an active role, ranging from investing into a global sales force and new products to driving operational efficiency gains to managing a gen-erational shift in the management team,” he said. n


PEI OPEX Awards 2016 EMEA

KKR: Alliance Tire GroupWINNER — LARGE CAP

In just three years, KKR assisted Alliance Tire Group (ATG) reach its goals of grabbing further market share, broadening its global presence and establishing itself as a worldwide brand.

KKR acquired a majority stake in the Netherlands-based producer of off-highway tyres (OHT) – which has a significant presence in India and Israel – in April 2013. By the time of exit in July this year in a sale to Japan’s Yokohama Rubber Company for an equity value of $1.2 billion, the company’s share of the market had doubled from 4 percent to 8 per-cent under its brands Alliance, Galaxy and Primex. Production capacity had also more than doubled from 73,000 tons annually in 2013 to 170,000 tons; and, impressively, the company offered the broadest range of prod-ucts of any OHT manufacturer.

ATG operates in an expanding segment of the global tyre industry, but growth during KKR’s investment

was not assured. The sectors ATG supplies, such as agriculture, forestry and construction, are cyclical. Revenue growth figures over the course of the hold period were not disclosed, but financials for fiscal year 2015 were robust. Operating profits stood at $95 million with annual sales of $529 mil-lion, according to Yokohama Rubber.

KKR Capstone team members based in Asia, the US and Europe dedicated about 13,000 hours to the investment. The firm, through one of its KKR Capstone executives, supplied an interim chief operat-ing officer for nine months as the company searched for a permanent replacement, and assisted with other key hires globally.

Early on, KKR’s operational ini-tiatives included introducing man-agement to equipment manufac-turers to facilitate expansion into new areas; streamlining sourcing benefitting from its procurement expertise in Asia; acquiring assets

4% Market share in 2013

8%Market share in 2016

$1.2bnEquity value at time of exit

Alliance Tire: doubled its market share over three years

to grow scale; and optimising the use of working capital.

Not least among its achievements was the launch of a new plant in Dahej in Gujarat in late 2014, its third globally and second in India. The plant is now operational and was accompanied by new go-to-market strategies for Asia, Eastern Europe, Africa and Latin America.

“What stood out for me with ATG versus other strong submissions, was that KKR Capstone supported a major reshaping of the business in parallel across three continents in what was a relatively short hold period,” said judge Miles Graham.

“It was extremely difficult to choose the winner in this category,” said another of the judges, Katja Salovaara. “KKR took ATG to the next level in an impressive case of operational improvements and scal-ing up ATG.”

Among factors that singled out ATG was KKR’s intense engagement; its strategic focus on improving the quality and range of products and brand recognition; and the intro-duction of sustainability initiatives, which reduced energy consumption and scrap waste, she said.

With its new owners, the com-pany joined the ranks of the top 10 global tyre producers. Around the same time, it received an endorse-ment of another sort: ATG tyres featured in the movie Batman v Superman: The Dawn of Justice, fitted to the Batmobile, no less. A true brand achievement. n


to take action. Often, private equity profes-sionals are quick to intervene in the parts of the business where they have relevant expe-rience or recent knowledge, but hesitant to address areas of unfamiliarity or ambiguity. These blind spots can be areas of significant value, and without targeted attention, they can be significant sources of delays.

Financial due diligence is a fundamen-tal requirement of banks and investment committees during a deal process, with a Quality of Earnings report used to justify the value of the business. But full opera-tional due diligence is not usually the norm. That’s where the Value Creation Framework can serve as an important tool, outlining 11 areas of the business, both front and back office, that are critical to unlocking the full value.

REPLETE WITH VALUE

Regardless of the industry, front office operations include the executive office, design and development, sales and market-ing, product/service delivery and customer service areas. These may or may not be dis-tinct organisations, but as business process areas, they are replete with value levers.

For private equity buyers, an opera-tional due diligence traditionally focuses on industry benchmarks such as order man-agement costs, total supply management costs and IT spending as a percentage of operational expenses. While these bench-marks are useful, a specialist in operational due diligence will provide a more in-depth perspective. This includes a baseline analy-sis and value realisation exercise that helps identify opportunities and synergies, plus scenario planning and financial modelling.

Technology is central to the framework, and should be considered as part of both the front and back office. Without the right

As a private equity professional, this sce-nario may be all too familiar. You acquire a company with tremendous potential for organic and add-on acquisition growth. The confidential information memorandum pre-sents an attractive investment thesis and the financials are sound. But the headwinds of institutional muscle memory, legacy technol-ogy and the desire to maintain the status quo are much greater than expected, slow-ing down the change that’s critical to your strategy and exit timeline. The 100 day plan first stretches into months, then into years.

Buyers struggle in this situation, as they try to manage the competing priorities of growing the business, completing add-on acquisitions and increasing the multiple, while confronting antiquated, unwieldly legacy systems and growing an organisa-tion that is resistant to change. Given these challenges, how do you efficiently and sys-tematically create value?

FOCUSING ON GROWTH

The best way to focus your thoughts – and investments – on creating value is to use a growth framework. This framework should address what matters most to the investment thesis, and help you to be more deliberate about the actions you will – and just as crucially, won’t – take.

Although the leadership and work needed to drive change can be difficult and time consuming, analysing and prioritising your efforts does not have to be. The Value Creation Framework (see panel) is a useful tool in understanding what drives value in your target or newly acquired business.

