October 2018 privateequityinternational.com
OPERATIONAL EXCELLENCE SPECIAL 2018
This year’s award winners The questions LPs need to ask Preparing for a downturn The rise of operating partners How diversity drives value
...and more
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BOSTON • NEW YORK • TAMPA Beyond the hype how operating partners are becoming an estab- GRAEME KERR EDITOR'S lished presence on the deal team (p. 48). There’s LETTER ISSN 1474–8800 growing recognition that portfolio companies OCTOBER 2018 need a credible back-up plan to guard against a Senior Editor, Private Equity future downturn, as we report on p. 6. Toby Mitchenall, Tel: +44 207 566 5447 [email protected] Diversity is also increasingly seen as a driver
Special Projects Editor of returns. On p. 42, we highlight the seven Graeme Kerr, Tel: +44 203 862 7491 [email protected] steps you need to take to ensure an inclusive
Editor, Private Equity International workplace. Isobel Markham, Tel: +1 646 380 6194 “Everybody talks a good game,” says Joncarlo Our keynote interviews and expert com- [email protected] Mark, who has years of experience listening mentaries shed light on a wide range of Asia Reporter Carmela Mendoza, Tel: +852 2153 3148 to GP claims of operational excellence. Until operational issues. Nordic Capital describes [email protected] 2011 he was senior portfolio manager with its “commercial excellence toolbox” (p. 10), Reporters Rod James, Tel: +44 207 566 5453 the California Public Employees’ Retirement PwC partner Tobias Blaser looks at extracting [email protected] System, responsible for more than $48 billion maximum value from a corporate carve-out Alex Lynn, Tel: +44 207 566 5463 of investments, much of it in private equity. (p. 22) and Blue Ridge Partners’ Jim Corey [email protected] He has watched as the implementation of discusses the inefficiencies holding back sales Contributors Vicky Meek operational partners and value-add has “accel- teams (p. 29). Victoria Robson erated exponentially” over the last 15 years, as Jon Caforio of RSM looks at why two- Managing Editor – Production Mike Simlett, Tel: +44 20 7566 5457 purchase price multiples have increased. thirds of bolt-on acquisitions don’t achieve the [email protected] And he has come to be very wary of GP expected synergies (p. 36) and Phillip McMil- Production and Design Manager Miriam Vysna, Tel: +44 20 7566 5433 claims about their expertise. The onus, he says, lan of CompleteSpectrum considers how the [email protected] is on LPs to differentiate between “what a firm right branding can bolster a buy-and-build Head of Marketing Solutions does, what they say they do, and if they really do strategy (p. 40). There are also expert com- Alistair Robinson Tel: +44 20 7566 5454 execute”, as he tells Isobel Markham on p. 38. mentaries from Efficio (p. 45) on platforms [email protected] All of which makes Mark the perfect judge that can track procurement savings and TBM Subscriptions and Reprints Andre Anderson, +1 646 545 6296 for our Operational Excellence Awards 2018, the Consulting Group on how operational due [email protected] results of which we reveal in this supplement. diligence has risen to the fore as valuations Avinash Mair, +44 207 566 5428 [email protected] Now in their seventh year, the awards are have soared (p. 51). a chance to celebrate the best examples of The sheer variety of the content is testa- Sigi Fung, +852 2153 3140 [email protected] value creation in the private equity industry. ment to just how operational issues have risen For subscription information visit The idea is simple enough. Every June we ask up the private equity agenda. And while GPs www.privateequityinternational.com. GPs to submit their best examples of how they may talk a good game, all the evidence here Director, Digital Product Development Amanda Janis, Tel: +44 207 566 4270 deliver operational value as owners. Returns is that they are putting increased effort into [email protected] are only part of the criteria. The 10 expert improving their expertise. Editorial Director judges also look for true ground-breaking work Philip Borel, Tel: +44 207 566 5434 [email protected] in creating value. Enjoy the supplement Director of Research & Analytics Turn to p. 14 for the list of winners and read Dan Gunner, [email protected] their stories on the following pages. While all Publishing Director Paul McLean, [email protected] GPs may claim operational prowess, it’s heart-
Chief Executive ening to read case studies where private equity Tim McLoughlin, [email protected] has created genuine value. Managing Director — Americas Elsewhere, the Operational Excellence Graeme Kerr Colm Gilmore, [email protected] Special gives PEI the chance to delve into the Managing Director — Asia e: [email protected] Chris Petersen, [email protected] changing face of value creation, and look at october 2018 operational excellence special 2018 1 CONTENTS OPERATIONAL EXCELLENCE SPECIAL 2018 4 Value creation: 5 things we learnt buyers don’t plan the integration 51 Expert commentary: Our Operational Excellence Awards properly, says Jon Caforio of RSM TBM Consulting Group demonstrate the vital role played Maximising operational value is by add-on acquisitions in bolstering 38 ‘Everybody talks a good game…’ essential in this era of high multiples growth … but what are GPs really doing and recession planning, says Gary to drive performance? LPs must Hoover of TBM Consulting Group 6 Overview: In search of a Plan B be prepared to ask some tough The market currently shares many of questions, says Joncarlo Mark, a 54 Private equity’s impending the characteristics seen in the lead-up former senior portfolio manager at disruption to the 2007-08 crisis. But is private CalPERS The operating model for sponsors equity better prepared for a future has held steady for 30 years, but data downturn this time around? 40 Keynote interview: science advances are set to change all CompleteSpectrum that, say Ian Picache and Sajjad Jaffer 10 Keynote interview: Nordic Capital Developing a successful brand can of Two Six Capital Nordic Capital’s Olof Faxander and bolster buy-and-build strategies Peter Thorninger explain how sharing by creating a platform that is 56 The view from the forum a ‘commercial excellence toolbox’ has more attractive to acquisition Key takeaways from Europe’s leading added value across the portfolio targets, says Phillip McMillan of value creators at our Operating CompleteSpectrum Partners Forum in London 22 Keynote interview: PwC With competition for deals intense 42 The value of diversity and purchase price multiples Diversity is now recognised as a reaching all-time highs, PwC partner value creation driver. Here are seven Tobias Blaser explains how to create steps you need to take to ensure an maximum value from corporate inclusive workplace carveouts 45 Expert commentary: Efficio 29 Keynote interview: To record and track procurement Blue Ridge Partners cost reductions, you should invest Sales leaders are too busy trying to in a technology platform capable of hit their revenue targets to focus on monitoring standalone and portfolio cost inefficiencies, says Blue Ridge wide performance, says Declan Partners managing partner Jim Corey Feeney of Efficio 14 Introduction and honour roll 16 Meet the judges 36 Expert commentary: RSM 48 The new player in the deal team 18 Americas More than two-thirds of bolt-on Operating partners are increasingly 25 EMEA acquisitions don’t achieve the involved before a transaction closes 32 Asia-Pacific expected synergies, largely because
NEW YORK Private Equity International is published © PEI 2018 be aware that external contributors 130 West 42nd Street, Suite 450 10 times a year by PEI. may represent firms that may have New York, NY 10036 No statement in this magazine is to an interest in companies and/or +1 212 633 1919 To find out more about PEI please visit: be construed as a recommendation their securities mentioned in their Fax: +1 212 633 2904 www.thisisPEI.com to buy or sell securities. Neither this contributions herein. publication nor any part of it may LONDON PRINTED BY: Stephens & George Ltd. be reproduced or transmitted in any Cancellation policy: you can 100 Wood Street www.stephensandgeorge.co.uk form or by any means, electronic or cancel your subscription at any London EC2V 7AN mechanical, including photocopying, time during the first three months +44 20 7566 5444 recording, or by any information of subscribing and you will receive Fax: +44 20 7566 5455 storage or retrieval system, without a refund of 70 percent of the total HONG KONG the prior permission of the publisher. annual subscription fee. Thereafter, no 19F On Hing Building Whilst every effort has been made to refund is available. Any cancellation 1 On Hing Terrace ensure its accuracy, the publisher and request needs to be sent in writing Central, Hong Kong contributors accept no responsibility [fax, mail or email] to the subscriptions +852 2153 3240 for the accuracy of the content in departments in either our London or Fax: +852 2110 0372 this magazine. Readers should also New York offices.
