Best Practices Advisory, llc
I'm going to share with you how building an operating framework within your PE portfolio operations can unlock $millions if not billions in value creation.
It's a great benefit having been a growth and operating leader at GE for 15+ years. I had a front-row seat at a global conglomerate, that was continuously seeking ways to improve it's performance across hundreds of operating businesses, with millions of customers, and thousands of new product and growth ideas. Add to that a culture where candor and transparency reigned supreme and sharing "best practices" was not only encouraged, but also rewarded.
Having participated and seen hundreds of business reviews, we ALL shared a common "framework" to ensure effectiveness and focus. It did not matter if a business was a start-up, a money-losing turnaround, or an extremely profitable and successful market leading business in the US, Germany, Japan, Brazil or South Africa. The operating framework worked consistently in the locomotives market, the medical industry, the energy and wind turbine business, or for that matter in a $180BN asset and $4BN net income generating global consumer finance business.
The framework was so effective, that the largest and most successful in Private Equity created similar operating frameworks for their management and leadership of portfolio companies. Firms like KKR, Cerberus, Blackstone, and OMERs to name just a few, ALL manage hundreds of portfolio companies and employ Operating teams to help "unlock" value in all aspects of value creation.
Yet I'll argue that the concept is just as effective for PE portfolio's of AUM $500MM or greater. Simply put, who wouldn't want to get a 10x+ or better return on their invested money?
I'll share with you the success story of one PE Fund. The fund had $2BN-$3BN AUM invested in 20+ existing portfolio companies across various geographies and industries. Based on the increasing need to achieve greater organic and operational growth, to drive and unlock value in their portfolio companies, the fund launched an Operational team.
The General Partners hired an experienced GE executive as an Operating Partner. This individual spent 10+ years at GE in various business development and senior management roles. He worked comfortably with leadership, employees, as well as bankers, and had a proven track record of value creation. His exposure was in various GE businesses and operating roles. In summary, he was an accomplished generalist, who would immediately be able to build the framework.
In the Fund's 1st full year after implementing the Operating Partner Group (OPG), they delivered over $10MM+ in quantifiable EBITDA benefits across the various portfolio companies. By the 4th year, the Operating Partner Group was responsible for over $100MM+ in EBITDA improvements across the growing portfolio of companies.
People & Technology, Growth, and Productivity are the core themes. The annual operating cycle involves CEOs, SMEs, and functional leaders from each business, sharing their strategies and opportunities to win.
How did they make it happen? Here are some of the key success factors.
1. Top down support from the General Partners with portfolio leadership teams and OPG development. Getting the right people and the shared commitment is critical.
2. Immediate focus on helping portfolio companies achieve their goals and deliver results. Sourcing and procurement is a great place to start - since all portfolio companies have SG&A and COGS overlap. By identifying and quantifying the "shared" expense categories and contract terms, the OPG team was able to negotiate better pricing and terms for a number of their portfolio companies and immediately save a few million dollars. With this win under their belts, opportunities for other "shared" benefits become easier to uncover.
3. Pick opportunities that are important and relevant. Forcing new ideas - even excellent ideas - is usually not an effective strategy. One portfolio company was struggling with organic sales growth and specifically pricing. The OPG team helped the portfolio company conduct a thorough market analysis and came up with a new multi-channel pricing structure that delivered $2MM EBITDA improvements.
4. Maintain a disciplined process for managing the overall framework, projects, results, benefits and strategies. Building on the pricing project success shared above, other portfolio companies themselves saw similar opportunities and executed their own pricing opportunities, generating even more value.
In Private Equity, ultimately the success is measured by the returns achieved via a successful exit. If EBITDA multiples on average are 7x - then every additional $ of EBITDA achieved equal $7 value. Therefore the $100MM in EBITDA achieved by the OPG team has delivered over $700MM in value creation!
So why don't more PE funds build a shared Operating Partner Group framework as part of their "tool box" to unlock value? Clearly, funds that do are at a competitive advantage versus other PE Funds. The truth is that it does take a tremendous amount of effort and commitment. An effort that pays itself back many times over at the end of the day.
Let Brock Capital & Best Practices Advisory help you build an Operating Framework of Excellence and take your EBITDA growth and improvements to the next level.