Using the framework means taking thoughtful decisions about each area, rep-resented by each box. This allows you to consciously address all the relevant areas of the business and decide whether or not

A diligent approach to value creationA growth framework can keep a 100 day plan on track by providing valuable operational insights, says Jonathan Caforio, a principal at RSM

Caforio: blind spots can be areas of significant value

DELIVERING GROWTH

INDIA ROUNDTABLEKEYNOTE INTERVIEW: ACTISEXPERT COMMENTARY: RSM


technology, it will be virtually impossible to meet the growth objectives, cut costs and remain compliant, and forecasts will become more laborious. Social media, mobile plat-forms, analytics and leveraging the cloud are primary drivers of new value in the digital era – even in more established industries.

The back office consists of finance/accounting/tax, risk, human resources, legal and facilities & equipment. A strate-gic business decision generally takes into account the full financial, human capital and facilities/equipment ramifications. But risk is especially important, as indicated by its tendency to make the headlines. This makes the safety of a business’s intellectual property and consumer data a fundamental question in due diligence. Is your target PCI (payment card industry) compliant? Does it need to be? Has the company been hacked? Have they recently conducted a network or website penetration test to demonstrate how they have limited their vulnerability? Overall security and privacy should be as important to your diligence as the financials.

A full operational due diligence report does not have to include every aspect of the

business, as long as the omissions are delib-erate choices rather than accidental over-sights. A full report is one that considers all the important aspects that contribute to the deal’s decision-making process. Full dili-gence helps provide clarity to a 100 day plan and the rough order of magnitude (ROM) sizing, including the required timing, effort and investment for value creation.

POST-CLOSE PRIORITIES

Post-close, the real work begins. As part of a 100 day plan, you should use your newly acquired access to every area of the busi-ness – all of its people and data – to adjust your targets, timing and expectations. This analysis phase is critical to validate your assumptions and address the all-important and time-honoured pillars of people, pro-cess and technology. Your proposed process changes will drive the technology change, which the organisation must be able to absorb and embrace.

After the initial changes, maximising portfolio value should involve additional deliberate actions instead of just watch-ing the business grow EBITDA and exceed

core industry benchmarks. Don’t overlook state and local tax incentives to optimise tax savings. Effectively outsourcing commodity human resources, finance/accounting and technology functions can support your add-on acquisition strategy and increase the value, particularly to a strategic buyer. Estab-lishing a programme that includes internal audit, the proper certifications (e.g., PCI, SOC/SSAE/SAS, etc.) and external penetra-tion testing demonstrates attention to detail and a lower risk profile to a potential buyer.

The deal process should include full operational due diligence and rough order of magnitude sizing. Using a comprehen-sive and repeatable framework for opera-tional due diligence will assist in assessing all aspects of the business, including core operations, technology and the back office. You may not need to address every area with specific action. But the framework will allow you to be more deliberate in consid-ering critical parts of the business, and to develop and coordinate a comprehensive 100 day plan that focuses less on the 100 days and more on those areas that drive spe-cific value in line with your exit strategy. n

EXPERT COMMENTARY: RSM

Due diligence

Dea

l clo

se

Liq

uid

ity

even

t

100 day plan/business transformation Maximise portfolio value

ROM sizing Transformation and project management

Core operating process assessment and roadmap

Executive office

Design and development

Sales and marketing

Product/service delivery

Customer service

Information technology

Finance/accounting/tax

Risk

Human resources

Legal

Facility and equipment

Best practice and portfolio value metric benchmarking

Business value optimisation

IT managed services

Support services cost optimisation

Audit and tax services

Finance and accounting outsourcing

Security, privacy and risk audit

Payroll and HR outsourcing

Legal services

Core process implementation

Support services mobilisation

Application/infrastructure implementation

Back office support services assessment and roadmap

Organisation build and alignment

Organisation build and alignment

Ass

et a

nd s

ervi

ces

pro

cure

men

t


HOW CAN YOU MAXIMISE THE VALUE OF YOUR INVESTMENT?Creating value and driving growth — all while ensuring proper risk management and controls.

RSM offers a complete suite of customised solutions for any phase of, or the entire transaction life cycle, to support your companies’ strategic goals. Our approach creates fund-level value by enhancing the enterprise value of individual portfolio companies.

With our depth of solutions, national capabilities and expe-rience, we are able to strategically combine our services and apply them to provide maximum value at any specific point in the life cycle.

PRE-CLOSE• Financial due diligence• Tax due diligence• IT due diligence• Operational due diligence• Risk due diligence

Value created• Increase leverage in the transaction• Provide early identification of improvement opportunities

that drive enterprise value• Mitigate risk in the transaction

POST-CLOSE • Merger integration and carve-out support• IT and internal audit risk management• Performance management• Transition team development• High-level financial and operational analysis• Detailed functional and operational benchmarking and

design of KPI metrics

Value created• Ensure timely integration to maximise synergies• Reduce the time and expense, while mitigating risk of the

TSA• Identify areas of improvement, such as personnel, operations,

sales and marketing and financial reporting• Analyse and quantify value drivers in the target company• Implement a strategic overview of key business segments

and controls• Develop a remediation road map for integration• Adjust pricing as a result of financial, tax and technology

due diligence

PORTFOLIO OPTIMISATION • IT system selection and implementation• Operational and supply chain optimisation• Process evaluation and improvement• Shared service centre implementation• Security and privacy

Value created• Help ensure appropriate financial reporting covenants are

followed• Establish 30-, 60- and 100-day action plans to measure

against KPIs and metrics• Track the integration process and confirm appropriate levels

of accountability• Maximise economies of scale by centralising business units

and duplication• Mitigate internal control deficiencies• Determine sufficient working capital

PRE-DIVESTITURE READINESS• Business valuation• Sell-side due diligence• Organisational structure optimisation and implementation• Compensation and benefit alignment• Cultural alignment• Key employee retention

Value created• Evaluate contract compliance issues or ongoing litigation• Help ensure that financial processes and controls are accu-

rate• Adequately address budgeting and modelling, enterprise

risk management, security and internal audit strategies• Optimise working capital by containing costs• Confirm technology platforms and infrastructure are perform-

ing to standards

ABOUT RSMRSM meets the needs of private equity firms and their portfo-lio companies with integrated transaction advisory, tax, audit and consulting services. With our expertise in middle-market companies, we offer a full range of technology, financial and risk advisory services to help clients optimise portfolio per-formance and operational effectiveness. Private equity firms investing in the middle market turn to us because of this deep expertise and an industry specialisation that aligns with many firms' portfolios.