2 private equity international october 2018
OVERVIEW
OPERATIONAL EXCELLENCE AWARDS Value creation: 5 things we learnt Our Operational Excellence Awards demonstrate the vital role played by add-on acquisitions in bolstering growth, writes Graeme Kerr
Now in their seventh year, our annual Operational Excellence Awards showcase the best examples of general partners transforming portfolio companies. Here are the key strategic takeaways from this year’s honour roll. Turn to page 14 for the full list of winners.
ADD-ONS ADD VALUE 1Bolt-on acquisitions are probably the single most favoured strategy by our Opera- tional Excellence Awards winners, with Nordic Capital alone completing 13 add- ons for its investment in payments business Bambora, winner of the EMEA large-cap category. “A truly exceptional case,” said sports betting market. Meanwhile, KKR’s experience in that particular portfolio judge Katja Salovaara, a senior portfolio white goods manufacturer Qingdao Haier company sector. L Catterton attributes at manager at Ilmarinen. Other GPs to suc- pulled off one of the largest-ever transac- least part of the spectacular growth of Ains- cessfully pursue a buy-and-build approach tions by a Chinese company when it bought worth Pet Nutrition to its prior success in for their winning entries included Partners Kentucky-based GE Appliances from parent the pet food category. Meanwhile Cerberus Group which completed more than three company General Electric in a (successful) Capital Management leveraged it’s “expe- bolt-ons of more than $100 million for its bid to bolster its US presence. rience with global automotive businesses, Hong Kong-headquartered apparel label highly complex corporate carve-outs and manufacturer Trimco International. DON’T SCRIMP ON AD SPEND operational turnarounds” for its impressive 3When L Catterton created a stra- restructuring of troubled auto interiors EMBRACE NEW FRONTIERS tegic plan for upmarket pet food brand business Reydel Automotive, according to 2Operational Excellence Awards judge Ainsworth Pet Nutrition, the main focus senior managing director Dev Kapadia. Joncarlo Mark says a more international was a nearly tenfold increase in consumer outlook – what he describes as “geographic advertising spend. The strategy paid off QUALITY COUNTS value creation” – is one of the new fron- spectacularly. The first TV ad garnered a 5Unsurprisingly, perhaps, product tiers for operating partners, with even mid string of awards, and, within two years, its quality was a focus for many of the award market firms “much more global” than main Nutrish brand was the fastest grow- winners. Carlyle Group transformed Span- they used to be. That’s borne out among ing consumer packaged goods brand in the ish data centre operator Telvent by focus- this year’s winners where there were some US, according to Nielson, with L Catterton ing relentlessly on “high-end connectivity noteworthy examples of international securing a gross cash-on-cash return of 8x driven customers” and Brookfield Asset growth – especially in the US – boosting on exit. Management says a focus on product qual- the bottom line. ity was at least partly responsible for what EQT Partners formed a dedicated US STICK TO WHAT YOU KNOW the judge Steve Kaplan termed “a stun- advisory board for its sports data firm 4Among the winners, it was nota- ning improvement” at electrode producer Sportradar to target the opening of the US ble how many of the GPs had previous GrafTech International. n
4 private equity international october 2018
A LEADER IN Private Equity Investing
We are a global alternative asset manager with a 115-year history of investing in real assets. Our private equity business invests in real asset-related businesses in the Services, Industrials and Energy sectors. We are value investors, using an operations-oriented approach that leverages our deep experience as owner-operators to position portfolio companies for long-term success.
We are pleased to receive the 2018 PEI Operational Excellence Large Cap Deal of the Year Americas award. OVERVIEW
CRISIS MANAGEMENT In search of a Plan B The market currently shares many of the characteristics seen in the lead-up to the 2007-08 crisis. But is private equity better prepared for a future downturn this time around, ask Vicky Meek and Graeme Kerr
Few would argue that we are, right now, in a 2018, considerably higher than the 11.6x Ewa Bielecka Rigby, head of value enhance- hot M&A and private equity market. Fuelled for the overall private company universe ment at LDC. “In a year or two, we will see by liquidity in the private equity world (dry and higher even than FTSE All-Share valu- the next wave of restructuring. The money powder stood at over $1 trillion at Preqin’s ations of 12.9x, according to BDO’s PCPI. you can borrow on the market is extremely last count) the ready availability of debt cheap and that can hide a lot of problems.” and a corporate appetite for acquisitions, FUTURE SHOCK? Indeed, there is a growing feeling the worldwide M&A increased by 5 percent by With the re-emergence of all-equity under- music will have to stop – it’s just a ques- number in Q1 2018 over the same period written deals in some instances (with a plan tion of when. “Capital structures are as rich in 2017, with numbers forecast to increase to raise debt following the deal), plus a hefty as they could be for debt,” says Amanda by 8 percent in the second half of the year, dose of cov-lite (86 percent of new institu- Good, partner at HgCapital. “We’re not according to Intralinks Deal Flow Predictor. tional loans issued in Europe in H1 2018 yet seeing any signs of contraction in the This is having an inevitable effect were cov-lite, up from just over 8 percent financial world and that is driving incredibly on M&A valuations – in 2017, average in 2007, according to LCD, S&P Global high valuations – there’s still a lot of flex in M&A EBITDA multiples hit their highest Market Intelligence), it’s not surprising capital structures. But these will inevitably recorded levels, at 10x in North America that many private equity houses and their change at some point. We’re at all-time high and 7x in Europe, PitchBook figures sug- advisors are considering the future with levels of debt and that’s not sustainable.” gest. And what’s striking is that, in a reversal some degree of trepidation, given the pain of historic norms, private equity is often many suffered in the aftermath of the global LESSON LEARNED paying more for deals than strategics. In the financial crisis. Yet while there is a sense of inevitability UK, for example, private equity deals were “There is a mismatch between the qual- about a future turning of the cycle, there struck at an average 13.5x EBITDA in Q2 ity of assets and the price currently,” says is also a degree of confidence that private equity could weather a turning of the eco- nomic cycle reasonably well. “Today’s capital structures are very similar to what we saw in 2008,” says Jim Corey, managing partner at Blue Ridge Partners. “Yet the financial crisis is still very much in peoples’ minds. There are bubbles rising in various parts of the market, but one of the key lessons from last time around is the importance We’re at of moving quickly. Private equity is better all-time prepared to react promptly to a change in conditions – firms know they need to take high levels costs out of the business and make deep of debt and that’s cuts.” not sustainable Many point to structural changes in the make-up of today’s firms versus 10 years Amanda Good ago. “Private equity has done a lot of work around operational improvement in ››
6 private equity international october 2018 DEVELOPING COMPANIES ACROSS THE GLOBE
A LEADING INVESTMENT FIRM www.eqtpartners.com OVERVIEW
There is no ›› the years since the crisis – they have They are also looking at which sectors or deal team or hired people in-house to drive operational niches are likely to weather any future down- change,” says Mike Mills, partner, KPMG. turn better than others. “You can’t create a investment “That means there is a lot of focus even at company that’s recession-proof,” adds Good. committee discussion pre-deal stage today about how operational “You have to look at industries that are more that doesn’t include change can drive value, 100-day plans have recession-resilient. For us, that’s areas such as evolved into value creation plans and firms technology that provides critical workflow an analysis of what a now look at a three-year horizon.” services businesses – you can’t turn off the downside or recession This greater pre-deal preparation is also back office in patient healthcare records, case would look like behind the increased use of advisors to test for example. You have to know what kind downside scenarios. “We are involved more of industries you, as a firm, are going to be Fredrik Henzler and more in recession-proof due diligence,” more comfortable with if a downturn hits.” says Mills. “Firms are looking at cashflow and how they can squeeze out additional work- CAUTIOUS APPROACH ing capital. They are much more focused on With the right operating partners on board, these areas than 10 years ago.” private equity firms should be in a better WORRYING SIGNS? position to manage portfolio companies in a WHAT IF? crisis. “One of the big lessons we learned was This external work complements and helps that it’s not enough to buy a company and 10x inform internal