Operational Excellence October 2020 • privateequityinternational.com
Value creation in action OpEx Awards winners revealed Are you preparing for the ‘new world’ of private equity?
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Senior Editor, Private Equity, Americas Isobel Markham [email protected], +1 646 380 6194 Senior Editor, Private Equity, EMEA Adam Le Operational Excellence [email protected], +44 20 7566 5437 Senior Special Projects Editor Graeme Kerr [email protected], +44 20 3862 7491 ISSN 1474–8800 • OCTOBER 2020 Special Projects Editor Louise Fordham [email protected], +44 20 7566 5440 Senior Reporters Carmela Mendoza [email protected], +44 203 640 7512 Insight Rod James [email protected], +44 20 7566 5453 Senior Reporter – Asia Alex Lynn 2 [email protected], +852 3704 4638 Key trends PE’s value creation Contributors Amy Carroll, Claire Coe Smith, Vicky Meek, playbook looks to prove its worth Victoria Robson Value creation Four key learnings Managing Editor, Production: Mike Simlett Production Editors: Daniel Blackburn, from the OpEx Awards 6 Adam Koppeser EDITOR’S LETTER Value creation Copy Editors: Eric Fish, Nicholas Manderson reimagined for a new era 7 Art Director: Mike Scorer Head of Design: Miriam Vysna Senior Designer: Lee Southey Honour roll 16 Designers: Denise Berjak, Pio Blanco Analysis Meet the judges 18 Head of Marketing Solutions, Private Equity Group: Winners in the Americas 22 Alistair Robinson 8 Winners in Asia-Pacific 29 [email protected], +44 20 7566 5454 Subscriptions and reprints Driving value creation through Winners in EMEA 36 [email protected] data analytics Data insights can be Customer Service [email protected] key to improving portfolio company Kucher on why pricing should be Editorial Director, US: Rich Melville profitability, says RSM’s Rich Davis high on the value creation agenda 26 Editorial Director: Philip Borel The operating partner of tomorrow Director, Product: Amanda Janis Reassessing carve-outs’ value Why GPs are on the hunt for Director of Research and Analytics: Dan Gunner creation potential PE may do well individuals with more diverse Managing Director, Americas: Colm Gilmore to consider carve-out opportunities, Managing Director, Asia: Chris Petersen skill sets 10 say Friederich von Hurter and Filip Chief Commercial Officer: Paul McLean A challenging win PER’s Gail Chief Executive: Tim McLoughlin Debevc of PwC Germany 33 McManus on addressing gender Partnering with family-led firms imbalance in operating teams 13 CPP Investments’ Rodolfo Spielmann Why tech transformation is ‘critical’ on building relationships 40 to growth The pandemic has underlined the power of digitisation Why misjudged cuts can misfire in PE, says Intertrust Group’s Chitra Rework human capital strategies Baskar 14 before trimming budgets, says FMG Leading’s Matt Brubaker 41 Sustaining procurement’s impact For subscription information visit privateequityinternational.com on EBITDA Efficio explains how Cultivating human capital How strong procurement foundations can effective talent management can create long-term value 20 seed benefits across portfolios 42 Pricing: PE’s hidden gem? Simon- The secret CEO 44
October 2020 • Operational Excellence 1 Key trends Private equity’s value creation playbook looks to prove its worth amid today’s pandemic- induced uncertainty
inancial engineering will [The crisis] has that not only did this intervention ever be integral to the “ save companies but helped them private equity model; underlined the thrive. McKinsey found that GPs with it is called leveraged operating groups achieved internal buyout for a reason. Still, importance of being rates of return roughly 500 basis the shift in GPs’ focus highly engaged in points higher than those without Ftowards creating value through on their 2009-13-vintage funds, a operational improvement has been good times and phenomenon unapparent in relation one of the most striking trends of the to other vintages. past 10 years, writes Rod James. bad ” A 2018 paper titled Private Equity Every one of the 25 largest Stewart Kohl, Riverside Company and Financial Fragility During the private equity firms in the world Crisis found sponsors’ willingness has an operating group focused on implementation and journey to to get stuck in not only helped supporting value creation in their exit, and possibly even beyond, if companies survive but also allowed portfolios, according to McKinsey. we reinvest in a business,” Geoff them to increase market share These teams are also getting more Tomlinson, value creation partner at versus non-PE-backed peers. hands on. In 2015, the consultancy LDC, told Private Equity International The situation today differs from found operating teams spent almost last year. “This is a much broader the GFC in several ways. Though a third of their time “monitoring and responsibility for operating partners extensive investment means GPs reporting” company performance. than has previously been the case, are better resourced to help than a In 2018 this dropped to 19 particularly in pre-deal.” decade ago, the unpredictability of percent, with “driving measurable the virus makes it harder for GPs to performance improvement” coming Lessons from the GFC provide strategic guidance to their to represent more than 50 percent It is prescient that a key driver of this businesses, the paper’s co-author of time spent. trend was the global financial crisis, Josh Lerner, a Harvard University “We aim to support portfolio when it became clear GPs would professor, tells PEI. companies throughout the life-cycle have to intervene, financially and The growth in operational of an investment – from pre-deal, operationally, to save businesses resources has also been matched by through the growth strategy under stress. With hindsight, it seems an expansion in the number of deals
2 Private Equity International • October 2020 NSSK Value Up Program in Ac�on! Winner - Opera�onal Excellence Award Insight
replicated across our portfolio. They saw demand increase as sales to groceries boomed, and they met that demand while overcoming a strict lockdown, shipping challenges and scores of unknowns. They are an inspiration.”
Further tests ahead For the aforementioned Northern European pension fund manager, the crisis has reaffirmed his belief in backing GPs with an operational focus, though he acknowledges his good fortune in being highly exposed to sectors such as software-as-a-service, whose spike in popularity during lockdown has that firms are doing, notes Daniel the US. It had shipped 40,000 masks helped buoy the whole portfolio. Winther, head of private equity as of the end of April and planned to Speaking to PEI in September, and infrastructure at Skandia Asset ship an additional 860,000. six months since much of the world Management, which has around Algerian pharmaceutical introduced lockdown measures, he €4 billion in PE assets and favours business Biopharm, acquired by is at pains to emphasise the worst of GPs with a focus on operational Development Partners International the crisis may not be over and the improvement. “What I worry is that in 2013, converted two production removal of state support could be a they have maxed out,” he says. lines dedicated to the manufacture death sentence for some sponsor- “When a crisis hits like this one, of topical creams and gels to backed businesses, even with the where every company is getting hurt, producing hydroalcoholic gel for best efforts of the operational team. these resources will help but it might hand sanitiser. It donated the first “Some manufacturers said [at the not be enough.” 30,000 to various public bodies and start of the crisis] ‘let’s burn through In May, a Northern European will sell further batches “practically at our excess inventory and not order pension fund manager told cost”, PEI reported. more’. They’ve now burned through PEI he took comfort in how “It is an entrepreneurial response it and they need to start the plant embedded operating partners are to this crisis,” Sriwatsan Krishnan, up again, but they are not at full in their portfolio companies. They a Mumbai-based partner at capacity because the demand is just A PASSION FOR understand the business intimately consultancy Bain & Co, told PEI. not there. So, once again we have a and their compensation is closely Mid-market buyout shop Riverside cost absorption problem. We are in aligned with that of management. Company has seen a modest a kind of twilight zone.” FUTURE-PROOFING Most were hired, however, during a increase in the value of its portfolio Despite the considerable decade-long bull run. They clearly since the start of the crisis, with year- uncertainty, there is no suggestion understand growth but what about to-date sales and EBITDA around yet that coronavirus will challenge COMPANIES distress? flat on last year, a product of the firm the fundamental pillars of the learning quickly “to do more with operational improvement playbook. Positive early signs less”, says co-chief executive officer If anything, it is likely to hammer While the crisis still has a long Stewart Kohl. He cites the success home the benefits of not just being a way to run, the initial response of of Galvanina, a sparkling water financial engineer. operating partners has given cause company from Northern Italy, one of “It has underlined the importance for optimism. Companies such as the earliest hot spots for covid-19. of being highly engaged in packaging business GPA Global, “One might think they were shut good times and bad so as to be A DIFFERENTIATED GLOBAL INVESTMENT ORGANIZATION owned by EQT, quickly pivoted to down or even at risk of going out of ready to jump in with both feet manufacturing personal protective business,” he says. “They developed on a moment’s notice,” says eqtgroup.com equipment for export to Europe and meticulous safety protocols that we Riverside’s Kohl. ■
4 Private Equity International • October 2020 A PASSION FOR FUTURE-PROOFING COMPANIES
A DIFFERENTIATED GLOBAL INVESTMENT ORGANIZATION eqtgroup.com Insight
Value creation Four key learnings 2020’s winning entries, including the successful simultaneous from the OpEx Awards acquisition and merger of payment integrity platform Equian and cost containment services and software he Operational Excellence provider Trover by New Mountain Awards shine a spotlight Capital. Ton private equity firms’ Meanwhile, during its investment value creation achievements – and in LBX Pharmacy, EQT helped the hard work, skill and strategic capture growth opportunities thinking behind these, writes in China’s pharmaceutical retail Louise Fordham. This year’s winners market via more than 40 add- range from a US connected fitness on acquisitions. In addition to business to a cybersecurity software accelerated store openings, this firm in Israel. In line with the strategy saw LBX’s store numbers particularities of each company and rise more than 40-fold. market, GPs pulled on numerous Elsewhere, Riverside-backed US and diverse value creation levers training and compliance company over the course of their investment Health and Safety Institute executed periods. Alongside examples of four acquisitions during the GP’s innovation in action, there were 2015-19 holding period. These some common threads that ran enabled it to grow market share through the winning submissions. and increase its recurring revenue Moving into new markets mix. Notably, Riverside invested in Honing the brand Several of this year’s winners IT systems at HSI, which allowed it In today’s social media age, 2took steps to facilitate to migrate the bolt-on acquisitions 1developing a company’s brand geographic expansion. KPS onto a unified platform. image has become increasingly Capital Partners not only helped fundamental to its success. L Netherlands-based Chassis Brakes Developing and Catterton recognised this with International to grow its operations aligning talent former portfolio company Peloton, in China, it also oversaw the 4Finding the right people to which sells exercise equipment automotive brake manufacturer’s lead and support a firm’s growth and access to live and on-demand entry into the North American trajectory is an integral piece of the classes. With consumer interest in market where its revenue grew value creation puzzle. When Affinity health and wellness accelerating, L to nearly €100 million in three acquired Virgin Australia’s frequent Catterton reinvested cost savings years. In Israel, software security flyer loyalty programme, Velocity achieved through improvements to solutions business Checkmarx grew Frequent Flyer, it identified 20 Peloton’s operational infrastructure its footprint in Europe and North strategically important roles and led into marketing and branding America with the backing of Insight the recruitment initiative, while EQT initiatives. This helped grow a sense Partners. To aid its international introduced incentive programmes at of community among customers expansion, former Fortify Software LBX Pharmacy to align management and catapult Peloton into the lifestyle COO John True was appointed to with its aims and support long-term brand well known today. the Checkmarx board, bringing with talent acquisition and retention. Identifying and focusing on him operational experience and Inclusive talent practices also your best attributes is a key tenet knowledge of the North American came to the fore this year. During its of effective branding. In Moldova, software market. Checkmarx now ownership of Japanese care home Horizon Capital assisted Purcari serves more than 40 companies in operator Vati, NSSK led initiatives Wineries in streamlining its product the Fortune 100. to support the hiring and career portfolio and relaunching its four progression of women and main wine brands, which was Making strategic people with disabilities. Today, marketed via a digital and social acquisitions 68 percent of Vati’s managers are media-led strategy. 3M&A featured heavily among women. ■
6 Private Equity International • October 2020 Insight
Editor’s letter
New York 130 West 42nd Street Value creation reimagined Suite 450 New York NY 10036 T: +1 212 633 1919 for a new era London 100 Wood Street London EC2V 7AN T: +44 20 7566 5444 Louise Fordham Hong Kong 19F On Hing Building [email protected] 1 On Hing Terrace Central Hong Kong T: +852 2153 3240
Private Equity International Published 10 times a year by t Private Equity International, we have now been running the annual PEI Media. To find out more about Operational Excellence Awards for nine years, and in that time the ability PEI Media visit thisisPEI.com of operating teams to successfully execute value creation plans has only © PEI Media 2020 A grown in importance. In this issue, we celebrate 2020’s winners and explore No statement in this magazine is to the array of operational levers they utilised to grow their portfolio companies, be construed as a recommendation but we also go beyond this to examine how the role of the operating partner is to buy or sell securities. Neither this publication nor any part of it evolving. may be reproduced or transmitted This year we have witnessed fundamental changes in the way companies, in any form or by any means, electronic or mechanical, including their employees, customers and photocopying, recording, or whole sectors operate. With the by any information storage or retrieval system, without the prior continuation of measures to restrict “ Operating teams permission of the publisher. the spread of covid-19, as well as the Whilst every effort has been are uniquely placed made to ensure its accuracy, the reintroduction of local and national publisher and contributors accept lockdowns in several countries, we to support portfolio no responsibility for the accuracy of the content in this magazine. are a long way off from returning to companies today ” Readers should also be aware pre-pandemic norms. It seems likely that external contributors may represent firms that may have that many aspects of daily life and an interest in companies and/or business operations will be reshaped for the long haul, particularly as we become their securities mentioned in their contributions herein. accustomed to more digital transactions and interactions. Operating teams are uniquely placed to support portfolio companies through Cancellation policy You can cancel your subscription at any today’s shifting sands, from assessing alternative revenue models to addressing time during the first three months supply chain issues. Yet firms may need new or less traditionally sought-after of subscribing and you will receive a refund of 70 percent skills to help them deliver optimum impact in this era of uncertainty and the of the total annual subscription challenges trailing in its wake. This may mean bringing in talent with more fee. Thereafter, no refund is available. Any cancellation request diverse backgrounds and experience, who can provide fresh perspectives. needs to be sent in writing to How such diversity can be achieved at both the firm and portfolio the subscriptions departments (subscriptionenquiries@peimedia. company level is one of many issues you can read about over the course of com) in either our London or this supplement, as we look back on the value creation successes of the last 12 New York offices. months and look ahead to envision the operating partner of tomorrow. Printed by Stephens & George Ltd stephensandgeorge.co.uk
Louise Fordham
October 2020 • Operational Excellence 7 Analysis
KEYNOTE INTERVIEW
Driving value creation through data analytics
Applying data insights effectively can be key to improving portfolio company profitability or successfully integrating acquisitions, says Rich Davis, growth acceleration leader at RSM
What kinds of demands is this dynamic between what is being SPONSOR are being placed on sold and how quickly it can be satisfied. Q RSM portfolio company chief A CFO armed with data can look at that financial officers? and what it means from a margins per- There was an immediate focus on cash- have passed, many organisations are now spective, helping the operations team flow and liquidity when the pandem- asking much more detailed questions of understand the opportunities in terms of ic hit. Most of the portfolio company their CFOs. delivering on the customer mandate and CFOs and operating partners we spoke reducing the overall cost to serve. to were trying to become laser-focused What dynamics typically The toughest gains, with the most on cash, and that meant looking at cash Q exist between the CFO, scalability, are the ones hiding in the projection modelling, examining the sales, operations and IT, and corners of operational synergies and the assumptions that were built into P&L how are these teams organising CFO with the right data can identify from top to bottom, and rolling that for- to drive value creation? those. Having that ability to drive the ward to understand the impact of cov- In most mid-market portfolio com- top line by working with the chief rev- id-19 on overall liquidity. panies, the IT team has either a direct enue officer on the one hand and with Those exercises highlighted the im- report into the CFO or a tight linkage. the operations team on the other is key. portance of having the right data to re- Where the CFO role continues to evolve fine the key business assumptions that is that connection between business per- How can a portfolio were going to have a major impact on formance and the underlying technology Q company executive team their ability to project cash through the that supports the business. best position the business to downturn and understand sources and From the front office perspective, a drive the investment thesis and uses of cash. Covid-19 caused CFOs to chief revenue officer at a portfolio com- use data to inform that decision take a hard look at how to make data pany is always looking to understand making? effective for their organisations. Moreo- how to drive core relationships and op- For a portfolio company operating part- ver, there was a clear need to step beyond portunities for the business, and how to ner working to create a platform to grow accounting and drive business insights ensure existing customer base and organ- beyond organic growth, the real chal- that could be pushed back to functional ic growth opportunities are not missed. lenge comes around M&A. With cov- teams to partner with the business more Now, the CFO often sits between sales id-19, opportunities are being presented closely. We have seen teams become and operations as a real arbiter of profit- and there are deals to be done. To realise more glued together around this, be- ability in customer relationships. the value of those deals, you have to un- cause even though the liquidity risk may From an operations standpoint, there derstand how to integrate an acquisition
8 Private Equity International • October 2020 Analysis
into the portfolio company without miss- ing a beat on servicing existing customers or capturing the benefits of combining. An executive team focused on under- standing the data and the systems coming with that acquisition can help enhance value creation.