RSM US LLP (formerly McGladrey LLP) is the leading pro-vider of audit, tax and consulting services focused on the middle market, with 9,000 people in 86 offices nationwide. It is a licensed CPA firm and the U.S. member of RSM International, a global network of independent audit, tax and consulting firms with more than 38,300 people in over 120 countries.

800.274.3978www.rsmus.com

Member of the RSM network of independent accounting, tax and consulting firms.

© 2016 RSM US LLP. All Rights Reserved.

INDIA ROUNDTABLEKEYNOTE INTERVIEW: ACTISCOMPANY PROFILE: RSM


Every private equity firm has a different way of approaching value creation, and each portfolio company has a unique set of challenges. But there are some common threads that weave through strong exam-ples of operational excellence.

Our regular Deal Mechanic feature in Private Equity International goes under the bonnet of a recent deal to find how ope-rating partners have added value to their portfolio companies.

Here are a few things we’ve learned from the last 12 months of examining the art of adding value to secure a successful exit.

1FINANCIAL RESTRUCTURING

Several of the portfolio companies featured in PEI’s Deal Mechanic pages in the last year were acquired

pre-2008, when buyout houses were rou-tinely saddling businesses with aggressive capital structures. Those that ultimately pulled off strong exits addressed the chal-lenges that ensued head-on.

Permira began the process of acquiring Valentino Fashion Group and Hugo Boss in May 2007, paying a combined €5.3 bil-lion, which included debt of 8x EBITDA. As the global financial crisis took hold the firm took a close look at all the financing structures it had in place, and in 2009 took the opportunity to negotiate with lender Citigroup to buy back a third of its debt at a 62 percent discount. On a much more stable footing, Permira could then re-discuss with its lenders the terms of the remaining debt so all parties were more comfortable.

Terra Firma acquired German motorway service area business Tank & Rast in 2004, and in 2007 sold 50 percent to RREEF Infrastructure, part of Deutsche Asset & Wealth Management. It then put in what the firm described as a “pre-crisis 2007

DEAL MECHANIC UNDER THE BONNET OF A RECENT DEAL

The ultimate Deal MechanicGROWTH DRIVERS

Every portfolio company’s value creation story is different, but there are a few common operational levers private equity firms can pull to stimulate growth and boost returns

legacy capital structure” which included “quite a bit of leverage, quite a bit of debt quantum, and a so-called bullet maturity, which were to mature in 2014”.

In 2011 Tank & Rast was still doing well operationally, but if the debt were to mature at that moment, Terra Firma would have been unable to refinance it. The firm immediately began exploring refinancing avenues, eventually completing a €2.1 billion refinancing in December 2013, lowering the cost of the debt and introducing longer-dated facilities with staggered maturities. In one step, risk was alleviated and a significant uplift in valuation followed.

2STRENGTHENING

MANAGEMENT

Firms will often say that getting the right management team in

place was the single most important thing they did to improve the performance of their portfolio companies.

In some cases, GPs have to start from scratch, building out a full management team. Such was the case with Apotek Hjar-tat, the Swedish pharmacy chain acquired by Altor Equity Partners in 2009 when the Swedish government deregulated the pharmacy sector. Following a complex transaction Altor was left with just the stores – no management.

Altor brought together a team of three Norwegians, who had held operating and board roles within the Norwegian phar-macy market, which had also been through deregulation, and the former deputy chief executive of Swedish grocery retail firm ICA to create a central management team.

ECI Partners also called on its little black book of contacts when it acquired employment law and health and safety solu-tions business Citation in 2012. As part

DEAL MECHANIC

16 Add-on acquisitions by Towry

€2.1bn Size of Terra Firma’s refinancing of Tank & Rast

€5.3bn Price paid by Permira for Valentino and Hugo Boss

1,800 Walmart outlets now stock Tommee Tippee

6 Bolt-ons completed by CloserStill ››


of the transaction, the CEO, a major shareholder, left the business, which left a significant hole to be filled.

ECI called on Chris Morris, at the time chief financial officer at former ECI port-folio company LateRooms.com, to fill the void. Together with Morris the firm then brought on a new board chairman and crea-ted several new roles: sales and marketing director, chief technology officer and HR manager.

3ADD-ON ACQUISITIONS

While organic growth is a key part of most portfolio companies’ value creation plans, pursuing a bold

buy and build strategy is an effective way to turbo-charge expansion plans.

Palamon Capital Partners portfolio company Towry, a wealth manager, com-pleted 16 add-on acquisitions during the firm’s 13-year hold period.

“[We] developed a very well-honed inte-gration machine,” Palamon partner Daan Knottenbelt told PEI.

“We had a very extensive training pro-gramme to teach the advisors who were used to selling their model to adopt the Towry financial planning and client fee-based model [and] we outsourced all the operations and administration to an exter-nal, very large global administrator business called SEI. That gave us the scalability.”