conversations around the then just let the management team run with M&A EBITDA multiple in effect of a recession on a company well it,” says Bielecka Rigby. “That only works in North America in 2017 – an all-time high before deals are completed. “There is no one in 10 instances. We have to apply our deal team or investment committee dis- own skills and experience to help manage- cussion that doesn’t include an analysis of ment teams to deliver better results. Oper- what a downside or recession case would ating partners, which have become a much look like,” says Fredrik Henzler, partner at more common feature of in-house teams, Partners Group. “We take the development bring a lot to the table, from increased focus 13.5x of the industry and its competitors as a and monitoring and changing targets when EBITDA multiple for UK PE deals in Q2 2018 proxy for examining what effect a V-shaped conditions shift through to being at the top or U-shaped recession would have or what of the game all the time.” a drop in EBITDA or cashflow would do.” Whether these changes in the make-up Firms are also creating plans for dif- and priorities among private equity firms ferent scenarios – in fact, as Good says, mean the industry’s portfolio weathers the this was one of the main lessons her firm next downturn better remains to be seen. 8% learned from the crisis. “From an opera- As Mills says: “I don’t know whether Of new institutional loans tional perspective, you can’t always expect private equity businesses will be recession- issued in Europe in 2007 were cov-lite that Plan A will happen,” she says. “This is proof in the event of another crisis.” especially so when looking at organic rev- Yet it’s clear what happened 10 years enue growth. You have to question whether ago is still imprinted on many executives’ the budgets will be there the following year. minds. And perhaps one sign of a more cau- Will companies spend more with you next tious approach at a time of high valuations year if their budgets get cut? You have to is that many firms we speak to not only 86% devise a case for if there might not be as acknowledge the fact that prices will have Of European institutional loans were cov-lite in H1 much money to spend on your products to reduce at some point, but are also making 2018 or services. You have to have a Plan B that the assumption in many investments now might be very different from your original that their exit multiples will be lower than Source: PitchBook, LCD S&P Global investment case.” those at entry. n
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KEYNOTE INTERVIEW: NORDIC CAPITAL
BEST PRACTICE The eight levers that generate growth
Nordic Capital’s Olof Faxander and Peter Thorninger explain how sharing a ‘commercial excellence toolbox’ ADDING VALUE has added value across the portfolio After five-years helping to steer Danish logistics company Unifeeder Group on a Driving operational change at a portfolio and knowledge [at your disposal]. Many growth journey, in early August, Nordic company requires laser focus. A manager of Nordic Capital’s investments are in Capital exited its investment. The firm sold needs to show sharp discernment in asset much smaller companies which may lack the business, which transports containers selection, deep sector expertise, heavy- resources, expertise and knowledge about, from large liners at the final leg of their duty operational skills and be proactively for instance, commercial excellence. We distribution and offers short sea services, to engaged, as well as pursue the value creation can support them and share best prac- Dubai-based terminal operator DP World plan without relying on external market tice consistently across the portfolio to for €660 million. By then the company had circumstances. help them get things done faster in their completed two add-ons, of United Feeder As managers strive to transform business organisations. Services in 2013 and Tschudi Logistics’ operations, implementing commercial best short sea services in 2015, and employed practice, a critical lever in driving top-line You mentioned commercial excel- around 400 staff in 25 countries. Nordic growth, is central to creating value across lence. Why is that important? Capital’s operations director Peter Thorn- the entire portfolio, say Nordic Capital Peter Thorninger: If you look at value crea- inger (pictured right) explains the strategy. operating partner Olof Faxander and tion across our portfolio companies, half of operations director Peter Thorninger. that uplift comes from top-line growth. To Talk us through the commercial communicate to management teams what improvements at Unifeeder. Some people still question the role best practice looks like, we developed a Two years ago, the CEO told me he that of operating partners. What would ‘commercial excellence toolbox’ of eight he felt the business was being pushed on you say to them? levers. First is a go-to-market strategy. You price. He wanted the sales team to be more Olof Faxander: If you don’t have strong need to access customers in the right mar- confident. In December 2016 we hosted engagement in operations then you are kets with the right channels and the right a workshop to help them articulate the missing the opportunity to leverage your approach. One of our portfolio companies, value proposition. Step-by-step we talked strength as a large, experienced firm and Vizrt, designs digital graphics for the broad- through six areas, including frequency apply it across your whole portfolio. I was casting industry. They want to break into of service and flexibility on weight. We the chief executive officer at two large- new areas. They can’t go directly to all of realised there were several areas where cap companies for 10 years. In organisa- their customers – there are thousands of the business offered better value [than tions that size you have a lot of resources them – so they need to change their go- its competitors] and Unifeeder should to-market approach and increasingly work communicate that even more clearly. For with a channel-partner. instance, if the standard container weight It is 10 times Another element is market mapping and is 14 tonnes and Unifeeder often transport the product offering. Bambora is a prime heavy containers (above 14 tonnes), they more costly example of understanding where to sell the provide better value and should charge to win a new product (market mapping) and a relevant for it. If a customer sends a container only customer than to keep product offering (payments solution) to mer- one-way, Unifeeder needs to handle the an existing one chants including a smooth onboarding. To empties and should as a minimum com- sell the offer, each company needs to equip municate the value we create and ideally Peter Thorninger its sales team with good tools to explain the
10 private equity international october 2018 KEYNOTE INTERVIEW:KEYNOTE INTERVIEW: NORDIC CAPITAL J-STAR
value proposition. That was key at logistics ADDING VALUE company Unifeeder. On sales excellence, it’s classic stuff about training your sales charge for that too. of their time talking people to push your message and develop- We drew up new stand- to local teams on the ing a sales pipeline. Then, once you have won ard terms to reflect where harbours that book the a customer you have to make sure they are Unifeeder was as a company. cargo, they started to satisfied. It is 10 times more costly to win We explained that to our cus- contact its client’s head- a new customer than to keep an existing tomers, the shipping lines, which quarters. That’s the level at one. Another example of sales excellence accepted them. If they didn’t meet which to talk about how Uni- is Handicare, a healthcare company offer- the new terms Unifeeder would charge feeder is adding value. ing mobility solutions for the disabled and a little premium. The business started to elderly, where we ran a full sales excellence talk more about being more frequent or How receptive was management? project supporting the company prior to its flexible on weight and one-way traffic. From a small push at the beginning, flotation on the stock exchange. Suddenly the customers recognised the Unifeeder started to get that pull from Pricing is not usually high on the [manage- value. This supported a volume growth the organisation. Now they are in the final ment’s] agenda, but you need to charge for the to Unifeeder. The second thing we did rounds of hiring a commercial director value you create. Then you create account- with the commercial team was to address who will drive commercial initiatives for- ability through reporting and processes so key accounts. Instead of spending most ward as we step out. that everyone understands what is expected. The last tool in the box is people and perfor-
Return journey: Unifeeder mance. Without good people, talent develop- sold for €660 million ment and performance processes, your com- mercial organisation can’t improve.
Of these eight elements, which is most important to grow the top line? PT: It varies vastly across our portfolio. We have used all of them for all our investee com- panies. A payments company like Trustly has a good sales excellence set-up and reporting, but they are working on their go-to-market strategy and how to attack new verticals. If you try to push an old direct sales model in a new market you can invest a lot of resources and not really move the needle.