What role can external Q advisors and industry expertise play at portfolio companies? The managers and portfolio companies we work with rely on a wide variety of service providers. It is difficult to provide a lot of exponential and accretive value to a portfolio company executive team that is already very knowledgeable about its industry. We have to assume the private equity firm has significant depth in the industry vertical, talented operating part- ners and an incredibly knowledgeable executive team, so it is hard for an exter- nal advisor to move the needle when the Assuming a portfolio What is the best way to client is already out ahead. Q company could capture Q accelerate the process of Firms like ours are putting a lot of any and all operational making the right investments in emphasis on demonstrable industry and financial data, should infrastructure, technology and depth. That means that if we are work- everything be measured? business processes with the ing with 10 portfolio companies, we can That is where the industry perspec- most operational payback? bring 10 perspectives from portfolio tive becomes so critical, because in any In most portfolio companies we look at, companies operating in that industry to portfolio company there is a handful of unless there has been tremendous un- a client that may benefit from hearing key performance indicators that matter der-investment in technology, usually the those experiences. We can build rela- most. A lot of the time we find ad hoc technology has been under-leveraged. tionships with portfolio company execu- reporting where clients are trying to It is not about the transformation of a tive teams and provide that industry lens go deep on analysis but have not got portfolio company’s enterprise resource and benchmarking that clients can use to the basics to understand how to take planning platform; instead, it may be as drive value. that information and identify what the simple as looking at the available data and best initiatives are going to be to help modelling performance over time to help drive additional value, so the initiatives understand how that platform can be bet- fall short. ter employed. There are so many CRM In our experience, those portfolio systems out there that are under-utilised. companies that have the critical view Companies have focused on mak- established at a management team level ing lots of requests to try to understand “Covid-19 caused can drive specific and targeted organisa- where the business performance oppor- tional initiatives that have an impact on tunities lie, or they install an expensive CFOs to take a hard sales, customer acquisition and churn, analytical tool to solve a problem. In re- all the way through to P&L. Portfolio ality, they may already have the right sys- look at how to make companies are looking for systems that tems but lack the understanding of how really help them tell the story. A good best to use them. The biggest opportuni- data effective for their team that understands sales and oper- ty usually comes from taking a fresh look organisations” ations, armed with the right data from at the systems and technology already the right systems, is going to be the most in place to see how it can work better to successful. drive performance. n
October 2020 • Operational Excellence 9 Analysis
The operating partner of tomorrow
As portfolio companies face disruption from the pandemic and accelerating digitalisation, private equity firms are on the hunt for operating teams with more diverse skill sets, writes Vicky Meek
ver the past dec- on supporting portfolio companies have supported portfolio companies ade, private eq- through covid-19-related disruption. through challenges and helped them uity firms have “Private equity firms have been invest- identify new opportunities,” explains doubled down on ing in their operational expertise for Erol Uzumeri, founding partner at operational im- many years now,” says Olof Faxander, Searchlight Capital Partners. “Compa- provement as a head of the operational team at Nor- nies have really needed operational ex- Odriver of value creation, a trend that dic Capital. “But recent experience has pertise to protect the business or go on was only accelerated by increasing highlighted how important an opera- the offensive to capitalise on increased purchase price multiples in the run-up tionally focused approach and mindset demand in parts of the economy.” to the pandemic. In a 2019 survey by is when navigating tough conditions Heidrick & Struggles, the recruitment and repositioning for a new normal.” New skills for a new era firm said it was experiencing record If operating partners’ skills were As we have moved through the initial demand for private equity operating not already highly valued in a firm, shock, it has become apparent the pan- partners and that the role was “the fast- the pandemic’s impact on portfo- demic has ushered in a different era for est-growing position within the indus- lio companies will have underscored businesses across all sectors – a devel- try as of mid-2019”. their significance. “Operating partners opment that could affect the kinds of This trend has continued unabated have undoubtedly been busier than skill and experience operating partners through 2020 as firms have focused usual over the past six months as they will need.
10 Private Equity International • October 2020 Analysis
“We are challenging portfolio com- panies to think about longer-term Getting the right people on board shifts, which trends have been accel- erated and which created,” says Faxan- As operating partners become integral to private equity firms’ success, der. “There is a need to think strate- attracting and retaining the right people becomes increasingly important. gically as portfolio companies leverage Yet operational hires have not always gone to plan, with “people flitting new opportunities in the market and in and out of operating roles” in some instances, according to recruitment consider what the new environment consultant Egon Zehnder’s head of US private equity, Kenna Baudin. will mean for their business models in “One of the issues is that the term operating partner means different one, two and three years from now.” things in different private equity houses,” she says. “When identifying the Among the biggest trends is in- skills a firm needs, it’s important to draw up a well-defined specification of creased demand for digital solutions what it needs the person for. Will it be a full or part-time role? Will they as people have had to work and con- work on deals or post-acquisition, for example? One size really doesn’t fit duct daily life in a more virtual sphere. all when it comes to operating roles – some are clearly figureheads; others “Over the past six months, we’ve really are worker bees.” seen an acceleration of things like the She also points to situations in the past where operating partners “have emergence of digital channels to mar- tended not to have a seat at the table and be considered a bit like second- ket and, evidently, the shift to remote class citizens”, although she adds that this is changing as operating skills working,” says Jérôme Losson, partner become more critical to returns. and head of the portfolio operations Diversity across teams is a major focus for firms today, and to achieve team at BC Partners. “That has really this, Baudin advises taking a different approach to recruitment. “You changed the way companies deal with really do have to be deliberate in your search if you are to build genuinely staff, customers and suppliers and it diverse candidate shortlists,” she says. “You have to look in different places can change companies’ infrastructure otherwise you’ll just come up with the same people. Firms also need to requirements.” focus on the skill sets they’re trying to address rather than on the chair an In some firms, the recruitment of individual sits in today. It’s not about what has happened, but about their operating partners with technolo- potential. This is probably more important now than ever because so much gy backgrounds had already started has changed – you need agility.” pre-pandemic. “When I joined the firm in 2012, the profile of -an oper ating partner would have combined facing disruption, you’ll see increas- management expertise in a sector and ing demand for a unique set of skills in consulting,” says Losson. “Yet since house.” around 2016, we’ve been recruiting Yet hiring these individuals may not people with a variety of technology be easy. “It’s quite a challenge to find backgrounds – people who have, for people who understand both the tech- example, worked at Amazon or in data nology and the business outcomes it science businesses.” can enable,” says Losson. “There is a For other firms, the experience of significant role for operating partners the past few months, combined with to be intelligent translators, to be the predictions of an increasingly digital architects of technology-led transfor- future, will lead to a different emphasis mation journeys, communicating them when it comes to hiring operational ex- in a way that is digestible by boards, en- pertise. “The skill sets required to help abling the right decisions to be taken.” companies shift to digital technology may not have taken prominence until An emphasis on agility recently,” says Uzumeri. “Many firms Even where firms are working on more have tended to focus on areas such as familiar operational territory, they may supply chains and even where technol- find the landscape has shifted. For ex- ogy expertise has been brought in, it ample, the restrictions put in place be- may not have been strategic technol- cause of covid-19 have highlighted the ogy experience. But now we’re seeing fragility of the dispersed and complex many businesses either disrupting or supply chains many companies built
October 2020 • Operational Excellence 11 Analysis
over the past decade. As Losson notes: teams would be far less focused on this.” “Companies have been forced to exam- The events of the past few months, ine their resilience across a number of “Past experience may combined with growing recognition in dimensions. Supply chain is clearly one not always lead you to private equity that groupthink is the of these – where in the past, there was enemy of innovation, could also im- an unquestioned dogma that just-in- the best answers even pact the diversity of operating teams time, cost-effective supply chains were themselves. Uzumeri adds: “Operat- highly desirable, we’ve seen significant if it helps inform a ing teams will need to become more dislocations over recent months to the diverse to ensure they have a variety flow of goods and people. We can ex- response” of perspectives on tackling challenges pect an increased focus on trading off and making improvements. This will resilience and cost-effectiveness.” SIR TERRY LEAHY be critical for the success of both pri- The agility required to navigate Clayton, Dubilier & Rice vate equity firms and portfolio compa- such trends could mean a change in nies – it may not have been a priority the way operating partners approach previously.” challenges. As the former CEO of UK And, echoing Leahy’s point, many supermarket group Tesco, Sir Terry believe operating partners will increas- Leahy, a senior advisor to Clayton, Du- ingly need to understand how to create bilier & Rice since 2011, knows more value through ESG. As Faxander says: than a little about areas such as supply “In a more financially restrained en- chains. He points to “good expertise in vironment, you might expect ESG to supply chains” in many private equity move down the priority list, but we’ve firms, but adds that he expects “new seen the reverse happen. The pandemic and different supply chains to emerge, has really moved things forward, show- although it’s not yet clear what will ing how a robust approach to sustain- change and how they will look”. ability integration can help companies As a result of this uncertainty, he navigate through turbulent periods and predicts the need for a different style. lay strong foundations for the future. “Operating partners are likely to be Operating partners really need to un- more reflective, open and be prepared derstand the ESG levers and issues in to listen,” says Leahy. “In the past, the portfolio companies, with experience emphasis has been on people being cer- in this field contributing great value to tain and decisive; today, companies and a company’s long-term future.” entire sectors are seeing new problems consulting firm Egon Zehnder. “We’ve Tomorrow’s operating partner is and challenges, in part because of dig- seen increased interest in operating unlikely to look like those of the past. ital disruption, but also because of the partners with talent experience,” she While there will remain a place for pandemic. Past experience may not al- says. “We will see that continue as we those with consulting skills, we could ways lead you to the best answers even come through the pandemic because see the emergence of a new breed of if it helps inform a response. More col- portfolio companies will need support tech-savvy, ESG-focused executives laborative work and flexible thinking around managing through change and with strong collaboration capabilities will be required.” increasing their agility.” as firms build operating teams with The dimension of talent that may more specialist and diverse expertise. The search for expertise well gain greater attention is diversity As Leahy says: “I see operating With widespread change happening and inclusion, in particular as the Black partners being younger with more dig- across portfolio companies, it is per- Lives Matter protests have brought ital experience – perhaps in the nexus haps unsurprising that private equity the issue of racial inequality to the fore between data, technology and market- firms are hunting for expertise across a this year. “Diversity and inclusion are ing – an open mind and a willingness range of issues, with, according to Le- becoming critical areas for companies to learn alongside everyone else. To ahy, a greater emphasis on areas such that want to achieve operational ex- be successful, operating partners won’t as environmental, social and govern- cellence,” says Uzumeri. “Operating necessarily be the ones that come up ance, and talent. It’s a trend picked up partners will become more focused on with the answers, they will be the by Kenna Baudin, partner and head of driving through diversity and inclusion ones that lead a group of people to the private equity in the US at leadership initiatives through the portfolio – deal answers.” ■
12 Private Equity International • October 2020 Analysis
Gender diversity: A challenging win
Guest comment by Gail McManus
Positive action from every investment firm will help address gender imbalance at the operating partner level, says PER’s founder and managing director