Emergency notifications business ECN, which was sold by The Riverside Company in June 2015, completed six add-ons during Riverside’s ownership, buying up direct competitors in different parts of the US, and consolidating revenues and customer bases.

Media and exhibitions company Clos-erStill also completed six bolt-ons under Phoenix Equity Partners’ ownership, allow-ing the company to expand both within

DEAL MECHANIC

››


DEAL MECHANIC

By selling off the non-core businesses Mayborn Group owned on acquisition and focusing all the attention on baby products brand Tommee Tippee, 3i enabled the highly innovative team to focus its energies on baby feeding products and accelerate past the competition. The most critical innovation came in 2007 when Tommee Tippee intro-duced the Closer to Nature bottle, which is designed to mimic breast feeding.

5INTERNATIONAL EXPANSION

Many portfolio companies have dreams of taking their product or service into new geographies;

investment from private equity firm can give them both the capital and the confi-dence to do so.

A key priority for The Abraaj Group when it acquired Peruvian women’s acces-sories retailer Iasacorp in 2009 was to turn the business into a regional champion. Iasacorp already had a strong presence in both Peru and Chile, but with Abraaj’s help the business expanded into Colombia and Mexico, and signed franchise agreements in Venezuela, Ecuador, Bolivia and Central America. During Abraaj’s five-year hold period, points of sale increased from around 120 to more than 480.

3i used the success of Tommee Tippee on the UK store shelves of ASDA and Babies R Us as a lever to launch stateside in their US counterparts. 3i agreed an exclusive launch in Babies R Us in the US and quickly became one of the store’s fastest-growing brands in the baby products market.

This was followed by agreements with Target and, in 2015, with Walmart, when Tommee Tippee was launched in around 1,800 of its stores. Today, Tommee Tippee is one of the leading baby products brands in the US with more than $40 million of annual revenues. n

the UK and internationally within sectors it already knew well.

4THE BENEFITS OF

INNOVATION

Among the many benefits that come with private equity invest-

ment, one that is often key to the successful growth of small and medium enterprises is the provision of not just the capital required but the headspace necessary for the mana-gement team to continue innovating and developing new product lines and services.

During Permira’s four-year ownership of Intelligrated, a business combining soft-ware and technology to sort and distribute packages for retailers and manufacturers, the firm helped the company develop new automation systems and a new parcel product. The company now has a pipeline of products in development which it antici-pates will bring in $4 billion in additional revenues.


HIRING PRACTICES

CFOs are at the heart of growth, and

that means securing the right person for the role is of crucial importanceLuke Davis

The vital role of CFOsThe chief financial officer of a portfolio company has an increasingly crucial part to play in creating value to secure a successful sale, writes Graeme Kerr

IN THE BOARDROOM

Inspirational. Forward-thinking. Adaptable. Strategic. If you thought the chief finance role was just about number-crunching, think again. The CFO of a portfolio com-pany is increasingly seen as pivotal in secur-ing a successful exit, and the job is evolving to reflect this.

A report by Fortune 500 recruitment firm Robert Half Finance 2020: Closer Than you Think uncovered a clear shift in the priorities of a CFO from the need to meet accounting and reporting standards to a more hands-on role where keeping pace with technology, harnessing big data and meeting regulatory demands are becoming the main pri-orities.

The CFO role is espe-cially pressured at private equity firms where the drive is to strip portfo-lio companies back to the “core essence of what can make value”, says Luke Davis, vice-president at Robert Half.

“That requires the CFO to be a forward-thinking leader who can cope with external change, changes with technology, changes with regulation and the evaluation of geo-political risk such as Brexit.”

It also requires charisma: “Private equity firms ask themselves whether the CFO can inspire the people around them to drive the change.”

Nadja Essmann, head of the CFO prac-tice at private equity recruiter PER, says you have to be a jack-of-all-trades. “PE firms are looking for a smart generalist

with a very broad range of technical skills, someone who can solve problems with a hands-on mentality and very good pre-sentation skills.”

Consultancy firms have noted a similar transforma-

tion in the role. Deloitte runs a CFO programme

that helps train finance exec-utives to cope with the mul-

tiple challenges faced by


confirm whether the strategic decisions are supported by the financials,” one private equity investor told Deloitte.

As is the ability to perform under the spotlight. “Lack of confidence in the CFO is never sustainable. It is relatively common for us to make a replacement,” said another investor.

For the CFOs themselves, the task is all-encompassing. “The CFO is the glue – involved in everything and the point person throughout the exit,” said one CFO of a PE-backed company.

And it’s not just about improving the bottom line. It’s demonstrating how you have done it. “The B+ CFO analyses and presents financial information. The A* CFO takes this further to present the infor-mation in the most attractive way,” said another CFO.

CFOs that successfully steer the firm to a successful exit can expect big rewards. “Remuneration is usually very highly incentivised with a disproportionately large bonus,” says Ashley Crich, a mana-ger at recruiter Morgan McKinley. Or as PER’s Essmann puts it: “There are a lot of incentives in the bonus on the exit side for CFOs.”

But recruiters confess that the multi-ple demands can make it a difficult role to fill. Robert Half’s Davis recalls one private equity executive saying that he was being kept awake at night worrying whether the CFOs at its portfolio companies were up to the job.

“CFOs are at the heart of growth, and that means securing the right person for the role is of crucial importance, both for the sake of the portfolio company and for the private equity firm,” says Davis.

“Getting the right CFO really can save some sleepless nights.” n

the modern CFO of a PE-backed portfo-lio company.

Strategic thinking forms a core part of the programme, which is specifically tailored to the exacting demands placed on the CFOs of a company acquired by a private equity firm.