What results have you seen? PT: Focusing on sales excellence alone we’ve seen top line uplift of 10-15 percent. At Virzt we have worked exten- sively on the product strategy, defining what we’re selling and the value proposition. ››
october 2018 operational excellence special 2018 11
KEYNOTE INTERVIEW: NORDIC CAPITAL
›› In some countries where Virzt has a SUPPORTING TRANSFORMATION presence, we’ve seen a revenue uplift of 10 percent plus over the last year. There is as much focus pre-deal as post-deal on ownership excellence, says operating partner Olof Faxander What challenges arise instigating change in a commercial organisation? Nordic Capital highlights ‘ownership excellence’. What do PT: We use a framework to assess the matu- you mean by that? rity of an organisation across these eight Within Nordic Capital, we’ve made a significant invest- elements. Inside a single commercial team ment into this function with the purpose of helping these can differ vastly. Where you see differ- support management drive value creation. We’ve added ent maturity levels you always go for the one resources – there are six of us on the operations team where you can have the most impact. That’s a now and we also have industrial advisors and further dialogue you have with management. Man- specialist consultants’ resources– we’ve worked a lot with agement is typically very open to receiving processes, and now we have a very extensive engagement with support for their product strategy, develop- our portfolio companies. We believe this increased focus has contributed very posi- ing new sales tools, improving sales excel- tively to the financial performance of the portfolio. lence, and making sure they have the right reporting. On pricing, less so. We continue to What is your goal as a GP? push on pricing. Price is always more sensi- We are there to help the management team succeed and achieve their target. Nordic tive – it is very close to a sales person’s heart. Capital is very good at delivering the money multiple. In today’s world investors are But there is a lot of value there. increasingly measuring the speed at which we are generating that return, and we have therefore set the aim at achieving similarly good money multiples as in the past, How involved does an operations but accelerated by 12 months. team need to be? PT: You don’t go in and magic occurs. You What is your role? need to be there to offer support and I head the operations team and chair the Portfolio Development Board, which fol- ensure structures stick. If you implement lows the deal teams and the portfolio companies throughout the fund’s ownership. a dashboard for your CRM you need to We have a continuous set of reviews and meetings with the company. The frequency ensure sales reps are trained and under- depends on where we need to focus the most energy. stand the value of transparency in their In the due diligence phase, our four operations directors and strategic HR sales pipeline; that it’s for their benefit. professional are selectively involved where they can add value. There is as much They can show what they are doing and work pre-deal as post-deal to evaluate the strength of the management team. can ask their manager for support where However, they spend 80 percent of their time or more on the existing portfolio necessary. Success doesn’t happen over- and post-deal support. We also bring in industrial advisors, some we call operating night. It might take three, four or five chairman, which we work closely with and they can be chairmen/sit on several iterations to get it right. portfolio company boards. It’s important you create pull, that you plant the idea with management so they How important are people to the success of the value creation plan? want to do it themselves. We work indi- We are continuously building our network of advisors. We support the deal team to vidually with companies and then every six appoint the board and company CEOs build their management teams. Typically, when months we host a sales network event for a private equity firm buys a company its ambition level increases and that needs to portfolio company sales leaders. We share be reflected in the management team. The alignment between Nordic Capital – as our own experience and try to inspire owners – and management is very important. them. But it’s also important that we come with a bit of a push. n
12 private equity international october 2018 Welcome to Private Equity International’s seventh Operational Excellence Awards — our annual celebration of the industry’s best value-creation stories of the last year OPEX AWARDS 2018
The best value creators
Just how successful is the private equity industry at creating AMERICAS lasting value? It’s a question that reaches to the heart of our annual Operational Excellence Awards, celebrating the GPs Large-cap that have done most to transform their portfolio companies. Brookfield Asset Management – Every June, we ask managers to submit their best examples GrafTech International of how they deliver operational value as owners. To be eligible for this year’s awards, an investment had to be either fully or Upper mid-market partially realised after 1 June, 2017. Entries are invited from L Catterton – three regions — Americas, Asia-Pacific and Europe, Middle Ainsworth Pet Nutrition East and Africa. We then divided them into three categories, according to the deal’s entry price — large-cap (greater than Lower mid-market/Small-cap $500 million), upper mid-market ($150 million-$500 million) The Riverside Company – and lower mid-market/small-cap (less than $150 million). Tate’s Bake Shop The entries then go before a judging panel comprising some of the leading scholars and operational experts in the Editors’ Award private equity industry. Competition is tough, with record Apax Partners – GlobalLogic entry levels in many of the categories. Returns form only part of the criteria. GPs are also expected EMEA to provide specific details of the changes and the initiatives they had undertaken, from product development and acquisi- Large-cap tion activity through to supply chain improvement and man- Nordic Capital – Bambora agement enhancement. And not just details but tangible evidence of how these Upper mid-market Cerberus Capital Management – initiatives created value. Impressive exit numbers were clearly Reydel Automotive a plus, but the main thing our judges were looking for was some genuinely ground-breaking work. Lower mid-market/Small-cap This year’s winners were a typically diverse bunch, includ- The Carlyle Group – Itconic ing everything from a premium pet food manufacturer to a struggling Spanish data centre operator. Editors’ Award In recognition that operational excellence can take many EQT Partners – Sportradar shapes and forms, this year we also introduced an editors’ award for each region to reward those entries that shone in ASIA-PACIFIC one particular area of management expertise. The inaugural winners were LeapFrog Investments for the healthcare impact Large-cap from Mumbai-headquartered Mahindra Insurance Brokers; KKR – Qingdao Haier EQT Partners for its “carefully crafted” M&A programme for sports data collector Sportradar; and Apax Partners for its Upper mid-market impressive growth strategy for US tech company GlobalLogic. Partners Group – The multiples achieved by the winners and the range of Trimco International growth strategies employed are testament to the impressive operational expertise the private equity industry has devel- Lower mid-market/Small-cap oped over the last three decades. Mekong Capital – Traphaco Congratulations to all the winners and a sincere thanks to all the GPs who entered in what the judges said was probably Editors’ Award the toughest ever for entries. LeapFrog Investments – Mahindra Insurance Brokers
14 private equity international october 2018 We create value in private equity by combining strategic vision with industry expertise.
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Private Equity | Private Real Estate | Private Infrastructure | Private Debt www.partnersgroup.com OPEX AWARDS 2018 Meet the judges An influential panel of industry experts from across the three regions assessed the relative merits of the submissions
Americas
STEVEN KAPLAN MICHAEL McKENNA JONCARLO MARK University of Chicago Booth Alvarez & Marsal Upwelling Capital Group
Steven Neil Kaplan is Michael McKenna is Joncarlo Mark is the the Neubauer Family a managing director founder of Upwelling Distinguished Service of Alvarez & Marsal’s Capital Group, a reg- Professor of Entrepre- Private Equity Perfor- istered advisor that neurship and Finance mance Improvement provides advisory at the University of group. He works with and capital solutions Chicago’s Booth private equity inves- to institutional inves- School of Business. tors across the trans- tors. Prior to forming His research focuses action lifecycle to Upwelling in 2011, on private equity, venture capital, entrepre- identify and execute transactions, acceler- he was a senior portfolio manager at the neurial finance, corporate governance and ate portfolio company performance and California Public Employees’ Retirement corporate finance. He is co-creator of the provide a smooth investment exit. His pri- System, where he was responsible for Kaplan-Schoar PME (Public Market Equiva- mary area of focus is finance operations, investing in global private equity partner- lent) private equity benchmarking approach. driving improvements in working capital ships and direct investments, with a portfo- Fortune called him “probably the foremost management, accounting and treasury lio that exceeded $48 billion of exposure. In private equity scholar in the galaxy”. He co- operations, and reporting and analytics. addition, from 2007 to 2010, Mark served as founded the entrepreneurship programme chairman of the board for the Institutional at Booth, helping start its New Venture Chal- Limited Partners Association. lenge competition, which has created over $10 billion in value from companies like GrubHub and Braintree/Venmo.
Asia-Pacific
VERONIQUE LAFON-VINAIS LIAN HOON LIM IVO NAUMANN Hong Kong University of AlixPartners McKinsey & Company Science and Technology Lian Hoon Lim is a Ivo Naumann is a Veronique Lafon- managing director partner with McK- Vinais is associate with AlixPartners. He insey & Company professor of busi- has more than 25 where he leads the ness education in the years of experience Private Equity and School of Business & in all aspects of oper- Institutional Investor Management of The ations improvement, practice as well as Hong Kong University including sales and the RTS service line, a of Science and Tech- distribution, manu- special unit that deliv- nology, where she is facturing, procurement, product develop- ers a proven approach for transformational the executive director (career development ment, overall supply chain management change, for Greater China. Naumann has and corporate outreach), associate director and transportation operations. He has more than 20 years of experience in sup- of both the undergraduate and World Bach- consulted to the automotive, electronics, porting shareholders and management to elor in Business programmes, and a project consumer goods and chemicals industries restructure and improve performance of director of the MSc in Global Finance pro- and held management positions in elec- underperforming businesses in Asia. He gramme. Lafon-Vinais is a seasoned financial tronics, shipping and logistics industries in has acted in multiple management roles market professional with over 20 years of South-East Asia and Greater China. and served on various boards of directors banking and capital markets experience. in China, Japan and South-East Asia.
16 private equity international october 2018 OPEX AWARDS 2018
EMEA
MILES GRAHAM LUDOVIC PHALIPPOU Metro AG University of Oxford Each year the entries Miles Graham is Ludovic Phalippou is an operating part- a Professor of Finan- continue ner at Metro AG, a cial Economics at the €37 billion revenue, Saïd Business School, to get better Frankfurt-listed food University of Oxford. wholesale business He specialises in Michael McKenna that has adopted a private equity funds private equity-style and focuses on issues operating model. such as risk manage- He has been in private equity for 20 years, ment, liquidity and measurement of returns. serving as president of 3i portfolio com- Phalippou’s research in this area has been pany John Hardy, which he restructured published in leading academic and prac- and sold to L Catterton, and was director titioner journals. and head of active partnerships at 3i Group, where he oversaw improvements across a $6 billion portfolio of 100 companies. He spent five years in McKinsey & Company’s private equity practice, and is a non-exec- utive director of Age Checked Ltd and the Operating Partners Group.