ender diversity data from different perspective to a broad range One of the challenges in taking this PER’s 2020 UK Private Equity of operating issues. first step is that there is a perception GInvestment Professionals Com- there are not as many women who pensation Report reveals that 75 per- Valuing different experiences have the same depth and breadth of cent of firms have no female operating and perspectives experience as their male counterparts. partners. Sadly, that figure is not sur- A small change that would have a mas- And for sure, there may not be the prising and broadly reflects the gender sive impact on this industry would be same absolute number. But operation- balance at senior levels in funds. What for every firm to consciously welcome ally successful women do exist. is surprising is that the industry has not on board one additional operating part- If firms are prepared to hire an op- taken a simple, low-risk and potential- ner who is female. This first step would erating partner who is not instantly ly high-return measure that will have have an immediate impact on the indus- known to them, and instead focus on an immediate impact on female rep- try’s gender balance at this level. bringing on board a proven business resentation among operating partners. I am by no means suggesting pri- leader whose experience may lie else- When faced with historic inequal- vate equity adopts the ‘one and done’ where in the corporate or advisory ities, it is important to be mindful of strategy that has been highlighted by world, then they will open the door to how they came to be. Crucially, most the Hampton-Alexander Review into a world of talent that might surprise operating partners are not usually the lack of gender diversity on the them. hired through a recruitment process. boards of FTSE 350 companies. But Positive action is necessary to in- Firms tend to appoint someone they it is a start that we need to consider. crease female representation at the know, often through first-hand expe- operating partner level and we are all rience of the value they have already going to have to try a little bit harder created. Operating partners hold a po- to make it happen. It is by no means an sition of trust and, as such, are often easy win; it is a challenging win – and someone who is already an established aren’t those wins all the sweeter for member of a firm’s network. it? There is no doubt in my mind that This, of course, is good business firms with a diverse operating partner sense and no-one is suggesting that group are at a competitive advantage these tried and tested routes for find- in this market. The new perspectives ing operating partners have had their that women can bring should be valued day. That said, why should firms limit “A broader range in the same way as the tried and trusted themselves to this group? A broader experience that firms have opted for in range of talent can benefit decision of talent can benefit the past. n making and help to access investment Gail McManus is founder and managing opportunities that the fund may not decision making” director at search firm Private Equity have at first thought of, bringing a Recruitment
October 2020 • Operational Excellence 13 Analysis
KEYNOTE INTERVIEW
Why tech transformation is ‘critical’ to growth
The pandemic has underlined the power of digitisation in the private equity industry, says Intertrust Group’s Chitra Baskar
As the world contends with the impacts What daily challenges are SPONSOR and uncertainties of the covid-19 pan- managers facing? INTERTRUST GROUP Q demic, we asked Chitra Baskar, global Private capital transactions are now head of funds at Intertrust Group, how multi-dimensional. For a manager deployment of new technologies can accelerated, so has digitisation. This raising capital, investors from all over contribute to operational efficiencies has been driven by the imperative to the world can commit to their fund, and growth across the private equity handle data more systematically to using different currencies and com- industry. create meaningful insights and infer- plying with various tax and regulatory ences. In the wake of covid-19, digital requirements. The manager needs to Is the private equity platform usage is growing quickly as take into acount the above complica- Q industry opening up to firms seek out ways to share informa- tions. Increasingly, larger investors are digital transformation? tion across multiple locations and ge- demanding the creation of separately Historically, the private equity industry ographies for several people to work managed accounts that invest alongside has not been particularly tech savvy. on collaboratively. At the same time, the main fund. That requires separate Firms were happy using Excel, emails structural changes in the way private documentation and the proportion of and Word documents as they made capital managers invest has introduced their investment and distribution needs and tracked investments. However, a high level of complexity that is rein- to be calculated. Further, in order to in- as the growth of private markets has forcing this trend. vest in assets in different jurisdictions,
14 Private Equity International • October 2020 Analysis
managers typically set up separate en- bringing people together across time to LPs in an easily digestible format. tities in those locations. Some private zones and allowing them to work on Greater transparency is key to keeping funds have hundreds of entities that the same documents and transfer data investors happy and open to re-invest- need to be administered and monitored internally and externally. Digitisation ing in the manager’s next vehicle. to a high level of compliance. has facilitated workflows. Investors can At the portfolio company level, for upload their KYC documents and com- What protections can funds investing across geographies and mit to a fund without sending papers Q technology offer in a industries, the reporting parameters by mail, and that information can be downturn? vary depending on the asset. For in- validated online. Managers can com- Information gathering is beneficial in stance, the financial dynamics and ac- plete the entire investment process, in- good or bad times. Typically, when a counting requirements for a German cluding due diligence, from home. manager outsources to a fund services IT services company are very different Firms are using portals and dash- provider, the vendor supplies the tech- from, say, a healthcare company in- boards to display data, and software to nology that supports processes and col- volved in drug discovery in the US. manage accounting and perform fund lects, collates and distributes data. The Data and information need to flow tasks such as setting up numerous enti- provider is the one who has invested, from all these entities into the main ties and making the investments. Inves- for the benefit of all its clients, in the fund vehicle, where it is consolidated tors are also able to digitally reach out latest software and systems to keep into one balance sheet. That requires to managers, make their investments pace with best practice. This means currency consolidation, and Generally and obtain their ownership statements the GP has, to some extent, de-risked Accepted Accounting Principles nor- all with increasingly complex waterfall the fund by not committing capital and malisation, etc. The investor sees one calculations. We also see the adoption headcount to this function. In the event statement that captures its share of cap- of cloud services, which are becoming of a downturn, managers are free of the ital and the P&L, but it takes a lot of increasingly relevant when employees drag of sunk costs. At the same time, work to get there. are working remotely and may not have if a fund is shrinking as economies de- access to an internal server room. cline, access to good data and software How can technology help that can analyse it in different ways in Q managers overcome these How does digitisation response to market trends is critical to challenges? Q contribute to growth? adjusting the investment model. As fundraising and investing become At the portfolio company level, in addi- more demanding, fund managers are tion to financial statements, managers To take advantage of new becoming more comfortable with out- need information on sales growth, cash Q technology, what skills do sourcing rather than doing everything flow collections, debt-to-equity ratios operating partners need? in house and focusing instead on what and other financial health parameters First, they need the right accounting they do best – investing. During fund- that indicate how the business is per- and domain knowledge to understand raising a manager can use a third party forming. There is rising pressure on underlying portfolio risk management. to source capital and pitch to investors management teams to submit these Second, they need a strong technolo- and another third party to undertake numbers on a more-timely basis and gy solution group that can anticipate Know-Your-Customer work, LP due with more meaningful inference. Dig- problems and keep ahead of industry diligence and subscription documen- itisation creates efficiencies and can trends. For instance, we see the private tation. Managers outsource fund dom- reduce costs. As the company improves capital market shifting from closed-end iciliation and the establishment of its processes and deliverables, it will funds to a hybrid format that permits special purpose vehicles. Depending attract better clients and grow its mar- investors to enter and exit when they on the underlying investments the ac- ket share, and the manager will benefit want. This introduces new complexi- counting needs will vary, as well as the from higher quality information with ties regarding fund valuations and dis- need for information. For instance, a which to monitor their investment. tributions, which need to be addressed. GP typically appoints a property man- At the fund level, software helps Currently, at Intertrust Group, we ager to oversee its real estate assets. a manager gain control and comfort are busy building hybrid waterfalls and However, in the case of private equity with the numbers and better aware- fee calculations. We are also investing or private debt investments, accounting ness of the fund’s risk profile, which is more broadly in technology to increas- performance or cash flows all become essential. It aids communication with ingly embrace digital delivery and data relevant to consolidate and monitor. investors by improving monitoring management solutions for our clients Over the course of the pandemic, and measurement of the portfolio and as we continue to expand the number technology has become a critical factor, facilitates the provision of information of locations we serve. n
October 2020 • Operational Excellence 15 Operational Excellence Awards 2020
KPS Capital Partners Group: Partners: Vermaat Chassis Brakes With the support International of Partners Group, Backed by KPS catering services Capital Partners, company Vermaat Chassis Brakes added more than International 172 high-footfall diversified its revenue food and beverage base and extended its locations and entered international reach. the German market. Read more on p. 38 Read more on p. 39 Portfolio Portfolio company HQ: company HQ: Eindhoven, IJsselstein, Private Equity International’s annual The Netherlands The Netherlands Operational Excellence Awards celebrate standout value-creation stories in the private equity industry. In our 2020 awards special, we go behind the scenes to explore the winning strategies GPs have employed from entry to exit
Riverside Company: Health and Safety Institute Four acquisitions helped widen Health and Safety Institute’s training and compliance services during Riverside Company’s holding period. Read more on p. 24 Portfolio company HQ: Eugene, US
New Mountain Capital: Equian New Mountain Capital’s focus on tech investment and strategic acquisitions helped transform Equian into a tech- enabled leader in the US payment integrity market. Read more on p. 23 L Catterton: Peloton Portfolio company HQ: Indianapolis, US With L Catterton’s backing, Peloton grew its product range beyond connected at-home exercise bikes Riverside Company: Censis Technologies to provide broader content and Growing the sales function was key to Censis Technologies’ equipment options to subscribers and expansion into the underpenetrated surgical inventory commercial customers. Read more on management software market under Riverside’s ownership. p. 22 Read more on p. 25 Portfolio company HQ: Portfolio company HQ: Franklin, US New York, US
16 Private Equity International • October 2020 Operational Excellence Awards 2020
Horizon Capital: Morgan Stanley NSSK: Vati Purcari Wineries Private Equity NSSK’s strong Awards process Horizon Capital Asia: China Feihe focus on talent successfully pivoted MSPEA’s hands- development and How the winners were from a growth on approach with inclusive recruitment selected to a turnaround baby milk powder practices boosted investment after producer China retention rates In May-July this year, Private a Russian ban on Feihe helped at nursing home Equity International invited Moldovan wine deliver operational operator Vati. managers to send us their imports shut down efficiencies while Read more on p. 32 best examples of delivering Purcari Wineries’ strengthening food operational value to portfolio Portfolio largest export market. safety management companies. From small to company HQ: Read more on p. 36 best practices. large-cap deals, we called Tokyo, Japan Read more on p. 31 for submissions involving Portfolio investments located across company HQ: Portfolio three regions: the Americas; Chisinau, Moldova company HQ: Asia-Pacific; Europe, the Middle Beijing, China East and Africa. To be eligible, an investment must have been fully or partially realised on or after 1 June, 2019. These submissions not only detailed key metrics, such as exit multiples, revenue and EBITDA growth, product line and geographic expansion, but also the story behind these numbers. The entries were put before EQT: LBX Pharmacy a panel of industry experts, Store numbers increased more than 40-fold who considered factors such at LBX Pharmacy as EQT harnessed growth as innovation, growth strategy, opportunities in the Chinese pharmacy retail and environmental, social and market. Read more on p. 30 governance initiatives. The Portfolio company HQ: Changsha, China judges were ultimately asked to score each entry for the overall level of operational excellence displayed, and the Insight Partners: four submissions that achieved Checkmarx the highest score in each region, Software security regardless of deal size, have firm Checkmarx received 2020’s Operational expanded its Excellence accolades. international reach We had a high standard of Affinity Equity Partners: and customer base entries this year, resulting in Velocity Frequent Flyer with the support of some very close runs for the top Insight’s operational Affinity was instrumental in enabling Virgin spots. Our thanks go to all those value-add team. Australia’s loyalty programme, Velocity Frequent who shared their value creation Read more on p. 37 Flyer, to expand its redemption offers for stories with us, and to the judges members through a series of partnerships. Portfolio for their expertise and the time Read more on p. 29 company HQ: they dedicated to carefully Ramat Gan, Israel Portfolio company HQ: Sydney, Australia reviewing the submissions.
October 2020 • Operational Excellence 17 Operational Excellence Awards 2020
Americas
STEVEN KAPLAN
University of Chicago Booth Meet Steven Neil Kaplan is the Neubauer Family Distinguished Service Professor of Entrepreneurship and Finance at the University of Chicago Booth School of Business. His research the focuses on private equity, venture capital, entrepreneurial finance, corporate governance and corporate finance. He is co-creator of the Kaplan-Schoar PME (Public Market Equivalent) private equity benchmarking approach and judges co-founded the entrepreneurship programme at Booth, helping start its New Venture Challenge competition, which has created more than $10 billion in value from companies like GrubHub and Braintree/Venmo. With decades of experience in the private equity industry JONCARLO MARK between them, this year’s judges combed through the awards Upwelling Capital Group Joncarlo Mark is founder of Upwelling submissions across the Americas, Capital Group, an investment advisor Asia-Pacific and EMEA that provides capital solutions to premier institutional investors. He was previously a senior portfolio manager in the alternative investment management programme at the California Public Employees’ Retirement System and chairman at the Institutional Limited Partners Association. He continues to serve as a faculty member for the ILPA Institute. From 2015 to 2020, Mark served as a trustee for the University of California Davis Foundation, and chaired the Finance and Investment Committee.
