Private equity executives and operational or industry sector experience
… continued from Managing portfolio companies most effectively …
“All private equity executives should, during the first 5 years of their career, be seconded to a portfolio company. This would make them far more effective portfolio directors.” – CEO/Operating Partner, Industrial sector
The results of our research show a high degree of consensus on this topic, with private equity directors’ lack of operational or management experience seen as a weakness in the way they interact with portfolio companies. Over 70% of those interviewed said that having managerial, operational or sector experience would give private equity executives more insight into the reality of running a business and a greater empathy with management.
Those respondents who had worked with private equity firms over a number of years were sceptical that firms will change their recruitment policies and seek to hire more investment executives with operating expertise. However, private equity firms do seem to be aware of their limitations in this area and have sought to complement the skills of their team through the increasing use of operating partners or industry advisers.
Use of operating partners and industry advisers
According to Honson To, Head of KPMG China’s Private Equity Asia Pacific Region:
“The debate on whether it is necessary to have operational experience continues. Our view is that a one-size-solution does not fit all. The key point is for firms to be aware of what their investment professionals are good and not so good at and make sure that they have the correct blend of skills within their teams. Additionally, secondments to portfolio companies could provide very useful training experiences.”
According to Ken Brotherston, Executive Chairman of Directorbank:
“This is an area where private equity firms do add enormous value but are often not given credit for being the catalyst that enables access to this expertise. We are also seeing, to some extent, a partial in-sourcing of operational expertise by private equity firms as they bolster their internal capabilities. This is more prevalent at the top end of the market, but we expect to see more of this in the mid-market.”
Bringing in outside expertise
Private equity executives continue to come mainly from financial, M&A, and management consulting backgrounds, and private equity firms have recognised that they need to bring in outside expertise to drive operational improvements. They hire in this expertise at the outset when assessing an opportunity and for help in carrying out commercial diligence, as well as after the deal has been completed to assist management in achieving the business plan.
“The best combination is a PE director who has both sector and operational experience as well as internal credibility.” – NED, IT sector
The survey found that in 60% of cases, businesses had 100-day plans or similar which mapped out the actions to be taken by management, together with timescales. While the majority of private equity firms made significant contributions to developing the plan, only about one-third were said to be actively involved in its implementation.
“Most PE houses do not have operational guys in their team – they bring them in on a deal-by-deal basis. That is a weakness because these guys do not understand how the PE team ticks. If you had operational people on the deal team, you’d shortcut a lot of processes.” – NED,Telecommunication sector
Several respondents observed that private equity firms need to work more closely with smaller firms than larger businesses which tend to have greater management resources. With the latter, they can afford to be more hands off.
Large private equity houses tend to make greater use of operating partners and industry advisers. These senior executives are employed to bring strategic insight or help within functional areas, ranging from IT, marketing, and purchasing to human resources.
Our respondents commented that although some smaller and mid-market firms do this too, it tends to be larger firms that have better networks and greater financial resources that enable them to hire the very best industry experts.
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