KATJA SALOVAARA ANTOON SCHNEIDER Ilmarinen Boston Consulting Group
Katja Salovaara has Antoon Schneider been a senior PE is a senior partner at portfolio manager at The Boston Consult- Ilmarinen since Janu- ing Group and leads ary 2000. Ilmarinen the Principal Inves- is a mutual pension tors & Private Equity insurer based in Hel- practice in London. sinki, managing €47 He has advised billion. Currently 6 leading principal percent of the assets are invested in pri- investors and more than half of the 50 vate equity. Before joining Ilmarinen, she largest private equity firms globally on a worked at the Shell UK Pension Fund in range of deal sourcing, due diligence and London analysing private equity funds and firm strategy projects. He has also worked monitoring a global private equity portfolio extensively with their portfolio companies with over $1 billion of commitments. Prior on 100-day value creation planning and to that, she was an investment analyst in the operational improvement projects, and European team at private equity specialists has deep experience in corporate strat- Pantheon Ventures. egy and M&A. october 2018 operational excellence special 2018 17 AMERICAS
WINNER – LARGE-CAP Brookfield Asset Management: GrafTech International
When Brookfield Asset Management in a strong position to execute its agreed to invest in GrafTech Interna- operational repositioning plan, tional in August 2015, the company which resulted in more than $100 was generating roughly $45 million million in annual cost savings. of EBITDA and revenue of around These included shifting produc- $530 million. By the time the com- tion from six electrode facilities pany listed on the New York Stock to three – while increasing annual Exchange in April, its estimated production per active facility from full-year EBITDA for 2018 was 34,000 metric tons in 2015 to more than $1.2 billion – a “stunning 67,000 this year; increasing focus improvement” in the words of judge on product quality, reducing volume Steven Kaplan – and its revenue was of dissatisfied customer reports up to around $1.8 billion. by 40 percent between 2015 and In 2015, GrafTech – a producer 2017; implementing continuous of graphite electrodes, a key com- performance improvement and cost ponent in steel manufacturing – reduction across plants to maximise was struggling. In the first quarter profitability; and halving headcount it reported a net loss of $56 mil- and optimising the manufacturing lion, driven by declining demand process at Seadrift Coke, the com- GrafTech: long-term average electrode price. for graphite electrodes, lower end- pany’s key raw material supplier. a ‘stunning GrafTech completed a debt improvement’ market demand in certain steel-con- In 2010 GrafTech had acquired recapitalisation and then listed on suming sectors and continued high Seadrift Coke, a supplier of petro- the New York Stock Exchange on Chinese steel exports. During due leum needle coke, the primary raw 23 April, with Brookfield selling 35 diligence, Brookfield identified spe- material for graphite electrode man- million shares of common stock at cific production improvements and ufacturing. This vertical integration $15 per share. Brookfield further strategic positioning opportunities put GrafTech in a unique position as $45m sold down its stake in August, but to boost profitability. the only electrode producer able to EBITDA on entry remains a significant shareholder. Upon completion of the acqui- provide customers fixed pricing and “We are pleased with the turna- sition, Brookfield seconded senior surety of long-term electrode supply. round of GrafTech and believe there operating executive Jeff Dutton into This allowed Brookfield to suc- is an outstanding future ahead for the business, first as chief operat- cessfully implement a new commer- the company,” says Cyrus Madon, ing officer and ultimately as interim cial strategy to sell 60-65 percent $1.2bn senior managing partner and head CEO. Dutton helped to reposition of GrafTech’s production capacity Annualised of Brookfield’s PE group. EBITDA for 2018 the business through selling off non- through three- to five-year fixed- The $855 million investment has core assets that were distracting volume, fixed-price take-or-pay con- returned approximately 9x based on from the company’s core focus on tracts – the first time this approach GrafTech’s current stock price. its electrodes business. had been used in this industry. “The Brookfield transformation By 2017 when the market began As part of that, GrafTech con- $100m of GrafTech epitomises operational to recover, GrafTech had established tracted more than $6 billion of Annual cost transformation,” judge Michael itself as an industry leader and was revenue at more than twice the savings McKenna says. n
18 private equity international october 2018 AMERICAS
WINNER – UPPER MID-MARKET L Catterton: Ainsworth Pet Nutrition
When L Catterton invested in Lang family and the management L Catterton initially streamlined fifth-generation family-owned pet team to create a strategic plan to operations, selling off a plant in food manufacturer Ainsworth Pet build the Nutrish brand, increas- Dumas, Arkansas, focusing energies Nutrition in May 2014, its pre- >10x ing consumer advertising spend by on its original plant in Meadville, mium Nutrish brand accounted for Organic EBITDA nearly tenfold. Pennsylvania. During the invest- roughly 30 percent of the company’s growth “We had a strategy that we would ment the firm invested more than total sales. But the deal team saw a turbo-charge the Nutrish brand and $40 million into the plant, growing big opportunity in the brand’s value advertise it aggressively,” Dahnke its manufacturing capacity by more proposition. says. “We worked with them to write than 70 percent as well as reducing “Based on our prior success in the first TV ad, which won a lot of the cost of manufacturing per ton the pet food category, we identified 8x awards.” by almost 50 percent, enabling the Gross cash- an opportunity to bring pet store on-cash return By the time of exit, Nutrish company to double its gross margins. quality pet food to the supermar- for L Catterton accounted for more than 80 percent Ainsworth added a new VP of ket, and were proactively targeting of total revenue. sales and tripled the size of its sales- companies that were positioned to force, more than tripling Nutrish’s deploy that strategy,” Scott Dahnke, national distribution points and global co-chief executive of L Cat- building a new e-commerce plat- terton, tells Private Equity Interna- form. It also launched two Nutrish tional. “We saw Nutrish as a brand sub-brands. uniquely positioned to capitalise on In June 2017 Ainsworth acquired that strategy.” Triple T Foods, its largest co-manu- It was a big leap of faith to make facturer. This strengthened the com- an all-equity investment, the major- pany’s control over its supply chain, ity of which was put straight onto adding a Kansas facility to support the balance sheet as primary capital, continued manufacturing growth. into a business with EBITDA of just “In 2016, as measured by Nielson, over $10 million, but it was a risk the Nutrish brand was the fastest that paid off. growing consumer packaged goods When L Catterton sold the com- brand, not just in the pet category pany to JM Smucker Company four but in all measured categories,” years later, it had grown EBITDA Dahnke says. organically by a factor of more than In late 2017 the firm retained 10x. Goldman Sachs as an advisor to “[Ainsworth is an] excellent sum- explore both a strategic sale and a mary of value-add – a complete public listing. The business was sold transformation of an OK business to JM Smucker Company for $1.9 into a market leader,” says judge Jon- billion, delivering a gross cash-on- carlo Mark. cash return of roughly 8x to inves- So, how did they do it? L Cat- tors in L Catterton’s $1.68 billion terton partnered with the founding Ainsworth Pet Nutrition: a big leap of faith seventh buyout fund. n october 2018 operational excellence special 2018 19 AMERICAS
WINNER – LOWER MID-MARKET/SMALL-CAP The Riverside Company: Tate’s Bake Shop