MICHAEL McKENNA
Alvarez & Marsal Michael McKenna is a managing director of Alvarez & Marsal’s Private Equity Performance Improvement group. He works with private equity funds and their portfolio companies across the transaction lifecycle to execute transactions, accelerate portfolio company performance and provide a smooth investment exit. His primary area of focus is finance operations – driving improvements in liquidity and working capital management, strategic analytics and performance management.
18 Private Equity International • October 2020 Operational Excellence Awards 2020
Asia-Pacific EMEA
VERONIQUE LAFON-VINAIS KATJA SALOVAARA
Hong Kong University of Bureau of Asset Management, Science and Technology NYC Comptroller’s Office Veronique Lafon-Vinais is associate Katja Salovaara is a senior investment professor of business education in the officer – private equity in the Bureau School of Business & Management of of Asset Management at the NYC The Hong Kong University of Science Comptroller’s Office. She works closely and Technology, where she is the executive director (career with the head of private equity in making investment development and corporate outreach), associate director of recommendations and helps manage the approximately both the undergraduate and World Bachelor in Business $22 billion PE portfolio, as of 31 March 2020, of the five programmes, and a project director of the MSc in Global New York City retirement systems. Salovaara was previously Finance programme. Lafon-Vinais is a seasoned financial senior portfolio manager – private equity at Ilmarinen market professional with more than 20 years’ banking and Mutual Pension Insurance Company in Helsinki, joining in capital markets experience. 2000 to establish its PE investment programme. Prior PE investment experience includes Shell Pensions Management Services and Pantheon Ventures in London. JIAN LI
AlixPartners ANTOON SCHNEIDER Jian Li is a managing director at AlixPartners’ Shanghai office. He Boston Consulting Group is a senior management consulting Antoon Schneider is a managing professional with extensive experience director and senior partner at The in supply chain management and large- Boston Consulting Group and leads the scale operations transformation in Asia. He has worked with principal investors and private equity clients in the consumer goods, industrial goods and logistics practice in London. He advises leading sectors. Prior to his consulting life, he was with P&G and principal investors and private equity firms globally on ExxonMobil in China in the area of operations and supply a range of deal sourcing, due diligence and firm strategy chain management. projects. He has also worked extensively with their portfolio companies on Value Creation Planning and operational improvement projects, and has deep experience in corporate IVO NAUMANN strategy and M&A.
McKinsey & Company Ivo Naumann is a partner with LISA STONE McKinsey & Company where he leads the Private Equity and Institutional Independent chairperson Investor practice as well as the RTS Lisa Stone joined Mercury Private service line, a special unit that delivers Equity in 1999, shortly before the a proven approach for transformational change, for Greater creation of HgCapital, of which she China. Naumann has more than 20 years’ experience in was a founding partner. Over a career supporting shareholders and management to restructure at HgCapital spanning 19 years, the and improve performance of underperforming businesses firm grew AUM to €10 billion with more than 120 people. in Asia. He has acted in multiple management roles and While at Hg, Stone established the portfolio support model served on various boards of directors in China, Japan and which evolved to become today’s leading Portfolio Support South-East Asia. team. She also participated in building the partnership, sitting on the operating, investment and portfolio committees, as well as the board. Since leaving Hg in 2018, Stone has worked as the chairperson of a number of private equity-backed businesses.
October 2020 • Operational Excellence 19 Analysis
EXPERT COMMENTARY
Laying strong foundations for procurement transformation can help organisations create long-term value, write Efficio’s Patrick Traynor and Fabian Bodoky
Sustaining procurement’s impact on EBITDA
Private equity recognises the impact and profit accountability, but a surpris- SPONSOR that transforming procurement can ing number do not practice spend ac- EFFICIO have on portfolio company perfor- countability. An effective strategic cat- mance and value. However, the focus egory manager, one who is accountable is typically on short-term transfor- The stakes for sustaining performance for a key category spend area, can be as mation, while sustaining the perfor- in procurement are real. High-perform- impactful for organisations as a strong mance in procurement and delivering ing organisations are realising a 3-5 per- sales or account manager. higher year-over-year value can boost cent productivity impact year after year Effective category managers under- EBITDA and valuation. from effective procurement, compared stand how to work with business spend Many initial procurement transfor- with 0-2 percent for average perform- owners to balance short-term needs mation efforts have yielded strong re- ers. Maximising this long-term impact with longer-term category strategies. sults. Transformation programmes have should therefore be a priority right from Strategic category managers devel- proven to be an effective way to reset the beginning of the transformation to op multi-year category plans, setting external costs and reposition the pro- have the value flow through to EBITDA year-over-year targets and working curement function within the organi- and valuation when exiting. with the business to deliver against the sation. Despite this initial success, most Organisations that sustain high year- targets. Top performing organisations companies struggle to sustain measur- over-year impact from procurement integrate the review of these category able impact beyond the initial surge. have four common characteristics, plans into their c-level business review They fail to build on the momentum which are detailed below. cycle, providing the category manag- from the transformation programme ers with the increased exposure and and embed the discipline and practices 1. Clear spend accountability accountability befitting this important needed to sustain performance. Most organisations understand revenue role.
20 Private Equity International • October 2020 Analysis
2. Organisational alignment in an organisation can be a catch-22. and commitment Procurement needs to build credibili- Company leadership must commit to “Realising maximum ty with the business and management procurement – with actions not just sustained impact from to get its seat at the table. However, their words. Procurement needs to be without the support and alignment of positioned as a strategic function that procurement can only the wider organisation, procurement works cross-functionally to support cannot grow into its role as an ena- the business to achieve its goals. Price be achieved through a bler. Transitioning to an accountabil- compression through volume leverage ity-based category management or- cannot by itself lead to sustained, year- holistic total cost focus” ganisation – for example, one in which over-year impact. Realising maximum procurement is a key player early in sustained impact from procurement demand processes – requires initial suc- can only be achieved through a holistic results but more change. Mature pro- cess stories for credibility. total cost focus, leveraging both de- curement teams articulate advantages The transformation programme can mand and supply-side strategies. of both approaches, but incentivising be an effective catalyst for this change. Effective leaders include procure- suppliers to bring new ideas to the ta- To sustain the value and transform the ment when setting business targets ble is key. company long term, organisations need and position the procurement team as to lay the foundation for the improve- support to the business managers. This 4. Measurement discipline ment of these four key characteristics. enables the category manager to work A frequent complaint about procure- Effective transformation programmes hand-in-hand with their business and ment functions is the inability to clear- build accountable category leads, pro- functional customers to understand ly see their impact on the bottom line. mote cross-functional working and their needs and help to choose and “We have two sets of numbers” and implement solid savings measurement manage those suppliers to meet those “I’m not sure what I’m getting from standards. Success in a transformation needs. Procurement’s involvement ear- procurement” are common refrains. event can prove to the organisation ly in the process is an important factor Poor measurement discipline coupled that early engagement of procurement to maximise the category manager’s with changing demand and business pays dividends. impact. Early engagement, shared ob- growth lead to uncertainty surround- While transformation programmes jectives and aligned incentives across ing procurement’s impact. can provide a catalyst, sustaining pro- procurement and the business/func- Effective organisations employ curement impact requires more than a tions will also help to promote collabo- strong measurement discipline to as- one-time programme. Successful com- ration and alignment. sess this impact. Beginning with a solid panies work purposefully to imprint savings tracking approach, one which these characteristics of accountability, 3. Alignment with key partners ensures that negotiated price points are alignment and discipline in procure- Once procurement has cross-func- applied and new suppliers or services ment into their organisational DNA. ■ tional alignment internally and has are leveraged. Effective measurement achieved success in helping the busi- also requires tight co-ordination with ness source the right supply partners, it finance to ensure that impact defini- Patrick Traynor, vice-president, leads Efficio’s US operations. He is a recognised can look to key partners for next-level tions are clear and to map category leader in procurement transformation, improvement across the supply chain. spend areas to budgets. Clear budget strategic sourcing, supply chain operational improvement, organisational development Suppliers often have innovative ideas linkage enables organisations to un- and supplier performance management. that can help take cost out of the sup- derstand where savings hit and to make Prior to joining Efficio, Patrick held leadership roles with ICG Commerce, Regan Advisory ply chain – ideas stemming from their explicit decisions on whether to re-in- and AT Kearney. He holds a BS in Electrical product development efforts or from vest savings into the business or to have Engineering from Penn State University and an MBA in Finance from The Wharton School, their other customer relationships. them flow through to the bottom line. University of Pennsylvania. Effective teams leverage ideas from A disciplined, transparent approach to Fabian Bodoky, principal, is part of the both incumbents and challengers to savings measurement helps organisa- Efficio US leadership team. He has extensive this goal. With incumbents, they set tions effectively assess procurement’s experience in improving procurement performance and has been running several up a structured supplier performance impact while also enabling the organi- large transformation programs around the improvement process to achieve a col- sation to row in the same direction. world, across four continents. Prior to joining Efficio, Fabian was part of Boston Consulting laborative, evolutionary change. Chal- Group’s Global IT Sourcing Practice. Fabian lengers can bring disruptive ideas to Catalysing change holds a PhD in Theoretical Physics from the Delft University of Technology (TU Delft) in the table, which can lead to stronger Embedding these four characteristics the Netherlands.
October 2020 • Operational Excellence 21 Americas | Operational Excellence Awards 2020
L Catterton
With L Catterton’s backing, Peloton grew its product range beyond connected at-home exercise bikes to provide broader content and equipment options
hen L Catterton led a $75 million growth capital Wround in Peloton in Decem- ber 2015, it identified a raft of opportu- nities to build on the connected fitness company’s potential for digital disrup- tion and its ability to harness fast-grow- ing health and wellness trends. Peloton sells exercise equipment with access to live-streamed and on-de- mand classes, adding an immersive and socially connected element to at-home fitness. Drawing on its knowledge of the fitness space, where previous in- vestments included CorePower Yoga The firm reinvested cost savings Catterton’s ownership, and the compa- and Xponential Fitness, L Catterton into marketing and branding initia- ny’s revenues increased 30-fold. set out to help grow Peloton into a tives, helping to transform Peloton In addition, L Catterton support- full-service fitness and technology into a unique lifestyle brand and de- ed the company through subsequent company. velop a community feel among sub- financing rounds, and aided Peloton This included launching a com- scribers. It also sought to grow the in recruiting for roles across key areas mercial version of Peloton’s exercise company’s customer base and expand such as finance, marketing and product bike for use in gyms, expanding the internationally. The business now innovation. By mid-2019, the business online content available to subscribers ships exercise equipment globally, and employed approximately 2,000 staff via the portals installed on its bikes, as during L Catterton’s investment period compared with just under 200 when L well as growing its range of home fit- its subscriber base grew from approxi- Catterton first invested. ness equipment. L Catterton played an mately 20,000 to 563,000 members. Peloton listed on Nasdaq in Sep- instrumental role in the development, The number of Peloton showrooms tember 2019, raising approximately sourcing, and positioning of the Pelo- also increased from 12 to 74 under L $1.16 billion. L Catterton’s complete ton tread – a connected treadmill. exit from the company came after the L Catterton also employed its op- IPO, in February 2020. The invest- erations and supply chain expertise to ment generated a gross IRR of 110 increase the company’s manufacturing percent and a 10x gross money multi- capacity and to achieve manufactur- ple. ing and supply chain cost efficiencies. 110% The judges praised the “very im- Among other initiatives, this included Gross IRR pressive” transformation of the com- assisting Peloton in developing a last- pany, awarding it full marks for growth mile delivery process and a long-term strategy and scoring it very highly for plan to improve the delivery experience innovation. “L Catterton contributed for consumers. Improvements to the a wide range of strategic and opera- company’s operational infrastructure 10x tional benefits that has led to the build- facilitated immediate cost savings of 25 Gross money multiple ing of a remarkable company,” said one percent. member of the judging panel. ■
22 Private Equity International • October 2020 Operational Excellence Awards 2020 | Americas
New Mountain Capital
New Mountain Capital’s focus on tech investment and strategic acquisitions helped transform Equian into a tech-enabled leader in the US payment integrity market
ew Mountain Capital pulled customer relationships and further off the difficult feat of simulta- “A great example of strengthen its position in the payment Nneously acquiring and merging integrity market. two companies. In December 2015, innovation in private it bought payment integrity plat- Investing in automation form Equian and cost containment equity” Perhaps the most notable aspect of the services and software provider Tro- company’s transformation, though, is ver. The transaction led to the crea- investment in technology, including au- tion of the Equian operating across tomation technology for data process- the US today, providing technolo- ing. The adoption of new technologies gy-enabled payment integrity and enabled the business to develop plat- cost containment solutions to the form-based solutions that could harness healthcare and property and casualty growth driven by the US healthcare industries. market’s shift to a value-based payment At the outset, New Mountain Cap- model. The investments also delivered ital assisted Equian in establishing a plan for the Indianapolis-headquar- benefits in terms of cost management board of independent directors com- tered business was inorganic growth and operating efficiency. For example, prised of leaders within their fields. It via strategic M&A. Including Trover, workflow enhancements resulted in also lent a helping hand in other talent New Mountain Capital worked with improvements to key performance in- initiatives and strategic hires, such as Equian’s management team to identify dicators such as conversion rates within the appointment of a new chief tech- and execute on six acquisitions. Among audit and data mining. nology officer and a new chief operat- these was the purchase of overpaid At the point of exit, the company ing officer to support the business as it claims recovery specialist OmniClaim operated in all 50 US states and served scaled. in 2018. The acquisition allowed Equi- more than 300 customers, including 22 A key tenet of the value creation an to build on OmniClaim’s strong of the top 25 healthcare payers. The judging panel viewed New Mountain Capital’s work with Equi- an as “a great example of innovation in private equity”. As one judge com- mented: “The exit is a remarkable outcome and was not simply a product of being in the right place at the right time; it appears that real value was add- ed by the sponsor.” ■ 6 Acquisitions
October 2020 • Operational Excellence 23 Americas | Operational Excellence Awards 2020
Riverside Company
Acquisitions helped widen Health and Safety Institute’s training and compliance services under Riverside’s ownership, in one of two OpEx Awards wins for the GP this year...