“Overnight, you are fundamentally in a different organisation where you’ve got to manage against a different set of metrics that stack up against future exit scenarios,” says Sanford Cockrell, the global leader of the Deloitte programme.

Cashflow, rather than earnings, become king, and the CFO’s role is transformed into becoming “hyperfocused” on forecasts and projections.

“The question becomes ‘what are the critical processes than can be improved to maximise cash generation,’” says Cockrell.

“It’s a catalyst role. It’s about leadership and influence. To be a CFO today, you’ve got to influence an organisation to make the necessary changes. Communication is key – not just to the CEO and the board but to the PE sponsors.”

The dramatic impact that CFOs can have on value creation comes out clearly from interviews that Deloitte conducted with more than 130 CFOs, CEOs, chair-men and private equity investors for a report published last November called “The Role of the PE Backed CFO: Maximising Value on Exit”.

All agreed, without exception, that CFOs can have a positive impact on the exit value, with 63 percent of PE inves-tors and 61 percent of CFOs believing the impact can be material.

The individual responses shine a light on the demands of the role.

Vision is vital. “The CFO should chal-lenge the strategy and how it is applied, and

HIRING PRACTICES

THE PRESSURES ON A PE-BACKED CFO

45% of CFOs expect an exit within

two years

32% of CFOs have been in their role

less than two years

59% of CFOs expect to achieve

a multiple of 10 or more on exit

Source: Deloitte 2015 PE-backed CFO research


MANAGEMENT

Around the world, investors and managers continue to face a slower global growth environment that has persisted far longer than perhaps many had expected. For mana-gers, the challenges of delivering strong returns in a difficult macro environment with low to no growth and prevailing high asset prices have led to an increased focus on operational involvement in their portfolio companies. GPs and LPs alike enthusiastically debate questions around just how much involvement is the right amount, and when, and how?

Pausing briefly to reflect, the whole notion of portfolio value creation has evolved considerably over the last 10 years. The impact of the global financial crisis was an obvious catalyst, but the basis of this concept goes back considerably farther than that. Historically, a GP’s management team identified which areas the fundamen-tal value growth in respective assets would come. The very essence of a management buyout was predicated upon backing a proven management team to deliver a pre-formulated business plan. The GP would help to deliver the original deal, working on M&A as appropriate and helping the business manage its balance sheet through to exit. Typically, the GP didn’t get involved in other value creation initiatives, but would often challenge the progress of the busi-ness against the plan from a non-executive board position.

This model evolved as GPs increasingly sought to become more proactive in super-vising the talent they entrusted to manage the assets they acquired. Many moved to a model that introduced a non-executive chairman of the board, who was independ-ent of the GP, but possessed appropriate industrial know-how to further support the executive team running the business,

Getting the harmony rightThe challenge of delivering strong returns is forcing operating partners to take a more hands-on approach towards portolio companies. The key is knowing just how much to get involved, writes Jim Strang, a managing director at Hamilton Lane

DELIVERING RETURNS

as well as to provide a solid sounding board for the GP’s non-executive team.

The rise of the IBO – the institutional buyout – triggered the next wave of change, when GPs began taking greater ownership of the value plans. A number of US-based GPs pioneered this model, which was then adopted throughout Europe. This new approach necessitated some differ-ent thinking: with an IBO, GPs needed a better way to understand and assess the “full potential” for the asset they were acquiring. As a result, they began adding individuals with more operational or consulting back-grounds to their talent pool, and also leaned

Strang: GPs now have a large and varied set of tools at their disposal


MANAGEMENT

Jim Strang is an Investment Committee member at Hamilton Lane and heads the firm’s London office. He focuses on investment opportunities across EMEA and primary fund investments in particular.

more heavily on “industrial advisors” to help validate and underwrite investment cases.

As this model continued to evolve, in addition to conducting operational analysis, the new operational staff became increas-ingly involved in actual value creation efforts. They helped with the so-called “100 day plan” and other value creation initia-tives, and also developed and often manned the project management office to coordi-nate and support the business as various value creation initiatives were undertaken.

Today, this engagement model is extremely varied: some GPs employ exten-sive teams of dedicated resources to deliver

perspective is a necessary, but not sufficient, criteria to deliver strong returns. It will only get you so far. The change of emphasis on the growth side has seen an increasing focus on full revenue potential. Market entry, new product development, loyalty, customer share of wallet maximisation and, perhaps most of all, product pricing strategy have become the new watch words. All of these initiatives represent powerful tools in value creation and, while not trivial to deliver, the rewards can be great.

GPs now have a large and varied set of tools at their disposal to drive value in port-folio companies, whether those companies are large multi-national businesses or far smaller and simpler entities. Akin to an orchestra, in which there are many instru-ments and many ways to play them, there exists a multitude of ways to approach port-folio value creation. The challenge GPs face is that, in order to make beautiful music, they need to know which instruments to play, how to play them, when and for how long. Doing so effectively is incredibly chal-lenging to get right, but when done well, the music is powerful indeed. n

on these initiatives, while others maintain smaller dedicated teams and instead lever-age external consultants to provide addi-tional resources. There are also other GPs that lean far more on external support to drive value. With the latter, the key premise is that the GP doesn’t need to have all the answers so long as they are confident that they have the right questions.

Most recently, there has been a slight change of emphasis on where GPs are looking to drive value: we’ve seen a shift from the bottom line to the top line. In this low-growth, hyper-competitive deal world, being able to optimise a business from a cost

Akin to an orchestra, in which there are

many instruments and many ways to play them, there exists a multitude of ways to approach portfolio value creation

Playing the right tune: to make beautiful music, GPs need to know which instruments to play


With an ever-increasing emphasis on trans-parency and timeliness of information flows, the issues of balancing outsourcing with substance are now top of the agenda for most CFOs and COOs. Existing operat-ing models are under pressure, and maxim-ising efficiency has become critical. At our Client Forum in London we identified the key challenges and the steps being taken to meet these challenges.