Judge Steve Kaplan described this as “With a unique and authentic investment closing she was joined by the toughest category in the Ameri- brand and truly delicious products, a new chief financial officer, with a cas section, with all entrants putting this acquisition gives us an attrac- new chief executive following three 64% forward compelling cases for the top tive entry point into the fast grow- months later. Rise in capacity spot. In the end it was Tate’s Bake ing premium cookie segment,” said Vice-presidents of sales, marketing over the course of the hold period Shop, producer of America’s number Dirk Van de Put, chairman and chief and operations, a plant manager and a one cookie (in the view of celebrity executive of Mondelez, at the time. raft of other more junior hires joined chef Rachael Ray, among other arbi- When Riverside came along in in quick succession, creating a strong ters of taste), which won out. June 2014, Tate’s Bake Shop was basis for growth. Between entry and Founded in Southampton, New looking to take the good work it had exit, the firm’s staff expanded from 10 York, by lifelong baker Kathleen done in its local market and repli- 187 to 383 employees. New varieties of King, who opened the first branch cate it nationally. Most important, Tate’s Bake Shop started about cookie developed in 1980, Tate’s has experienced tur- it wanted to do this without losing expanding its output by moving into during Riverside’s time at the helm bocharged growth since the entry of any of the special touches that had a new warehouse and management The Riverside Company as an inves- helped it stand out from the crowd offices, putting in an ERP system and tor four years ago. What started as in the first place. adding two new automated manufac- a highly regarded but small opera- King stayed with the firm to turing lines. Over the course of the tion on the East Coast is now part focus on product development hold period, the company’s manu- 104% of the empire of confectionary giant and public relations, the functions facturing capacity increased by 64 Increase in size of Mondolez, which snapped it up for a she had performed so well up to percent. team at Tate’s cool $500 million in June of this year. that point. Within two days of the Realising the strength of Tate’s brand and the loyalty of its cus- tomer base, the new management introduced fresh packaging, more than 10 new flavours and formats, and raised prices on existing prod- ucts in order to bolster profitability. Distribution expanded to include more than 70 percent of the grocery channel, with the company making dents in the convenience market and gaining contracts with a number of superstore chains. The result was Tate’s Bake Shop becoming the fastest-growing pre- mium cookie brand in the US, top- line revenue growth in the hundreds of percent, and Riverside achieving a gross cash-on-cash exit multiple in Tate’s Bake Shop: producer of America’s ‘number one cookie’ the mid-single-digits. n
20 private equity international october 2018 AMERICAS
EDITORS’ AWARD Apax Partners: GlobalLogic
to achieve disruption through digital transformation. The board was revamped with hires including a new CFO, chief marketing officer and chief delivery officer. GlobalLogic also strength- ened its non-executive board by appointing Sir Peter Bonfield, former chief executive of BT, as chairman. Unusually, perhaps, for a PE- backed firm, GlobalLogic’s EBITDA margins decreased by 250 basis points in the first year after Apax doubled down on investing for growth. Since then the business has grown substantially, increasing GlobalLogic: increasingly creative product offering EBITDA by nearly 3x and margins In the public consciousness, Silicon investments in recent years. It also by more than 300bps. Between entry Valley is mainly associated with the saw that GlobalLogic’s delivery in 2013 and exit in May 2018 head- cut and thrust of the start-up scene. capabilities, strong customer base count doubled to 12,000, driven by But it’s also home to many mid-sized 3x and good management team made the establishment of new engineer- technology companies with strong EBITDA growth it the right horse to back in a frag- ing centres in Norway, Poland, Slo- from the end of track records, proven cashflows and the first year on mented market. vakia and India, and the upsizing of big potential for growth – perfect for Together with the firm’s man- its customer sales and delivery func- private equity investment. agement, Apax developed a strat- tions in North America. One of these is GlobalLogic, egy focused on five areas of growth: As a result, GlobalLogic’s market which won the Editors’ Award in the investing in new capabilities; geo- share has increased from 3-4 percent Americas for its impressive growth 5.4x graphic expansion; operational to 5-6 percent. strategy. Founded in San Jose in 2000, Gross multiple improvements; targeted manage- The investment was exited in two on exit the firm helps business customers ment upgrades; and accretive M&A. stages. In April 2017, its funds sold a design, build and deliver digital prod- In practice, this meant investing 48 percent stake to Canada Pension ucts. It was already a well-established heavily in sales and marketing, broad- Plan Investment Board. In May 2018, name with an international presence ening the firm’s offering in sectors it announced the sale of its remain- when Apax Partners came along in such as healthcare and telecoms, and ing interest to Partners Group. On December 2013 with a plan to take 5-6% expanding into retail and automotive completion of this transaction, the GlobalLogic’s its growth to the next level. share of a production. This broadened, increas- investment in GlobalLogic will result fragmented Apax saw the huge long-term market ingly creative product offering was in a gross multiple of around 5.4x potential for the outsourced product driven by a business development and an internal rate of rate of more development industry, having made operation focused specifically on than 50 percent – not too shabby a number of successful IT services Fortune 500 companies that aspired at all. n october 2018 operational excellence special 2018 21
KEYNOTE INTERVIEW: PWC
NON-CORE ASSETS Value creation in carve-out deals
With competition for deals Creating value in portfolio companies has starting to create holding structures, as intense and purchase price become even harder over the last few years. grown companies are often too inflexible to With record amounts of dry powder to react to market changes quickly. A holding multiples reaching all- deploy, private equity firms are competing company with a specialised business model time highs, private equity fiercely for assets while high levels of cor- allows for a lean structure and facilitates to houses are increasingly porate cash are driving strategic buyers to adapt the corporate group to a demanding turning to corporate carve- acquire businesses, too. Announced M&A transaction market by divesting business globally reached $2.6 trillion in the first half units more easily and faster. For instance, outs to generate returns. of 2018, according to Bureau van Dijk, just Siemens recently listed its healthcare busi- PwC partner Tobias Blaser shy of the record $2.65 trillion announced ness Healthineers. explains how to create in the first half of 2017. We’re also seeing mega-mergers. The maximum value from In turn, purchase price multiples have Bayer-Monsanto tie-up is one example; rocketed: in 2017, median enterprise Linde-Praxair is another. These large trans- these non-core assets value to EBITDA multiples in M&A rose actions are subject to anti-trust investiga- to their highest recorded levels in both the tions and sometimes the only way to get US (above 10x) and in Europe (above 7x), the deals past the regulators is to agree to Pitchbook data shows. dispose of certain parts of the business. With such elevated prices being paid, And, of course, with the high prices private equity firms are having to work at being paid in today’s market, there is more value creation strategies to ensure they can appetite for divestiture among corporates, deliver the promised returns. That often so that is driving some of the activity, too. means looking at less well packaged deals found in secondary buyout situations and What type of buyer is showing most turning to corporate carve-outs. We spoke interest in carve-outs: private equity to Tobias Blaser, partner at PwC in Ger- or strategic? many, about how firms can ensure they have We’re seeing high levels of competition the best chance of maximising the potential across industries. Private equity firms have value from these non-core asset sales. become much more interested over recent years, as they can see plenty of opportunity Corporate carve-outs have become to increase the value of these businesses. a more popular source of deals over They are especially interested if these busi- recent years. Why do you think this is hap- nesses have not been restructured before- pening? hand because there is much greater poten- Carve-outs have certainly been increasing in tial to create value, while strategic buyers the last five years. One of the main drivers may find these less optimised/unrestruc- for this has been corporates’ ever sharpen- tured situations more difficult to deal with. ing focus on core competencies. German conglomerate Thyssen Krupp, for example, With strong competition from other faced repeated calls from shareholders to firms and corporates, how are pri- simplify its complex structure and cut vate equity bidders improving their down on corporate expenses seeking to chances of winning these kinds of deal?