ased in Eugene, Oregon, Health development capabilities to accelerate and Safety Institute is an en- HSI’s organic growth rate. The firm Bvironmental, health and safety improved HSI’s regional sales leader- compliance and training company, ac- ship with new hires. It consolidated the quired by Riverside in 2015, and sold to 104% sales team from three offices to one and Waud Capital Partners last year. Riv- EBITDA growth almost doubled the size of the sales and erside has a longstanding relationship marketing team. It also improved the with the business, having originally company’s pricing strategy, revamped invested in 2006 before exiting in 2012. its website and enhanced digital mar- During its latest four-year holding keting efforts. period, Riverside executed four stra- 122% Single platform tegic acquisitions to expand the ad- Revenue growth dressable market, grow market share Indeed, investment in IT was critical. and increase the recurring revenue The firm migrated all the bolt-on ac- mix. The acquisitions added a full set quisitions onto a unified platform that of workplace compliance solutions, Riverside enhanced the manage- can pull a customers’ entire organisa- including digital workplace training ment team, including bringing in chief tion together around safety and com- safety programmes; document man- executive Chad Birckelbaw, who the pliance in one system. agement, reporting and tracking soft- firm had previously partnered with at The results of these initiatives were ware; chemical inventory management FairPay Solutions. The firm also hired significant. At the point of acquisition, software; and on-site inspection servic- a new chief financial officer, a new VP HSI serviced around 48,000 authorised es. The target companies included Saf- of sales and a new VP of marketing, as trainers in the US and Canada. When etec Solutions in 2015, Comprehen- well as several new second and third the firm exited, it serviced more than sive Loss Management in 2017, Vivid layer managers. 54,000 authorised trainers, as well as Learning in 2018 and EMS Safety last In addition, Riverside invest- 4,300 workplace compliance solutions year. ed in sales, marketing and software customers, across a diverse range of end markets. Over the course of the investment, HSI’s workforce expanded from ap- proximately 100 to almost 300 staff members, EBITDA grew by 104 percent and topline revenue growth reached 122 percent. “A great story about a high-quality firm that can repeatedly create value when partnering with successful man- agement teams,” said one judge. “HSI’s ability to become a leader in a crowded training market is a big accomplishment and Riverside has been instrumental in both developing the strategic plan and helping the company execute.” ■
24 Private Equity International • October 2020 Operational Excellence Awards 2020 | Americas
Riverside Company
...Riverside’s second accolade is for Censis Technologies, where growth of the sales function was key to market expansion during the GP’s investment period
ounded in 2001, Tennessee-based Censis Technologies provides Fsoftware as a service-based surgi- cal instrument tracking and workflow solutions for the sterile processing departments of hospitals and ambula- tory surgical centres. The software is used for assisting with the assembly of trays for surgical procedures, which can contain hundreds of instruments; sterilising instruments; and managing inventory from purchase through to retirement. The company’s flagship product, Censitrac, provides customers with a real-time dashboard that can locate a specific tray within a hospital and au- tomatically alerts users to issues such as company more than quadrupled the incorrect assembly, insufficient sterili- number of hospitals served during Riv- sation, missing instruments or instru- “The strategic erside’s five-year holding period. ments requiring maintenance. Riverside also sourced and com- Disorganisation in sterile process- combination of Applied pleted the bolt-on acquisition of St ing departments can cause costly dis- Louis-based Applied Logic in 2018, to ruption and delays, while improperly Logic was important” support Censis Technologies’ vision to sterilised equipment can lead to wide- remain the first-class choice for surgi- spread infections. Riverside acquired cal inventory management software. the business in the summer of 2014, Applied Logic provides software and drawn by the increasing demands that third-party hardware used in hospitals’ hospitals face when it comes to regula- component was the completion of an and other medical facilities’ sterile pro- tion and the need to deliver exceptional important strategic acquisition. cessing departments. care. Among the firm’s key wins was the Riverside sold Censis to Washing- At the point of acquisition, Riv- successful expansion of the sales func- ton-based conglomerate Fortive, a erside had a clear vision for value tion, which enabled Censis to capitalise spin-off from Danaher, in November creation – the firm planned to work on an underpenetrated market. The 2019. alongside management to drive or- The judges, who scored this deal ganic growth through investment particularly highly for growth strate- in sales and marketing and strategic gy, praised the innovative solutions the price increases. It also aimed to im- company provides to the healthcare prove the product suite by introduc- industry. “Censis Technologies’ client ing new modules that could be sold 4x base grew dramatically,” one judge Increase in number of separately and to add new functional- hospitals served added. “The strategic combination of ity to the core software. Another key Applied Logic was important.” ■
October 2020 • Operational Excellence 25 Analysis
KEYNOTE INTERVIEW
Pricing: PE’s hidden gem?
In the future, private equity professionals will struggle to remember a time when pricing wasn’t high on the value creation agenda, say Simon-Kucher’s Mark Billige and Adam Echter
Achieving top-line growth during a to investment teams, with significant SPONSOR downturn can be a significant chal- access to portfolio companies, greater SIMON-KUCHER & PARTNERS lenge, and private equity firms will need influence, and a bigger mandate. But to pull all the levers at their disposal more and more I am also being intro- to build more resilience in portfolio professionals we work with describe duced to value creation professionals companies. Although many managers four eras of value creation: leverage, who wear a dedicated pricing hat. This already have expertise in areas such as balance sheets, cost cutting and now is still the exception, and whilst revenue supply chain optimisation and cost cut- growth. Each period has captured at- topics are starting to get more traction, ting, few have placed serious emphasis tention for approximately a decade there is still some way to go. on pricing to date. We caught up with and they are cumulative, meaning the Mark Billige, CEO of Simon-Kucher current private equity professional Why does pricing not & Partners, and Adam Echter, partner needs to be proficient in all four topics. Q always get the attention it at the consulting firm, to discuss how Growth really emerged as a focus fol- deserves? pricing can tie into value creation strat- lowing the 2008 crisis. Although nearly AE It’s really a conundrum. There egies and how portfolio companies will all aspects of the first three phases are is recognition in private equity that need to navigate revenue generation in well understood, there are still some el- pricing can have a huge impact and it the year ahead. ements of top-line growth that are not scores highly on return on investment, receiving the attention they should. but there is simultaneously an acknowl- What are the recent Pricing is one of these. edgement that too little resources are Q trends in private equity devoted to it. Based on what we see, operational improvement? Mark Billige: We see the ongoing build around 10-15 percent of firms ac- Adam Echter: Most private equity out of value creation teams separately tively look at pricing as part of their
26 Private Equity International • October 2020 Analysis
investment thesis, most still see it as a ‘nice-to-have’ as opposed to a system- How will work on pricing develop atic, planned process. through 2021? MB: As pricing is a relatively new area of focus and value creation lever for AE: There will be increased consolidation as we work through the many, there are not that many people downturn, including acquisitions of companies that are in a weak position with the necessary expertise. The skill because of erratic pricing. While many managers will accept issues in set is harder to find than, for example, their market may be driven by lower demand, some will recognise that cost optimisation. This means firms are discounting does not help. Others will continue to discount, and these will finding it difficult to grow teams with be the businesses that get bought. This will require the acquiring firms to experience in pricing at the speed and quickly unwind bad pricing policies of their targets. quality they would want. MB: The days of being able to tolerate anarchic discounting have now AE: The other key factors are financing gone. Every penny and every percentage point will count because the and risk aversion. If you go to a bank cost of doing business has increased in the wake of covid-19. You will see and present an investment hypothesis repatriation of supply chains and a focus on quality, which will affect the that relies on taking cost out, the bank cost of goods sold. Cost-inflation is coming, and companies will have the is more likely to underwrite the deal option of absorbing that cost through lower margins or working out how than if pricing is a key theme. We are to structure pricing to pass the increase on to customers at a time when working with banks to help address that demand is soft. That is a brand new skill for most businesses. and seeing traction there. The next is- sue is risk aversion – it often seems risk- ier to increase prices and push hard on customers rather than pushing suppli- ers to take out costs. As firms get more cycles with pricing, they realise how to de-risk pricing moves, so that concern is changing as well.
How does pricing fit Q within private equity’s value creation playbook? AE: Pricing is a well-kept secret in pri- vate equity. It feeds into the three main components of value creation. Optimis- ing pricing can push EBITDA growth, particularly in a more benign market. It can also generate multiple expansion through, for instance, the creation of MB: Pricing also comes into play in the product portfolio to avoid price recurring revenue streams. If we take buy-and-build strategies. While tradi- cannibalisation. the example of a well-trodden path tionally the focus has been on reducing – software businesses – it is clear that operating costs and increasing operat- What trends are you you can create a more valuable business ing synergies post-acquisition, more Q seeing in pricing? by evolving pricing models. For exam- private equity firms are now looking at MB: The biggest single trend is reve- ple, if you buy a $100 million revenue revenue synergies as a source of value nue model transformation as business- transactional software business at, say, creation. If you put together company es try to build recurrence and resilience an 8x multiple, then convert it to a re- A and company B, they may have the into pricing. The move that Adam curring revenue model, you might have same customer base, but one business mentioned in software is an obvious ex- the same revenue four years later but may offer cheaper products and servic- ample, but we are also seeing this kind you can achieve a double-digit multiple es. This can lead to pressure to reduce of shift in other areas. We are working because the subscription model creates the higher prices, but it is possible to with far more traditional services and more resilient revenue streams. avoid that by proactively restructuring products businesses and helping them
October 2020 • Operational Excellence 27 Analysis
to move towards a subscription or re- curring contracts model. This is in- creasingly becoming part of the private equity investment thesis as firms look at ways of generating a return beyond simply optimising operational areas.
AE: If ever there was a time to shift revenue models, 2021 will be it because businesses cannot afford to track the ups and downs of renewed lockdowns – they need stable revenue models.