The increasingly time-consuming task of responding to complex and detailed data is driving a move towards greater outsourc-ing, particularly in areas such as reporting activities and data driven requirements. However, while decision-makers are trying to free up time to focus on value-added work, a big concern is how to find the right balance between outsourcing and substance. And, as substance is very much in the spot-light with authorities clamping down on any perceived weakness in the area, it is a question that needs careful consideration.

Substance is now less about people and more about responsibilities and corporate governance: what is the process, and are the right people in place to demonstrate genuine local decision-making powers? What we are seeing today is that increas-ingly fund controllers are sitting in local jurisdictions with the bulk of back office activities delivered by service providers.

The AIFM licensing requirements are seeing the emergence of two new operating models: funds are either creating their own in-house AIFMD-authorised management company or seeking a third-party manager. The in-house model allows fund managers with an operational presence in the EU to

Operating models under pressureAs regulatory requirements increase, a big concern is ensuring that investment teams are not choked by administration, say Robert Brimeyer, the chief operating officer, and Alan Dundon, the chief marketing officer, of Alter Domus

Robert Brimeyer Alan Dundon

NEED FOR TRANSPARENCY

INDIA ROUNDTABLEKEYNOTE INTERVIEW: ACTISEXPERT COMMENTARY: ALTER DOMUS

establish a licensed AIFM entity in their home jurisdiction, where the portfolio and risk management is actually carried out, or in the jurisdiction where the investment vehicles are domiciled.

The need to hold fund board meetings to discuss all investment decisions can create a ‘fly in, fly out’ situation. That can work when investments are low, but for debt funds, where there is a lot of investment activity, it presents a practical problem.

While both models focus on substance, being licensed in your ‘vehicle’ jurisdiction with the right people in place strengthens the substance argument, whereas entities licensed in their home jurisdiction will struggle to demonstrate substance.

QUESTIONS OF TRUST

Following the introduction of the AIFMD, fund boards have a very different role to play, including new risk management responsi-bilities and the need to demonstrate genuine independence. Inevitably this has changed the relationship between portfolio managers and fund boards. Where once fund boards could be seen to take a relatively ‘hands-off’ approach, today they must examine investment decisions in greater depth and be confident that fund managers are making the right choices. This shift in responsibility can raise questions of trust as investment managers may wonder if fund boards are demonstrating independence or caution.

It also generates considerable data requests as boards seek clarity and under-standing at every level of the decision-making process. This presents a huge educational challenge with more steps and processes

KEY TAKEAWAYS

• New opportunities must be balanced with operational ability

• Asset managers are turning increas-ingly to ‘home’ licensing

• Global data dictionaries are being developed to manage reporting

• Do fund boards demonstrate real independence, or caution?

The need to hold fund board meetings to

discuss all investment decisions can create a ‘fly in, fly out’ situation


for portfolio managers to follow. However, investment teams must be made aware of just how significant the role of the fund board is, where responsibility lies and what they must do to ensure they are getting it right. While it can put additional pressure on their time, it is essential to establish a clear and simple process to ensure investment teams do not become choked by administration.

INFORMED INVESTORS

In addition to the challenges of choosing the appropriate operating model, pressure is also building significantly from inves-tors. On one hand, they are seeking higher returns through increased diversification between asset classes and geographical regions. At the same time, they are demand-ing broader and more detailed information about the fund’s investment decisions. This growth in the ‘informed investor’ can be seen at every stage of the investment pro-cess. The level of detail they require can be overwhelming as they seek maximum transparency and absolute clarity.

Both developments, with investors seek-ing greater diversification and detail, have a substantial impact on operating models. The information flow is substantial, and relent-less, eating into time and resources. But it is an essential and integral part of today’s investment world and managers must imple-ment processes and procedures to ensure it runs as smoothly as possible. However, while the right processes may be in place, it also takes the right people to be in place together with a flexible platform. Without this the risk is that so much time and effort is spent on meeting investor demands that there is little capacity to service bolt-on investments or capture new opportunities in an efficient and effective way.

As managers and back office teams struggle to meet increasing investor demand, including the expectation of more face-to-face time at every level, one clear trend is emerging: an increase in separately-managed accounts for large

investors, typically replicating the fund but perhaps also exploring areas and opportuni-ties that the fund’s investment parameters do not allow. This brings a whole new set of operational challenges for the fund manager.

FANTASY VISION

At least for now, the dream of being able to push a single button to bring together layers of data from multiple jurisdictions, systems and sources into one coherent report is just that – a dream. While the need for more, smarter, faster technology is evident it must be balanced with the costs involved and CFOs and COOs are debating whether to invest in technology and transactional sys-tems or to partner with a service provider, leveraging an existing relationship.

While technology is the means by which information flows, the biggest challenge comes from integrating the wide variety of systems in use as investment structures span many jurisdictions. Factoring in multiple service providers, in multiple jurisdictions, for fund managers with a range of different systems, the true extent of the technology challenge becomes clear.

As an initial response to this challenge, and in the absence of a single button, com-panies are looking to build ‘global data libraries’, cataloguing in detail the report-ing requirements, deadlines, processes and

multiple systems of jurisdictions, investors, stakeholders and authorities around the world. While it is a comprehensive approach to a fragmented and ever-changing regula-tory and fiscal environment, the scope and frequency of ad hoc requests continues to challenge traditional operating models.