Blaser: more appetite for divestiture among eliminate the conglomerate discount, as The competitive nature of the market corporates Reuters reported. Another driver is firms means that private equity firms have to
22 private equity international october 2018 KEYNOTEKEYNOTE INTERVIEW: INTERVIEW: J-STAR PWC
identify these assets early. We introduce WORKING WITH A STRATEGIC PARTNER and discuss potential carve-out deals with them – from a commercial, financial, carve- out and value creation angle. That way they can create a value creation story and an exit case at the earliest available opportunity and be ready to move on quickly. They are attempting to pre-empt auctions. While around 80-90 percent of carve- outs still go through the auction process – unsurprisingly, given the competition for assets – they can proactively approach com- panies at an early stage of the process and avoid lengthy negotiations if they have done the groundwork. In some instances, we’re seeing private equity firms and strategic You mention that private equity firms and trade buyers are pairing up. How buyers pair up to acquire carve-outs of large can the arrangement work for both sides, given the often competing objectives businesses in risk-sharing arrangements. of financial and strategic investors? There has to be a clear agreement from the outset. Often these arrangements are What do firms need to have ready structured so that, for example, a strategic investor will contribute 30 percent or 40 if they are to move fast on a deal in percent of the capital, with the private equity firm investing the balance. However, they today’s market? will often have the same voting rights on the board. This is in recognition of the fact Firms need a combined team of inter alia that a strategic investor can bring considerable knowledge to an investment, such as carve-out, financial, IT, operational and in-depth sector expertise and market intelligence. The combination of smart, patient legal advisors to assess the full value crea- capital with this kind of expertise can be quite a compelling one. tion potential and have the advisor team For the arrangement to work, there has to be alignment on the plan for the busi- onboarded prior to the transaction ideally. ness and, importantly, what happens at the end of the investment. There needs to be a These teams need to align and co-operate clear exit plan – and investment time-frame – from the outset. So, there could be an closely and seamlessly and the ultimate goal agreement to exit via IPO and/or the strategic investor could have an option to buy of every work stream should be to create out the private equity firm’s stake at a later date. and deliver deal value in each functional There are some deals currently being worked on that include just such an arrange- area. For instance, a lawyer might highlight ment and one of the benefits of the two sides pairing up is to deal with anti-trust a legal topic but should also understand that rules, which can be extremely complex and require the knowledge and insight of a it might have an impact on the commercial strategic partner to position the acquirer as a viable competitor. Also, while private and operational aspects of a deal, and run equity firms mainly provide operational expertise, strategic buyers contribute valuable through this with the respective advisors. industry expertise and infrastructure – such as an existing management – that can be Due to the multidisciplinary nature of leveraged to realise synergies and maximise the enterprise value. carve-out topics, the carve-out advisors are Indeed, firms are very conscious of competition in these deals. Whenever we intro- usually in the lead to drive communication duce such a deal to private equity, houses are very interested to know the bidder and manage the overall value creation pro- universe and which strategic buyers are likely to make a bid – sometimes with a view cess. In our experience, it really helps to to teaming up with them. n have advisors on board that have worked together on a number of transactions ›› october 2018 operational excellence special 2018 23
KEYNOTE INTERVIEW: PWC
›› over the years – you really need an We’re seeing the current status of operational entan- A team on your side to win. PwC’s deals glements, day one readiness with regards practice supports private equity clients and private equity to operations as well as on the standalone provides guidance along the whole M&A firms and financials such as the standalone EBITDA process. strategic buyers pair up and an optimised EBITDA. So, the carve- For sell-side clients, we usually start by to acquire carve-outs of out assessment indicates potential red flags helping to define a clear deal vision and and their corresponding mitigation. strategy. Firms need to have a well-defined large businesses in risk- Effective private equity firms monitor concept regarding the assets to divest and sharing arrangements the business regularly against detailed KPIs need to consider the right transaction and they interlink value creation measures structure as well as the right timing to with the P&L. Firms should also focus on make a move. leaving TSAs (transition service agree- For buy-side clients, the process usu- ments) as quickly as possible – they need ally starts with a rigorous due diligence can have a significant and lasting effect on to create a business that can operate on and value assessment to validate robust- the bottom line. a standalone basis and the sooner this is ness and upside potentials of the target. We Procurement is often another area of done, the more identified value they can then accompany our clients along the entire focus – it is usually not in perfect shape create and the more hidden value they can deal cycle, from negotiations to day one and so much can be achieved through re- unlock. Overall, adequately orchestrating readiness and even to the post-deal value negotiation and changing suppliers. On the throughout the post-deal phase is key to realisation which in turn may also include other side, dis-synergies resulting from realise the envisaged values. an exit strategy. lower bargaining power when ceasing pur- That said, management also clearly has chasing under the parent’s umbrella have to an important role to play here – strong So what kinds of value creation strat- be bypassed. And then there is optimisation teams really drive value creation. egy are the most effective in carve- of the business’s regional footprint, which out situations and how can firms hone in will contain some legacy arrangements that And what kinds of development in on the right course of action? made sense while the business was part of the process are you seeing when it Before acquiring the business, firms need a larger entity, but don’t necessarily as a comes to carve-outs? to know what has to be done with an asset separate business. Does it need the presence One trend we are seeing with more expe- so they can get moving from day one. That it currently has in different areas and/or rienced corporates is that they are working means looking at the strategic levers, such should it move into new areas to maximise to create a standalone business ahead of the as additional M&A in the form of further sales potential? process to minimise having to negotiate and add-on acquisitions or divestments. They Firms need to identify some of this put in place TSAs. So, for example, they need to have a clear picture of how they are during due diligence, but also have clean may already have implemented IT systems going to grow sales, either through entering teams that continue to identify and validate and outsourcing agreements so the business new markets or enhancing or developing value creation possibilities throughout the can operate separately from day one. That new products. deal process. can help boost the pre-sale value of a busi- They also need to understand what they ness as it reduces risk for a private equity can do alongside the P&L – top-line initia- What’s the key to getting this right? buyer and it helps the seller because it’s a tives such as volume scaling, price adjust- Given the high multiples being paid, cleaner break. ments or footprint optimisation as well firms need to fully realise the value crea- The other trend is the increasing impor- as bottom-line via COGS optimisation or tion potential in a business to make the tance of digital disruption and digital deal G&A right-sizing. Many carve-outs often numbers work. Sometimes, you see firms analytics to private equity buyers. Firms are emerge from their parent with an over- do all the preparation and then leave it to focusing on this much more than in the past sized corporate function – there is often management to get on with the work. In and they now use digital teams to assess significant overhead that gets transferred. fact, it requires a comprehensive carve-out and identify value creation potential from Simply right-sizing this part of the business assessment which provides visibility on a technological perspective. n
24 private equity international october 2018 EMEA
WINNER – LARGE-CAP Nordic Capital: Bambora
“A truly impressive case” is how end-to-end offering. We had a vision resources,” says Näslund. The judge Katja Salovaara, a senior port- to create a new type of player that number of IT engineers rose from folio manager at Ilmarinen, describes would change the payment landscape four at entry to 200 over the course Nordic Capital’s investment in pay- and bought a number of adjacent 13 of the investment, he says. “And we ments business Bambora. She high- companies, the products Euroline Add-ons during were smart about using modern lights the GP’s vision and use of its was missing,” says Näslund. Nordic Capital’s technology such as the Amazon ownership strong sector expertise and networks These included three deals cloud for hosting, which was very “to create a payments powerhouse secured during the buyout. In the cost efficient.” with an end-to-end offering for the course of Nordic’s ownership, during The team undertook “signifi- mid-market distributed on a global which it invested €55 million into cant work on customer needs”, says scale”. products and sales, Bambora com- €55bn Näslund, interviewing thousands of Having mapped out the payments pleted a total of 13 add-ons and Transactions customers. “We invested in commer- space and looked at several assets, expanded its geographic coverage processed a year cial excellence, added sales resource in May 2014 Nordic Capital Fund across the Nordics, Switzerland, US and segmented the market. Then we VIII secured the carve out of Swed- and Australasia. focused on customer support, where ish bank SEB’s payment division, Nordic appointed familiar face resources were also added.” Euroline. “We had a long dialogue Johan Tjärnberg, the ex-chief execu- Digitisation slashed the customer with the seller,” says Fredrik Näslund, tive of payment business Point that 50 onboarding time from weeks to min- Employees on partner at Nordic Capital. “We con- the firm acquired in 2004 and exited entry utes. Intake soared to around 3,000 vinced SEB that Nordic Capital was in 2011, to head up an entirely new new customers a month, up from the right owner and would invest leadership team. around 200 at entry. At the same time, into the products and the people.” “Since Euroline was a carve-out, staffing levels increased from 50 to The Bambora brand launched a we had to support the incoming more than 700 people, of which more year later focused on an underserved management team with significant 700 than half were directly recruited. segment of small and medium-sized resources, especially on the financial Employees on exit In just two years, annual revenues merchants demanding digital and side and IT and invested heavily in reached €200 million. By exit in July Bambora: cross border services. “The plat- products, some through add-ons and ‘exceptional 2017, organic net revenue growth form [acquisition] didn’t have an also through adding development execution’ had accelerated from zero at entry to 30 percent, and profits had tripled. With 110,000 customers in 70 mar- kets, Bambora was processing trans- actions totalling around €55 billion a year – a five-fold increase. The business was sold to pay- ments business Ingenico Group for €1.5 billion after just 30 months. The speed and extent of the transforma- tion were truly impressive. Salovaara agrees. Nordic Capital’s engagement with Bambora shows “exceptional execution with investments in prod- ucts, capabilities and organisation”, she says. n october 2018 operational excellence special 2018 25 EMEA