How is the pandemic Q playing into private equity’s interest in pricing? MB: When covid-19 first hit and the lockdowns came into force, we saw private equity firms focus on cash How will private equity’s preservation, they created war rooms “Pricing is a well- Q approach to pricing and worked hard to stabilise portfolio evolve? companies, but that phase is now over. kept secret in private AE: Currently management is asked And while firms were already showing during due diligence about products curiosity in pricing well before the start equity. It feeds into and supply chains, for example, but of this year, over the coming period we going forward it will become standard expect more focus on pricing and reve- the three main practice to ask about pricing. Private nue management as they seek to create equity will become as comfortable in- more agile portfolio companies. Unlike components of value terrogating pricing and the price/value previous downturns, which have been creation” model as it currently is with manufac- more linear in nature, the current eco- turing and supply chain issues. That nomic picture is more unpredictable as shift will lead to stronger companies. we may well have ups and downs with ADAM ECHTER lockdowns and businesses needing to MB: We will see a move beyond simple adapt to social distancing measures. pricing ‘quick wins’ into much more Commercial agility will be key in this sophisticated revenue management kind of environment. You can’t just cost capability as firms focus on getting cut your way out of a downturn; you the apparatus and skills in place to en- need to generate income wherever you sure their work in this area reaches the are in the cycle. same standard as on cost management. Part of the answer to this in portfolio What kind of heavy lifting companies will be technology – most Q do you expect to see in projects we work on involve swapping this area? out Excel for pricing software and con- MB: The topics are the same as they product and service restructuring come trolling tools. would be in any environment, but the into play. uncertainty will create opportunities AE: We don’t know what the next era for private equity and there will be AE: There is a bias for action in pri- of private equity will be, but we are action across all levers, with pricing vate equity and the current crisis has confident that in 20 years the pricing moving up the agenda. Some will view accentuated this. Private equity-backed playbooks will be developed to the level this as an opportunity to pick up acqui- companies are most likely to go on the financial engineering is today and the sitions, including stressed businesses offensive to capitalise on an unprece- next generation of private equity pro- that may have engaged in heavy dis- dented event to clear out bad pricing fessionals will struggle to imagine a time counting – here we would expect to see practices and unprofitable customers. when pricing wasn’t on the agenda. n
28 Private Equity International • October 2020 Operational Excellence Awards 2020 | Asia-Pacific
Affinity Equity Partners
Affinity was instrumental in enabling Velocity Frequent Flyer, Virgin Australia’s loyalty programme, to expand its redemption offers for members through a series of partnerships
ffinity invested in Velocity, for value creation. Velocity launched its the frequent flyer loyalty pro- mobile app in 2018, as well as refresh- Agramme of Australian airline, ing its website, driving incremental Virgin Australia, in October 2014. points earning and points redemption Having first led the carve-out from activities, as well as enhancing mar- Virgin, restructuring the organisation keting capabilities for the company’s from a business division within an air- partners. line into an independent, autonomous Another significant move for the business, Affinity set about expand- business was its relocation from Bris- ing the opportunities for the loyalty bane to Sydney, together with the programme’s members to earn points consolidation of divisions into a single as well as broaden redemption offers location. Enhancing Velocity’s environ- available beyond flights. This included mental, social and governance creden- a new partnership with energy compa- tials was also key. Business partnerships ny BP enabling members to earn and were designed to use the ‘power of redeem points at fuel stations, as well points’ to reward members for socially as partnerships with Flybuys, the loyal- conscious choices, for example electing ty programme belonging to the second to purchase energy saving plans and so- largest retailer in Australia. lar power. In 2018, the company also Partnerships were also established established a points partnership pro- with China’s HNA Group, which was gramme with Envirobank, a recycling introduced to Virgin Australia by Af- business. finity, as well as with TEG, then an Critical to this transformation was As a result of these efforts, Affinity Affinity portfolio company. The lat- Affinity’s approach to human capital. grew its membership base by 2.5 times, ter partnership gives members access The firm identified 20 strategically im- from four million to over 10 million. It to exclusive event offers and pre-sale portant roles in the organisation and also substantially diversified its revenue tickets. led the recruitment initiative, includ- base over its five-year holding period, ing recruitment of the c-suite. In ad- delivering compound annual growth dition, Affinity recognised the value of rates for revenue and EBITDA of 17 Velocity’s database and invested heavily percent and 16 percent, respectively. in data analytics to drive engagement Affinity exited the investment in through tailored points-earning and 2019, selling its 35 percent stake to Ve- points-redemption opportunities. As locity’s controlling shareholder, Virgin 2.5x part of that process, Velocity acquired Australia. Increase in members Torque Data. The company’s manage- The judges praised Affinity’s invest- ment team and Affinity evaluated more ment in human capital and its intro- than 100 different prospects before de- duction of resources from other Affini- ciding on the data analytics business as ty portfolio companies. They were also the best fit for Velocity. impressed with its ESG efforts, as well 16% Indeed, creating a culture that em- as the innovative and creative opera- EBITDA CAGR braced data and cutting-edge technol- tional development displayed, which ogy was fundamental to Affinity’s vision resulted in strong growth numbers. ■
October 2020 • Operational Excellence 29 Asia-Pacific| Operational Excellence Awards 2020
EQT
Store numbers increased more than 40-fold at LBX Pharmacy as EQT harnessed growth opportunities in the Chinese market
QT acquired a 48 percent stake In addition, it tapped into the glob- in LBX Pharmacy through the al EQT network to leverage expertise EEQT Greater China II fund in in the retail and healthcare industries, 2008. The Chinese pharmacy super- as well as visiting leading pharmacy store chain, established in 2001, had 40 groups outside of China to help drive Add-on acquisitions grown to 114 stores, and EQT iden- business development. tified further organic and acquisitive LBX listed on the Shanghai Stock growth opportunities in China’s ex- Exchange in 2015, raising approxi- panding pharmaceutical retail market. strengthening corporate governance mately $177 million through its over- EQT set out to capture these op- and the management team. This in- subscribed IPO. According to EQT, portunities through more than 40 syn- cluded setting up audit, remuneration this was the first IPO in China with a ergistic add-on acquisitions of local and and strategy committees, establishing foreign private equity fund as control regional competitors. It also accelerat- an experienced board of directors, and or co-control shareholder. The fund ed store openings and upgrades, with recruiting key c-suite hires to lead the retained a 35 percent stake in the busi- the total number of stores rising more company forward. An investment com- ness following its public listing. It fully than 40-fold between 2008 and EQT’s mittee was also formed to optimise the exited in November 2019 when it sold exit in 2019. As of 30 September 2019, add-on acquisition due diligence and its remaining equity interest of approx- LBX operated 3,756 self-owned stores approval process. EQT took steps to imately 25 percent to Primavera and and 1,052 sub-franchised stores across align management and directors with FountainVest at 235 percent above the 22 provinces and three municipal cities its aims for LBX and to support long- 2015 IPO share price. in China. term talent retention and acquisition Under EQT’s ownership, LBX The firm implemented a number through the introduction of incentive achieved double-digit average annual of operational improvements, such as programmes. EBITDA and revenue growth, with sales rising by more than 570 percent and EBITDA by more than 1,100 per- cent over the total course of the in- vestment period. Employee numbers almost tripled between 2008 and 2019 in line with the company’s growing geographical and market reach. As one judge noted: “EQT con- tributed to LBX Pharmacy’s profitable growth over a long period of time by enhancing the functional excellence and making synergistic add-on acquisitions.” Another member of the judging panel praised the firm’s “spectacular growth numbers”, as well as the oper- ational developments achieved across corporate governance, board and man- agement, and geographical expansion through acquisitions. n
30 Private Equity International • October 2020 Operational Excellence Awards 2020 | Asia-Pacific
Morgan Stanley Private Equity Asia
MSPEA’s hands-on approach with baby milk powder producer China Feihe helped deliver operational efficiencies while strengthening food safety management best practices
n 2013, Morgan Stanley Private Eq- world-class manufacturing practices uity Asia invested in Chinese infant at production sites to support quality Imilk powder producer China Feihe while also achieving cost efficiencies, as in a take-private deal valued at approx- well as attracting talent from multina- imately $147 million. The company tional corporations to contribute addi- had previously been listed on the New tional market knowledge and expertise. York Stock Exchange. MSPEA took a Product freshness was also a key minority stake in China Feihe, com- priority, and numerous supply chain mitting $34 million of equity under the improvements were introduced to sup- deal, alongside financing from China port this, such as establishing a central Feihe’s founder and $50 million in debt planning function. As a result of the financing. changes, supply chain lead-time was The transaction took place at a chal- shortened by nearly half. In addition, lenging time for the baby milk formula MSPEA was instrumental in establish- industry after some domestic products ing and driving the ESG agenda, which were found to contain melamine. A included investments in areas such as China Feihe spokesperson confirmed waste-water treatment. at the time that its products were never Between 2014 and 2019, China among those involved in the scandal or Feihe’s workforce more than doubled, suspected of being unsafe. The scandal and the company’s market share in led to the introduction of tighter infant China grew around four-fold. Revenue formula regulations in 2015, which and EBITDA increased at 31 percent came into effect in 2018. CAGR and 45 percent CAGR over this Against this backdrop and with the period, respectively. And in 2019 alone, support of MSPEA, which appoint- revenue and gross profit were both up ed a dedicated operating partner to more than 30 percent over 2018. work with China Feihe, the company In November 2019, China Feihe realigned its value proposition to be listed on the Hong Kong Stock Ex- “more suitable for Chinese babies”. change, raising approximately $855 Steps were taken to drive this value million. Morgan Stanley’s Asian private proposition, such as further enhanc- equity arm partially exited the invest- ing food safety management, investing ment over April 2019-September 2020. in product innovation and R&D, and 31% The judges were impressed by developing environmental, social and Revenue CAGR MSPEA’s diligence and the breadth of governance programmes. value creation levers it used. They also The operating partner worked highlighted the investor’s “remarkable” closely with management and produc- environmental focus, as well as the in- tion site teams to help implement ini- depth operational developments un- tiatives to grow and develop the busi- dertaken, which they noted helped to ness. This included appointing a chief 45% boost performance and propel growth quality officer and upgrading quali- EBITDA CAGR within an industry facing regulatory ty-assurance processes, implementing and branding issues. ■
October 2020 • Operational Excellence 31 Asia-Pacific| Operational Excellence Awards 2020
NSSK
NSSK’s strong focus on talent development and inclusive recruitment practices boosted retention rates at nursing home operator Vati
ati is a Japanese nursing home operator focused on the low- Ver cost end of the market. NSSK backed the business in October 2016, embarking on a multi-faceted transformation programme covering everything from a human capital de- velopment strategy to marketing initia- tives and diversity efforts. Key among NSSK’s value creation strategies was a focus on analytics. The of employees at Vati increased by 23 firm developed a tool with a multi-var- percent during NSSK’s period of own- “The social impact on iable equation that drives better deci- ership, while retention levels reached sion-making for new facility expansion. industry highs in what is an extremely women’s leadership in The tool optimises decision-making competitive labour market. on location, size and scope that drives NSSK also instilled a strong com- a Japanese company is lower cash break-evens. The result mitment to environmental, social and has been a 16 percent increase in the governance principles, including di- inspiring” number of facilities, a 31 percent versity and inclusion. The firm led in- growth in sales and EBITDA margins itiatives around hiring and promoting of 13 percent. women to key management positions, Occupancy management was an- as well as hiring people with disabili- other priority, because of its impact ties, which it believes has contributed establishment of a compliance promo- on both revenues and profitability. to the company’s overall success. To- tion office, which facilitated more fre- This was achieved through a complex day, 80 percent of Vati’s staff and 68 quent and robust internal audit proce- revenue management programme that percent of its managers are women. dures, as well as enhancing training and required sales initiatives with hospitals It strengthened governance pro- development in this area. and nursing care counsellors, as well as tocols at the company through the NSSK sold Vati to an investor the elderly population directly. System- group that includes Neuberger Berman atic calling programmes were initiated in early 2020. While the actual returns and monitored. The combined effect are not disclosed, they are believed to was an increase in occupancy levels be in excess of 3x MoM and over 45 from 84 percent to 92 percent. percent gross internal rate of return. Recruitment and retention, mean- 68% “The social impact on women’s while, can be challenging in the care Percentage of female managers leadership in a Japanese company is sector. As a result of employee com- inspiring,” remarked one judge. The pensation schemes tied to performance, judging panel highlighted the strong training and education programmes, growth numbers achieved across the the development of career path blue- board and praised NSSK’s role in prints for every staff member, and 23% introducing a comprehensive ESG strong communication between facility Increase in staff numbers strategy, particularly around employee managers and head office, the number retention and diversity. ■
32 Private Equity International • October 2020 Analysis
KEYNOTE INTERVIEW
Reassessing carve-outs’ value creation potential
As the pandemic continues to put pressure on corporate balance sheets, private equity firms may do well to look at carve-out opportunities, say PwC Germany’s Friederich von Hurter and Filip Debevc
Given the current Filip Debevc: The market has shifted SPONSOR macroeconomic significantly to focus on these types Q PWC environment and deal climate, of deals, and firms have become more is now a good time for capable of navigating the challeng- managers to embark on carve- thought they were quite complicated es involved. Almost 50 percent of the out transactions? for them to deal with – it was difficult large-cap deals being done involve Friederich von Hurter: Covid-19 to do the due diligence, to manage the carve-outs, according to PwC’s Private aside, we have seen two key dynamics disentanglement from the corporate Equity Trend Report 2020. So far, we see shaping private equity interest in carve- entity in the short term, and to tran- less of this activity among mid-market out transactions over the last few years. sition the carve-out from the culture private equity firms, but there is clear First, private equity as an investor of the corporate seller to the culture of potential for mid-caps to invest in group is seeking an increasing number the investor. But private equity firms carve-outs in the future. of targets because firms have a growing have had to search for new investment amount of money that they need to put opportunities in the deal landscape, What does the pipeline for to work in high quality assets. Second, and as attractive standalone targets Q carve-outs look like, and private equity firms often did not pre- have become rare, firms have begun to where might opportunities lie? viously look at carve-outs because they look more closely at carve-outs. FvH: The impact of the covid-19
October 2020 • Operational Excellence 33 Analysis
How can operational value creation be everything else to understand where the target’s potential Q initiated in carve-out deals on day one? lies. Initiating operational value creation from the beginning FvH: Value creation starts from due diligence and needs to means taking the time upfront to fully understand the impact continue throughout the entire life cycle of the investment, on the new company of its separation from the group, the embedded into the leadership of the new company, including operational and financial effect of disentanglement, and the the private equity investors. Instead of looking at performance efficiencies that will be possible for the standalone business. over, say, the last three years and building on that, the buyer Prospective buyers should be sure to develop their own needs to think about the future and its possibilities. It is almost view of the target and test that with the sell-side as much as a creative process, drawing on experience gained from other possible. They should create an investment story for the stan- businesses to see what strategies can be implemented. dalone operation and be mindful of taking only the elements Buyers who might have taken a so-called ‘pay-and-pray’ that they want in the transaction – we advise our clients to be approach will need to fundamentally rethink their strategy, careful not to let sellers hand over ‘presents’ that they do not with value creation at the heart. That also means due diligence actually want. If these points are kept in mind, value creation must go much deeper, delving into IT, operations, legal and can often far exceed expectations in a carve-out deal.