Against this background decision-mak-ers must weigh up the balance between opportunity and operational ability. Oppor-tunities may be everywhere, but if the plat-form and infrastructure does not have the flexibility to cope with a new or different process, it can lead to operational problems.

FINDING THE RIGHT BALANCE

Outsourcing is no longer a question of ‘should we, shouldn’t we?’ it is now a ques-tion of defining what aspects can be out-sourced in order to deliver an efficient and compliant service. Typically, regular report-ing activity is outsourced freeing up time for more value-added work.

The sheer demand for data drawn from multiple layers of fund structures and fre-quently a range of jurisdictions for regula-tory purposes is overwhelming – on top of the detailed information investors require. As operating models adapt to optimise efficiency in the face of these challenges, service providers too are evolving to meet the complex needs of their clients. n

EXPERT COMMENTARY: ALTER DOMUS

Alter Domus is a leading provider of fund and corporate services, dedicated to international private equity and infrastruc-ture houses, real estate firms, private debt managers, multinationals, capital markets issuers and private clients. The vertically integrated approach offers tailor-made administration solutions across the entire value chain of investment structures, from fund level down to local Special Purpose Vehicles.

Founded in Luxembourg in 2003, Alter Domus has continually expanded its

global service offer and today counts 31 offices and desks across five continents. This international network enables clients to benefit globally from the expertise of more than 900 experienced professionals active in fund administration, corporate secretarial, accounting, consolidation, tax and legal compliance, depositary services and debt administration services.

Alter Domus serves nine of the 10 largest private equity houses, six of the 10 largest real estate firms and three of the 10 larg-est private debt managers in the world.

ALTER DOMUS


MANUFACTURING

It’s not labour: it’s speed…In two articles, Joe Haviv, chairman of Protostar Partners, explores the productivity issues in assembly operations

EFFICIENCY TARGETS

Boards and CEOs are increasingly called to respond to ever-changing challenges, whether through industry disruptions, competitive pressures, or the quest for optimal profitability. However, traditional approaches aimed at conquering labour pro-ductivity are falling short of targets. Simi-larly, automation, though an important lever, can’t deliver its ultimate promises. How then should a VP of operations respond to such new environments and assert the crucial relevance of manufacturing? What are the hidden jewels? Where and how should resources be directed? What follows is a roadmap to new performance thresholds.

1 CAPACITY CONSTRAINTS

Ask a manufacturing executive for the plant capacity and you will get a measure of output per unit of time. Though cor-rect, this fails to recognise the multiple interdependencies amongst manufacturing processes and the critical output con-straints. A better approach is to focus on defining clear production value streams, identifying constraints within each stream, optimising the current configuration and rebalancing the production process to yield the fastest throughput times.

In the real world, two questions are often raised: (1) how to define proper value streams and (2) how to optimise the cur-rent configuration. Defining value streams serves both communication and analytic purposes: the most effective way is to limit the number to a manageable subset (some-where between three and 10) by deter-mining value stream ends at specifically

Haviv: the maths of targeting materials improvement are compelling

4 FIRST PASS YIELD

Long viewed exclusively as a quality indicator, first pass yield is one of the strong-est indicators of the improvement potential in manufacturing operations. It embeds all deficiencies, whether through scrap, rework or excess intermediary work-in-process. Above all, it quantifies the limits to a faci-lity’s output, and can provide direct insights into improving throughput time and output.

5 CELEBRATE AND EXPAND

Nothing builds success more readily than early wins and galvanising the organi-sation in the search for more. Operational interventions can be readily expanded to other functional areas, maintaining the mantra of “speed based competition”. As this process unfolds, new areas can be explored: product design, quoting processes, prototyping and customer service. Speed-based competition is no longer a luxury but a necessity. Charting a course and a mandate for senior operating executives is not only compulsory, but can successfully reposition a company for long-term sustainable com-petitive advantage. n

identifiable output points, whether a sub-system, a rough casting, or when specific value-added features have been incorpo-rated. But optimising the current configura-tion can’t be as prescriptive, as it is crucial to precisely quantify constraints and attack them systematically. Accelerating through-put time might require streamlining of set-up times, new changeover procedures or creating adequate buffer stocks.

2 MATERIALS OPTIMISATION

In most manufacturing environments materials represent 35 to 50 percent of total product cost. Yet materials optimisa-tion efforts tend to be at best sporadic and often lack rigour. Setting aside the obvi-ous approach of rebidding for materials, overlooked aspects include specification adjustments to use common materials, rigorous certification and quality inspec-tion practices, standardisation of compo-nents, changes in chemical compositions, and kanban arrangements with suppliers. Though not glamorous, the maths of target-ing materials improvement are compelling.

3 WARRANTY COSTS

The proverbial “pot of gold”. Long for-gotten if not ignored, warranty repairs and costs are an extraordinarily rich source of data and improvement potential. Pareto analyses of claims can yield substantial insights into ineffective assembly operations, unwarranted failure modes, product design faults and component deficiencies. Once the data is compiled, cross functional teams can attack specific improvement areas.


MANUFACTURING

…but don’t ignore the workforce!

Protostar Partners is a New York-based private equity mid-market buyout firm and an early pioneer in the direct secondaries sector.

Joe Haviv is the managing member of Protostar Partnersand has over 20 years of private equity investment expe-rience across a broad range of industries. He also spent 12 years at McKinsey and Company focusing on opera-tional and strategic excellence.

signals, can falsely suggest that pause times are respected on the shop floor. Over the length of an eight-hour shift, it is not unu-sual to identify lost time levels of an hour or more: that’s a 15 percent time recap-ture that should not be forgotten. Though such gaps are easily measurable, corrective actions need to properly incorporate cul-tural and behavioural changes within work crews.