pandemic on the market is not yet clear, more pressure than others, particularly but our expectation is that carve-outs in central Europe. will become even more popular. Large “As attractive corporates will use this crisis – just like FD: In terms of deal sourcing, it can every other crisis – as an opportunity to standalone targets sometimes be a challenge for mid-mar- focus on their core activities and take ket firms to become listed as a potential a stronger view on portfolio consider- have become rare, investor and be informed about sale pro- ations. This means the big conglomer- cesses for these deals. The information ates will put more assets on the market, firms have begun to about a transaction may also be routed by whether for strategic or performance the sell-side to a specific group of people. reasons. With the pipeline of deals in- look more closely at So, if you are a mid-sized private equity creasing due to corporations’ restruc- player, you have to get past that hurdle turing and cash needs, now is a good carve-outs” and make sure you are listed as a poten- time to acquire undervalued targets tial buyer, and only then will you be invit- with potential via carve-out transac- FRIEDERICH VON HURTER ed to look at the target. tions. There are a number of targets com- FvH: A lot of mid-sized buyout firms ing to market from corporates that are may also lack experience of carve-out being forced to review their portfolios transactions and may be put off by the due to market challenges. This is par- complexity, but they should not be. At ticularly the case in the automotive PwC, we do about 5,000 deals a year and industry, where technological change we are convinced that almost all carve- and consumer behaviour are serving out deals bring more value to an acquirer as additional drivers. We have seen than they thought they would upon first some interesting targets come to mar- look, because there are a lot more value ket there. The second stream is leisure creation opportunities than there are and consumer goods, where we are in standalone deals. Although there are seeing a change in consumer behav- some private equity firms that are reluc- iour as well as rather narrow financing tant to do carve-outs, they are becoming structures behind corporates, which fewer and fewer in number. mean they also are being forced to put assets on the market. Obviously, these What are the barriers to trends vary by region and depend on Qgetting carve-out deals off the strength of individual players, but the ground? these parts of the market are under FD: One of the main challenges that
34 Private Equity International • October 2020 Analysis
private equity investors face with the company, the buyer needs to actively service provisions will have to be rebuilt, carve-out deals is that they will not end identify improvement levers during the so you are taking costs out, but it is im- up operating what they buy, because acquisition process that can be used over portant to understand which costs need what they acquire will not be a fully the following few years. to go back in. We see in most of the cases functional company until it is com- that the cost-in is much lower than the pletely separated from the group. They FvH: From a private equity investment cost out – hence value creation is already do not have the opportunity to look at perspective, this means more effort and happening. a standalone operation or access the thinking needs to be put into the deal to The other issue is transitional service usual data on historical performance. fully understand its implications and po- agreement costs. These are costs that a Instead, they need to do much more tential. Once the buyer has understood buyer must pay to a seller to keep run- to understand the challenges and calcu- this, they have likely identified value cre- ning specific services, such as IT, until a late assumptions based on a future stan- ation potential to put into their business standalone option has been implement- dalone scenario. The buyer, supported case that the seller has not recognised, ed. These costs are typically calculated by industry experts, must be capable of so they have a value creation advantage too high, and the implementation of an developing an operating model which is and an information advantage for nego- improved standalone solution quickly based on a strong understanding of the tiations. reduces them. However, these transition market and which takes into account the costs are especially important because operational and financial implications of How do carve-outs differ the transition period can last for 12-18 the separation. Qfrom standalone deals months, which may be as much as a third We have also observed some key is- when it comes to the transaction of the investment period for a private eq- sues that occur in terms of the financials. process? uity firm. First, the impact on carve-out financials FvH: The transaction process is not as Finally, it is important to be very clear is generally under-estimated, so the straightforward as the usual auction of a about one-off costs. Typically, the seller positive EBITDA impact that usually standalone business. The buyer needs to will need to pay a larger proportion of materialises means there is the poten- maintain a carve-out perspective on the the separation costs until the transac- tial to take a more aggressive approach deal, as well as a seller-minded perspec- tion closes, but the remaining stan- to pricing going into the deal. Second, a tive; that is important in these negotia- dalone build-up costs will be an addi- lot of the time buyers do not have fully tions. tional cost, so a buyer needs to have prepared documentation from the sell- clarity about those and consider them side, meaning the corporate sellers do FD: Understanding the carve-out finan- when negotiating enterprise value and not necessarily help the buyer to form a cials is a vital element of the transaction the investment needed to enable the view on the carve-out. Third, the seller process, and particularly the cost-out el- company to perform. n tends to underestimate the growth po- ement, which refers to the relevant cost Filip Debevc is senior manager, Deals, and tential of the company they are selling. allocations that will not discontinue as Friederich von Hurter is partner, Deals, at PwC In order to understand the full value of a result of the deal. Of course, specific Germany
October 2020 • Operational Excellence 35 EMEA | Operational Excellence Awards 2020
Horizon Capital
Horizon Capital successfully pivoted from a growth to a turnaround investment after a Russian ban on Moldovan wine imports shut down Purcari Wineries’ largest export market
ounded in 1827, Purcari Win- environmental and health and safety eries operates three wineries in best practices. FMoldova and another in Roma- The company has also made an on- nia. When Horizon Capital backed the 15x going investment into the latest wine Moldovan company in 2010 through EBITDA growth technology and has been digitising its 2008 vintage fund, Emerging Eu- processes to enhance its operations. rope Growth Fund II, it believed it was In 2018, with the support of Hori- looking at a typical growth deal. At the creation plan significantly. To mitigate zon’s investment team, Purcari Winer- time of the investment, Horizon Capi- the loss of the Russian market follow- ies became the first Moldovan company tal identified an opportunity to expand ing the 2013 embargo, it developed to go public on the Bucharest Stock Ex- the company’s customer base and draw a new commercial strategy targeting change. The IPO raised approximately on its relationships and expertise in the CEE markets, primarily Romania and 186 million Romanian leu ($50 million; sector to grow sales quickly while im- Poland. To support this, Horizon’s €40 million). As a result of the listing, plementing operational improvements. investment team took a hands-on ap- Horizon sold a 41 percent stake in Pur- However, in 2013, Russia placed an proach to training management in sales cari, realising a 3.2x gross cash-on-cash embargo on Moldovan wine imports, and marketing best practices, as well as return. It remained an active sharehold- shutting down Purcari’s largest mar- streamlining its product portfolio and er with a 23 percent stake, before fully ket overnight and depleting it of over relaunching Purcari’s four main wine exiting in October 2019. It realised a half its accounts receivables. A year brands. Horizon developed a “market- gross 3.3x cash-on-cash multiple on exit. later geopolitical turbulence and eco- ing on a shoestring” strategy, empha- Over the fund’s investment period, nomic shocks in CIS countries such as sising the use of new digital channels Purcari Wineries’ workforce grew from Ukraine, Belarus and Kazakhstan – also and social media. 652 to 1,172 employees and EBITDA significant export markets – caused cur- increased 15-fold. Between 2013 and rency devaluations which compound- Strengthened leadership 2018, the company’s revenues more ed the challenges facing Purcari. The Horizon strengthened the manage- than doubled. Today, Purcari delivers company’s EBITDA dropped to nil, ment team under the CEO by making to more than 40 countries and manages while net debt approached $20 million, key hires including HR director, chief over 1,392 hectares of vineyards. straining its liquidity. operating officer, commercial direc- The judges commended Horizon As a result, what Horizon had en- tor, financial controller and market- for the “excellent turnaround of a busi- visioned as a growth deal became a ing director. It implemented greater ness with continued growth despite a distressed, turnaround deal, and the working capital discipline, more ro- significantly challenging business envi- fund manager had to reshape its value bust procurement processes, as well as ronment”. ■
36 Private Equity International • October 2020 Operational Excellence Awards 2020 | EMEA
Insight Partners
Software security firm Checkmarx expanded its international reach and customer base with the support of Insight’s operational value-add team
heckmarx, an Israel-based analysis, interactive application se- companies in the Fortune 100 and half company specialising in soft- curity testing, and developer AppSec of the Fortune 50. Cware security solutions, se- training and awareness capabilities, to- Checkmarx now has more than cured an $84 million investment from gether with a strong managed services 1,400 customers across 70 markets, Insight Partners in June 2015. Check- organisation. R&D and cost efficien- and its employee headcount has grown marx was founded in 2006, and at cies were also achieved through the to over 600. In 2020, Checkmarx was the time of Insight’s investment, the opening of an R&D centre in Braga, named a leader in the Gartner Mag- business had grown its employee and Portugal, in 2016. ic Quadrant for Application Security customer count to over 150 and 700, Another core pillar of the value cre- Testing for the third year in a row. respectively. ation strategy was inorganic growth; in Hellman & Friedman acquired the Insight took a scale-up approach to 2017 Checkmarx acquired Codebash- cybersecurity business from Insight in accelerate the company’s geographical ing, an application security education March 2020 in an all-cash transaction reach and build on momentum in the company that provides training for de- valued at $1.15 billion. TPG also
1,400 Customers now served
fast-growing cybersecurity market. In velopers. The developer training tool partnered with Hellman & Friedman order to do so, the GP drew on the serves as a complement to the Check- on the acquisition and holds a minority expertise of its more than 50-strong marx Software Security Platform. In- interest in Checkmarx. Insight has operational value-add team Onsite, sight provided M&A expertise and retained a substantial minority interest whose knowhow spanned marketing, execution support pre- and post-acqui- in the company. pricing, M&A, product, sales and strat- sition. The judges were impressed by egy. The team helped Checkmarx cata- The GP also supported the com- the company’s “outstanding perfor- lyse growth by focusing on five pillars. pany’s expansion in international mance”, particularly the strength of Among these was go-to-market accel- markets, contributing to its growth its client base and international expan- eration involving intensified hiring and in North America and Europe. This sion, which they said demonstrated a resourcing in this area, with increased included the appointment of former “well-executed growth strategy”. As investment in sales and marketing serv- Fortify Software chief operating officer one judge remarked: “Insight provid- ing to speed up growth. John True to the Checkmarx board, ed critical international go-to mar- Insight’s product team helped who brought with him extensive op- ket knowhow and support, as well as Checkmarx move from one product to erational experience and knowledge hands-on operational excellence in a full suite including static application of the North American software mar- several areas, enabling Checkmarx to security testing, software composition ket. Today, Checkmarx serves over 40 scale in an impressive manner.” ■
October 2020 • Operational Excellence 37 EMEA | Operational Excellence Awards 2020
KPS Capital Partners
Backed by KPS Capital Partners, Chassis Brakes International diversified its revenue base and extended its international reach
PS Capital Partners created for five consecutive years and built Chassis Brakes International to a robust order book, positioning the Kacquire Robert Bosch’s founda- company for future growth. tion brakes business in 2012. This was In particular, CBI successfully grew based on its track record of investing 6.2x its operations in China. Chinese reve- in global manufacturing businesses, Euro cash-on-cash realisation nue increased by over 66 percent, while including in the automotive industry, simultaneously improving adjusted and of improving their performance, EBITDA margins by around 690 ba- nurturing constructive relationships Furthermore, KPS put together a sis points between 2012 and 2018. In with unions, and saving and creating new management team, helped im- addition, CBI built a new assembly fa- jobs. plement a new enterprise resource cility and engineering centre in North Having acquired a collection of as- planning system, and established a new America where it had previously had no sets that KPS valued at almost €600 organisational structure and corporate presence, taking market share from key million for just €88.6 million, and with culture, focused on maximising profita- competitors and building revenue to Bosch receiving no cash consideration bility and cashflow generation. nearly €100 million in three years. at closing, KPS embarked on a radical Growth was also central to KPS’s in- Under KPS, CBI invested over business transformation. First, it was vestment philosophy. Under the firm’s €234 million in research and develop- faced with a complex global carve-out ownership, CBI expanded and diversi- ment and applied engineering to com- that saw CBI exit all manufacturing fied its revenue base through new busi- mercialise three new industry braking facilities previously shared with Bosch. ness wins that increased market share products and develop the world’s first Netherlands-based CBI opened four with key customers, expanded the com- all-electric brake. new, state-of-the-art manufacturing pany’s customer base and extended its Overall, CBI materially increased facilities in Poland, China, India and reach overseas. Indeed, between 2011 adjusted EBITDA under KPS’s stew- Mexico, and built four R&D and engi- and 2018, CBI increased annual new ardship, from €1 million at acquisition neering centres in Germany, India, the business wins by around €600 million, to €86 million at the end of 2018, with Netherlands and China. experienced record new business wins EBITDA margins rising from 0.1 per- cent to 9.2 percent. KPS sold CBI to Hitachi Automo- tive Systems in 2019 for an enterprise value of €690 million, achieving a total 6.2x euro cash-on-cash realisation (5.6x US dollar cash-on-cash realisation) and a gross US dollar IRR of 30.1 percent. “This is a remarkable case of busi- ness transformation, investing in new products and of growth,” said the judg- es, who scored the deal exceptionally highly for innovation. “There was a complex carve-out resulting in the creation of eight new facilities supporting multifaceted busi- ness improvements.” ■
38 Private Equity International • October 2020 Operational Excellence Awards 2020 | EMEA
Partners Group
With the support of Partners Group, catering services company Vermaat added more than 172 high-footfall food and beverage locations, and entered the German market
stablished in 1978 as a delicatessen store, Vermaat is a leading provid- Eer of premium catering services to corporate, leisure, hospital and travel locations, as well as events. The compa- ny is headquartered in the Netherlands. Global private markets investment manager Partners Group, on behalf of its clients, developed a relationship with the family owners and management, positioning itself as an experienced suc- cession partner with a track record of working with family businesses. Partners Group was attracted to Ver- tenet of the investment philosophy. maat based on the growing and resilient In particular, Vermaat was focused on Western European catering segment “An outstanding using healthy sustainable food while where it operates, driven by an ongo- reducing food waste by collaborating ing outsourcing trend. The company journey of creating the with suppliers to purchase imperfect also had long-term client contracts with ingredients and working with seasonal impressive renewal rates, as well as a leader in sustainable fruit and vegetables to reduce its carbon strong financial track record. premium catering” footprint. Nonetheless, Partners Group had a International expansion was next on clear value creation plan to leverage or- the agenda. Partners Group analysed ganic and inorganic growth opportuni- different avenues from when it first in- ties. The firm set about professionalis- vested in Vermaat to 2018, and created ing what had been a family-run business a platform to enter the German market. while maintaining its entrepreneurial series of accretive acquisitions. Vermaat Vermaat generated annual sales of approach. It institutionalised financial increased its high-footfall locations by €138 million at the time of Partners and operational reporting and controls, more than 172 to around 360. It was Group’s investment in 2015, and this as well as budgeting, strategic planning, also awarded a Michelin star for its RI- rose to more than €300 million last year, training and development. JKS restaurant. when the private equity firm exited. Next, it helped management to invest In order to support this growth, Vermaat was acquired by Bridge- in growth and increased Vermaat’s num- Partners Group added seasoned retail point in 2019. Partners Group remains ber of high-traffic food and beverage lo- experience to Vermaat’s board, along- a minority investor. cations, both organically and through a side its own industry and investment “This story represents an out- professionals. The firm also installed a standing journey of creating the lead- project management office to drive dig- er in sustainable premium catering,” ital strategy, including a KPI dashboard a member of the judging panel com- for location-by-location insights and mented. The judges also noted the 172 management, and like-for-like growth. company displayed strong growth while High-footfall locations added Environmental, social and govern- maintaining margins, and that it had ance considerations were also a central been convincingly focused on ESG. ■
October 2020 • Operational Excellence 39 Analysis Q&A Rodolfo Spielmann, managing director and head of Latin America at CPP Investments, on building long-term value and relationships with family-led firms
What opportunities does as both share multi-generational hori- Q partnering with family- zons, not only six to 10 years. controlled businesses present Since these relationships can last to institutional investors? decades, it is essential to focus on the Family-controlled businesses, es- people you will be partnering with A pecially multi-generational ones, rather than on the individual trans- are recognised as best-in-class oper- action. It is an approach that requires ators, with deep knowledge of their patience and a deep commitment to a business and markets, and long-term long-term philosophy, so invest signif- investment horizons. Institutional in- icant time before making such an in- vestors can benefit from those distinc- vestment. Build the relationship slowly, tive features to create an effective strat- as both sides gain confidence in the egy for deploying long-term assets. other. Over time, a simple investment These businesses have recurring can scale into an entire investment traits, such as strong governance, sta- which can translate into greater fixed platform. Make sure your values align ble shareholders and long-term value investment and higher R&D expendi- with those of your potential partner creation strategies that resonate with tures, even during a crisis, as these firms and take the time to be certain about institutional investors, especially long- tend to pursue long-term strategies. compatibility. Finally, approach these term focused investors like CPP In- These firms are among the top glob- relationships as equal partnerships, un- vestments, creating mutually beneficial al operators, with an appetite for smart like more transactional arrangements. partnerships, where family-controlled risk-taking, a strong business focus and businesses contribute their operation- determination. Since we are not opera- Are there any operational al and market expertise, and investors tors, and don’t aspire to be, we partner Q considerations particular contribute with top-notch governance, with best-in-class operators, providing to investing in Latin America? decades of investment expertise, and a long-term capital and investment ex- Traditionally in Latin America, global business perspective. By creat- pertise, as well as advice and best prac- A cost of capital, including cost of ing these partnerships, investors bene- tices from our global portfolio. debt, was markedly higher than in de- fit from access to the best assets in the veloped markets, which led to more region and can create a scalable invest- What’s the key to building conservative capital allocation strate- ment platform leveraging the partner’s Q collaborative relationships gies and financial engineering. The gap operational excellence while contribut- with family-owned firms? has reduced substantially, but is still far ing their investment expertise. It is important to bring more to from the US and Canada, making these A the table than just money. Be clear strategies imperative. What operational what value you bring to the business, Compliance is a key consideration. Q knowledge is brought such as a shared emphasis on govern- This isn’t exclusive to the region, but to the table when investing ance, investment and industry exper- investors should consider intensified alongside family-run firms? tise, global experience in the relevant due diligence in compliance-related is- Multi-generational family busi- sectors, and long-term commitment. sues, especially for companies involved A nesses build companies and assets Family-led enterprises are more willing in infrastructure, large construction to last, and usually resist short-termism, to do business with long-term investors projects, or public sector contracts. n
40 Private Equity International • October 2020 Analysis
Why misjudged cuts can misfire
Guest comment by Matt Brubaker
To avoid hindering long-term growth, portfolio companies trimming budgets must first rework human capital strategies, says FMG Leading’s CEO
s private equity portfolio com- leadership circles that have an outsized without risking eliminating key sup- panies reassess their strategies impact on the company? What are port roles? How do you prioritise en- Ain today’s shifting landscape, they doing to ensure these people are gagement initiatives without knowing they would be wise to do the same with protected, engaged and empowered to who is most important to engage? their human capital strategies, especial- thrive amid the impact of covid-19 on Because the everyday demands on ly while trimming budgets. Short-term both their professional and personal portfolio company management can gains from a cut in the wrong place lives? make it difficult to achieve and main- could ultimately put them behind the Only by devoting requisite time, en- tain this holistic perspective, it often competition. ergy and resources to answering such falls to operating partners to question Despite a growing awareness of all questions can companies devise a com- how reworked budgets will impact or- things human capital, too few private prehensive human capital strategy that ganisations’ most crucial people, and – equity leaders have fully internalised can support its larger goals in the midst big-picture – whether companies have that human capital initiatives only drive of covid-19. And only then can they reworked their human capital strate- significant returns when they flow from be sure cuts will not lead to long-term gies to guide further decision-making an integrated human capital strategy, pain for their organisations. in the new normal. This can rein in designed to drive big-picture financial short-term thinking that can hinder objectives. And like all strategies, those Human dynamics future growth. focused on human capital must evolve Without understanding companies’ What’s more, it can help unlock as business environments evolve. evolving human dynamics, it is all too organisations’ growth potential, even To illustrate, the pandemic has up- easy for budgetary adjustments to un- amid today’s serious economic down- ended myriad companies, creating dermine the very teams best poised turn. swift and significant changes to the to drive growth. How do you cut staff Every crisis presents an opportu- profitability of respective business units nity for companies to become smarter or areas. By now, most companies have and savvier. Though unprecedented, sought to pivot and lean heavily on the today’s crisis is no exception. But it re- aspects of their business that they be- quires deep thinking about the people lieve will get them through the covid who are best positioned to help the era. company survive and thrive. Together, But have their leaders deeply con- “Every crisis presents operating partners and portfolio com- sidered the people driving these parts pany management must look to harness of their business? Do they understand an opportunity for their full power and potential. n which positions will create the most Matt Brubaker is CEO of FMG Leading and value in this new environment? Have companies to become an expert on organisational assessment and they determined whether the crisis change. A frequent advisor to private equity smarter and savvier” firms, he serves as an operating partner at has changed the company’s “fulcrum Windrose Health Investors and is a board roles”, meaning those outside senior member at JM Search
October 2020 • Operational Excellence 41 Analysis
Cultivating human capital
Talent management, embedded in supportive and inclusive cultures, is a core operational lever that can seed benefits across portfolios and beyond
ovid-19-related chal- personal accountability and ownership lenges, the rise of re- Panel of a positive outcome. mote working and Merche del the growing diversity Valle Séverine de Wulf: Employee satisfac- imperative have high- Managing tion is central to value creation, with director lighted the importance and chief research showing engaged management of effective people management. We talent officer teams deliver superior performance. To C at Grain asked a selection of private equity talent Management realise this potential, it is key to recog- and portfolio management specialists to nise the intrinsic value of engagement share their perspectives on human capi- initiatives goes beyond monetary re- tal as a value creation lever. wards, as management teams need to Elizabeth Wallace feel connected to be fully engaged. This What role does employee Head of is why the PAI Performance Group, portfolio Qreward and engagement talent at Hg PAI’s senior operations team, has pri- play in creating value? oritised building a sense of community Merche del Valle: Engaged and mo- among our portfolio companies; to learn tivated team members are what drives best practice from each of our business- success in our portfolio companies, es and to provide them with access to and our firm as a whole. That is why a global portfolio of cultures and initi- Séverine de we structure our rewards to incentiv- Wulf atives to benefit their entire workforce. ise value creation, and reinforce our Managing director core organisational goals: efficient and in the PAI How have approaches to proactive management of our portfolio Performance Qhuman capital evolved? Group at PAI companies; identifying, developing and Partners MdV: The most important evolution retaining high-quality, diverse talent; has been the emergence of human cap- and establishing a culture of doing the ital as a core operating principle. We right things, for the right reasons, in now place a much stronger emphasis on the right way, at the right time. leadership assessment and development at our portfolio companies, in particular Elizabeth Wallace: In a private “Employee satisfaction with the C-suite executives and board equity context, the reward scheme is advisors we appoint. We are constantly transparent – everyone knows what is central to value seeking leaders – both internally and they are working towards and that externally – who will help our portfolio is the growth of the business and, creation” companies nurture their in-house talent. ultimately, a good result at exit. For
many, this includes sharing financially SÉVERINE DE WULF EW: Human capital management is in the success of that exit and this PAI Partners increasingly seen as a core value crea- creates inclusion towards a common tion lever. The approach has evolved to goal. This can be very powerful for become more proactive in nature. This
42 Private Equity International • October 2020 Analysis
allows for better decision making in the EW: Yes, we do and this is for the better their opinion safely. That is one reason talent acquisition process. Also, we are in our view. The fact that everyone has why earlier this year we joined Diligent seeing a more deliberate approach to experienced remote working first-hand, Corporation’s Director Network, which talent management and development as knowing the upsides and downsides helps post and fill board roles at leading well as thoughtful cross pollination of means that the workplace of the future private equity firms with diverse direc- talent across portfolio companies. has to look different. There is a better tor candidates. From entry level to the education and greater empathy around board room, we know diversity of back- SdW: The investment community’s ap- balancing home and working life given ground and perspective leads to smart, proach to human capital has undergone what has happened. Also, the ability to differentiated investment decisions. a transformation in recent years. There work flexibly and remotely will attract a is an increasing awareness that the broader set of candidates, thus widening EW: Private equity as an industry is on structured, cutting-edge management talent pools and allowing for greater di- a journey in terms of inclusion and di- of human capital can be a key lever of versity in hiring processes. versity. This means that there needs to long-term, sustainable value creation. It be education around these important is also well understood that transitions SdW: It is too early to draw long-term topics. Getting the story right at the GP and succession, for example during a conclusions, but we are encouraged level first, then leading by example for change in ownership, need to be care- by the speed at which management the portfolio companies is a good start. fully managed. The importance of di- teams have reacted, and the flexibility We really should shift the conversation versity as part of the recipe for successful and resilience that our businesses have towards equality rather than inclusion. corporate governance has also pushed demonstrated in response to the crisis. Of course, we know well that there is the market to adopt a more active ap- The first phase of the pandemic re- little point bringing diversity into the proach in managing human capital. quired a focus on people and operations equation if there is a lack of equality. to ensure employee safety, followed by Do you expect the crisis to a phase of “maximum resilience” where SdW: The role of operating partners Qhave a long-term impact on leaders adopted measures to mitigate is to share best practice from decades talent strategies? risk; now we have entered a phase where of cumulative experience with man- MdV: We have learned this year that companies need to bring people back to agement teams, to enable diverse and teams can adapt quickly to new working work and provide stability. inclusive cultures to emerge within our models, and that we do not necessarily portfolio. As it becomes widely under- lose efficiency if we are not physically How can GPs help foster stood that diversity leads to superior re- together. While we hope to bring our Qdiverse and inclusive sults over an investment’s life cycle, GPs teams back together soon, these lessons cultures at portfolio companies? need to fully integrate professional tal- are here to stay. This means we will be MdV: One of our firm’s core competen- ent management into their investment able to consider leveraging talent across cies is ensuring every level of our organ- thesis. Culture plays an important role geographies and portfolio companies isation creates an environment that en- in value creation; PAI’s origins date back in a more flexible manner than before. ables growth, listens and communicates to 1872, allowing us to share with our This will need a strong focus on build- clearly and effectively, and encourages management teams a long and success- ing and maintaining our culture, and a diverse, inclusive, high-performing ful history of creating industry leaders, that is a challenge we look forward to. environment where everyone can voice building on a culture of excellence. n
October 2020 • Operational Excellence 43 Analysis
The secret CEO
A seasoned portfolio company chief executive gives the inside scoop on what makes for an effective private equity-management working relationship
Our anonymous CEO leads a private private equity firm, they can be sup- routines with the private equity com- equity-backed financial services busi- portive to the CEO or very intrusive to pany and other shareholders. ness in Europe and has extensive senior the day-to-day operations of the busi- The other significant benefit is management experience at both public ness. Having worked with both, and as that decision making is usually quick, and private companies. Well-versed in an experienced CEO, I clearly prefer rationales for decisions are very clear working with private equity firms, the the former operating model. and working in a private equity envi- CEO offers their candid take on the Secondly, as CEO of a portfolio ronment is much more dynamic as op- pros and cons of having private equity company it can be difficult to get visi- posed to a large company or corporate owners, including during the pandemic. bility of the issues, fund strategy, invest- structure. ment parameters, etc, at a private equity What was your experience level that may adversely impact on the Is there anything you Q of liaising with private business but may not be obvious. Q wished operating partners equity backers remotely while at private equity firms better running a business during understood about your role? lockdown? “Be assertive in your Depending on the private equity com- We had very supportive private equi- pany culture, there can be little regard ty shareholders who were close to the role as CEO and your for colleagues and customers within business, supportive of management the business, with the view that it is ba- and confident to let management deal vision for the business” sically a financial transaction. with the various scenario plans and changes required. While they were What would be your top concerned about the potential nega- And the benefits? Q tip for a first-time portfolio tive impact on the business, they stood Q As an experienced CEO, align- company CEO? ready to support the business with ad- ment of the operating model with the Be assertive in your role as CEO and ditional funding if required. Fortunate- private equity partners can be liberat- your vision for the business, and re- ly, it was not needed. ing, so that myself and my executive member that private equity partners team have the ability to drive the busi- are not primarily experienced in run- What are the greatest ness on a month-by-month basis with- ning and operating a business. Build Q challenges of working at a out undue interference. However, this a strong relationship with the private private equity-backed firm? requires me to have strong stakeholder equity partners and engage proactively Firstly, depending on the culture of the management and strong governance with them. ■
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