3 CLOSED LOOP MANUFACTURING

Never underestimate the importance of segmenting complex manufacturing processes into specific value streams. By adapting concepts from cell manufacturing, value streams can be further subdivided into shorter, clearly identifiable process

sequences that yield a specific output (i.e. closed loop). This new unit of measure can be fully examined to redefine task sequences, component progression and tooling, thereby leading to new job con-tents, responsibilities and accountabilities. Even well-designed processes can benefit rapidly through such activities, unearthing force of habit shortcomings, and providing compelling evidence through simple pilot programmes.

A common scene in a manufacturing war-room: tasked with new headcount reductions plant executives struggle with where to go next. Traditional approaches have been exhausted: automation, quick changeovers, cutbacks by edict and produc-tivity training have been implemented with strong success, yet the Board is requesting more actions. The quest for new thresholds has to necessarily seek new approaches and solutions, sometimes dusting off proven old techniques.

1 INDIVIDUAL CONTRIBUTION

Managing a labour intensive manufac-turing environment often overlooks a very simple truth: labour is tied to individual con-tribution, and the management approach needs to fully reflect such reality. Rather than aggregate or average measures which most often lead to amorphous conclu-sions, leaders need to embrace the fact that regular, consistent measurement of pre-established performance expectations at the individual level are the key to suc-cess. Above all, analytics need to be tied to clear consequences for meeting expec-tations (i.e. rewards) or failing to do so (coaching or more severe interventions). This level of granular analysis is critical to reshaping shop floor performance and culture.

2 LOST TIME

Productivity measures are almost entirely focused on productive time on the shop floor. Overlooked in such effectiveness oriented processes is “lost time”. Especially in large scale operations, the actual start and end time of production can vary widely from scheduled shift times. Similarly, sched-uled work breaks, often triggered by audible

4 GOAL BOARDS

Boooring! Indeed they might be so, but – when properly utilised – few techniques can provide as swift a change in analytics, behaviour and root cause identification. Success hinges on a few critical factors: (1) record as few variables as needed, typi-cally time and output measures, resisting the temptation to cover the waterfront; (2) enforce strong discipline in properly coding causal factors for deviations; and (3) routinely conduct Pareto analyses to identify immediate corrections. Above all, proper leadership involvement can ensure that goal boards are a live tool, rather than a burdensome reporting device.

5 PRODUCT LINE PRUNING

Tasked with capturing savings, manu-facturing executives should take the unu-sual step of examining the complexities introduced on the shop floor by product line proliferation. Changeover and set up times, customisation requirements, and incremental processes should be exam-ined and quantified, especially for low volume stock keeping units. Seldom have such analyses originated within the mar-keting organisation, and most commonly the hidden cost of labour is not an explicit factor in deciding product line breadth. Though a clear “overstepping of bounds” by manufacturing executives, the analysis can become a strong catalyst for cross-functional decision making. n

Labour is tied to individual contribution,

and the management approach needs to fully reflect such realityJoe Haviv


OFF THE RECORD

Secret squirrelIf you can keep up with the pace of change, working in private equity-backed business can be a rewarding experience, says our anonymous financial controller

INSIDE STORY

Our “secret squirrel” is a financial controller in a UK-based business in the TMT sector. He joined the company shortly before it was carved out of its corporate parent by a US-headquartered buyout firm.

The experience of working with the incoming private equity owner has been more “hands on” than the squirrel’s previ-ous place of business: a restaurant chain that had for some years been owned by a European private equity firm. We got him to close his office door and give us the benefit of his experience working with a financial sponsor.

How has this experience differed

from the previous private equity-

owned business you worked in?

“There the investment was more mature and the private equity owners were quite hands off. Here, because the buyout shop was a relatively new entrant into Europe – this was only its second investment – and because I was involved from the start of the ownership, during the initial cost-cutting stage, it has been much more hands-on.”

And when you say hands on…?

“There was a lot more oversight and interrogation of results. And more direct involvement: specifically people physically on site – landing staff into the business who subsequently join the payroll.”

And outside consultants?

“Yes. They brought in a lot of consult-ants in the early stages. This can be quite tough, quite emotive.”

In what way?

“The consultants are there to look at cost savings and efficiencies; this could

be quite disruptive and a number of people moved on at this stage.”

So after the initial period of cost-

cutting, disruption and staff

departures, what happened next?

“After the initial period of dramatic change – cost-cutting, focus on margins etc – it stabilised and the owners and management started to focus on revenue growth. This is when it becomes a lot more interesting for me, because it becomes more about growth and opportunity. A private equity owner-ship is – in my experience – a two-stage process.”

Presumably ‘stage one’ — when costs

are under the microscope — is pretty

fraught?

“Yes, because there is uncertainty and that can cause tension. Obviously you have people landing in the business with their own views and expectations. And in private equity there is an expectation to move a lot more quickly than one would in a traditional corporate. This is not to everyone’s liking.”

And would you choose to work in a

private equity-backed business

again?

“Yes, I would. It can be disruptive, but if you are willing to see the opportunity and progression that is available – if you are of that mindset – then it represents a great opportunity. More than that, it represents a valuable learning experience. Private equity owners bring in experts – people with deep knowledge of various business areas… it’s a great learning exercise.

“There is also a freedom and an entre-preneurial atmosphere that comes with private equity ownership. For me, it is an environment in which I like to work.” n

Being nimble: if you can move quickly, you will thrive

In private equity there is an expectation to move a lot more

quickly than one would in a traditional corporate

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