WINNER – UPPER MID-MARKET Cerberus Capital Management: Reydel Automotive
The automotive industry is going Systems agreed to buy Reydel for recruits included a vice-president through a period of significant $201 million in cash in April this of operations, treasurer, controller, change. It is within this context year. head of Asia sales, general counsel that Cerberus Capital Management’s How did Cerberus turn a trou- -$16m and chief technology officer. Cer- turnaround of Visteon Corporation’s bled automotive interiors business EBITDA on entry berus executives including more global automotive interiors business into a success story? It first set about than a dozen operations profession- into Reydel Automotive is even more reorganising the company. The deal als spent substantial time with the impressive. – valued at around $185 million new leadership team to implement It’s little wonder the judges – included a $35 million primary the carve-out and turnaround plan picked Reydel – in addition to creat- equity investment and around a $150 $68m and drive operational improvements ing cultural shifts, and change at both million injection into the business. EBITDA on exit across finance, human resources, the corporate level and on the plant The interiors business was renamed manufacturing and legal areas. floor, Cerberus expects to make a “Reydel Automotive”, the unit’s orig- Cerberus was relentless in whopping 7.8 times multiple on inal name from the French family improving manufacturing efficien- invested capital and a 112 percent business when it was founded three cies. The firm introduced a review internal rate of return upon exit decades earlier. 7.8x of new programme bid proposals to which was signed in April. With improving efficiency a key Expected multiple focus on “core assumptions” which on exit New York-listed Visteon had part of Cerberus’s strategy, the firm protected Reydel against margin wanted to divest its automotive set up a manufacturing plant in risk. It also focused on “continuous interiors unit – which operated Chennai and relocated production; improvement” at each of Reydel’s 20 plants, R&D and sales facilities it separated IT systems and invested plants which included a company- across 16 countries – for several in capital equipment and software wide programme that collected years prior to Cerberus’s 2014 licences. input from all levels of staff at every acquisition in what was a proprietary One of the biggest changes was plant. This removed the siloed cul- deal. The unit was losing money and to executive management. New ture from each facility and helped was substantially cashflow negative lead to year-on-year cost reductions in 2013. of at least 5 percent annually. It was Cerberus’s experience Over a three-year period with the in the global automotive business help of Cerberus, Reydel’s EBITDA as well as in complex corporate grew from negative $16 million to carve-outs and operational turna- $68 million. rounds that made the firm the ideal “Reydel was a successful part- partner for the Visteon unit. Cer- nership that leveraged Cerberus’s berus in fact viewed the automo- experience with global automotive tive interiors sub-sector as ripe for businesses, highly complex corporate consolidation and believed the unit carve-outs, and operational turna- could become a prized part of this rounds,” says Dev Kapadia, senior area – something that would prove managing director of Cerberus and to be right when Indian automo- co-chair of the firm’s private equity tive parts maker Motherson Sumi Reydel Automotive: relentless in improving efficiency investment committee. n
26 private equity international october 2018 EMEA
WINNER – LOWER MID-MARKET/SMALL-CAP Carlyle Group: Itconic
Imagine acquiring a business that not only suffers from falling revenues and profits but has no financial or per- formance data you can analyse. That’s what Carlyle Group faced when it spun Telvent Global Services out of Schneider Electric in 2015. When the global private equity giant invested in Spain-headquartered Telvent, an IT infrastructure man- agement business with data centres across the Iberian peninsula, the busi- ness had no standalone finance, tax, Itconic: data of hybrid cloud products as part of a on its investment. The business now centres across the legal, human resources or property Iberian peninsula single platform. operates the largest network of data management functions. The firm, One of Carlyle’s priorities was to centres in Spain and Portugal. which used its €656.5 million Carlyle refocus and invest in Itconic’s core Fernando Chueca, managing Europe Technology Partners III fund data centre unit, which had strong director in the European technol- to invest in the deal, had to build all telecommunications connections ogy team, said: “The acquisition of these functions from scratch. in the Iberian peninsula but which Itconic by Equinix for €215 million Carlyle rebranded the business to had been suffering from neglect. The only two years after the original Itconic and set about strengthening private equity firm worked with the acquisition by Carlyle was a testa- the management team, including newly implemented management ment to the substantial changes adding a chief executive, new chief team to increase capacity at the made in the business through a com- financial officer, two senior execu- Barcelona, Madrid and Lisbon data bination of improved strategic focus, tives and former Telecity chief exec- centres and focus on “high-end con- attracting leading international cus- utive Mike Tobin as a board director. nectivity-driven customers”. It was tomers to the business and deliver- One of the key elements in Car- this element that boosted Itconic’s ing additional investment into cloud lyle’s value creation story was the market position to one able to com- technologies.” increase in products. Carlyle devel- pete with global players. Katja Salovaara, OpEx judge and oped a cloud exchange point allowing In just over two years, Carlyle had senior private equity portfolio man- connectivity with Amazon Web Ser- transformed a business with falling ager at Finnish pension insurance vices – the online retailer’s massive revenues and profits to one that firm Ilmarinen, describes the Itconic on-demand cloud computing plat- 7x delivered strong underlying topline deal as a spinout from a corporate Reported multiple form – as well as Microsoft’s Azure. on exit revenue and EBITDA growth. that was “completely transformed” In addition to adding major regional In 2017 Carlyle agreed to sell from a business with falling revenues internet exchanges to Itconic’s port- Itconic to internet services firm and profits to strong growth. “The folio, the firm acquired CloudMAS, an Equinix for €215 million. The deal refocusing and investment in the AWS reseller for Spain, and expanded marked the first exit from CETP III core data centre division paid off its offering to cover Azure and Google €215m and media reports at the time noted with securing global marquee cloud Cloud as well as offering a full suite Sales price on exit the firm made a seven times return customers.” n october 2018 operational excellence special 2018 27 EMEA
EDITORS’ AWARD EQT Partners: Sportradar
Fans of sports statistics: ever won- was not disclosed, but is understood core customers (sports betting dered who is counting all those to have been in the region of €400 operations) to a wider group. These passes? You may be surprised to learn million. By the time EQT would now include sports federations – like it is the same people – or at least come to sell the company in 2018 ~€400m the Bundesliga, Germany’s football the same company – that is beaming to Canada Pension Plan Investment EV on entry, league – who use Sportradar’s Integ- live video footage to fans, gathering Board (an investor in EQT VI) and according to rity Services unit to guard against market sources data for bookmakers and monitoring tech investor TCV, it would have an match-fixing and betting fraud, or games in search of possible match- enterprise value of around €2.1 bil- the International Mixed Martial Arts fixing. lion. Association, which uses Sportradar’s Switzerland-headquartered Spor- The value creation programme OTT (“over the top”) service to tradar has more than 7,000 freelance earns our EMEA Editors’ Award €2.1bn stream and monetise video content sports data journalists on its books for the way in which it tapped into Enterprise value directly to its fans. and partnerships with sports federa- the innate potential of the business, on exit During EQT’s investment period tions from the NFL and NBA to the expanding into adjacent segments, Sportradar’s annual sales grew at German Handball Bundesliga. Its and executing what one of the judges a compound annual growth rate pitch – “the source code of sport” described as a “carefully crafted” of more than 40 percent per year – refers to its positioning at the M&A programme. to approximately €300 million “intersection of the sports, media Over the course of EQT’s owner- ~35% during the most recently com- and betting industries”. ship, Sportradar grew its data “event Ownership stake pleted 12-month period. In the Using its sixth flagship fund, the coverage” so that it was tracking and same period, Sportradar increased 2011 €4.25 billion EQT VI, EQT reporting data on a wider portfolio its headcount by 1,400, a rate of 25 Partners acquired a co-control stake of sports events (it has now covered percent per year. of around 35 percent in the business more than 400,000 events) in new In EQT’s own words per its press from its own EQT Expansion Capi- geographies going deeper into lower ~25% release at the time of the exit, the Annual employee tal II fund and other minority share- leagues. It also diversified its client headcount growth company “expanded via several holders in 2014. The enterprise value base, growing beyond its traditional add-on acquisitions and secured a strategic investment by [growth investor] Revolution Growth which led to the formation of dedicated US advisory board comprising Ted Leon- sis, Mark Cuban and Michael Jordan. The strong focus on the US market over recent years has positioned Spor- tradar well to capture the significant growth potential from the opening of the US sports betting market”. Carsten Koerl, founder and CEO of Sportradar, who will continue to lead the business with EQT as a minority shareholder, described EQT as a “great partner supporting Sportradar in its globalisation and Sportradar: ‘the source code of sport’ diversification”.n
28 private equity international october 2018
KEYNOTE INTERVIEW: BLUE RIDGE PARTNERS
BEYOND GROWTH TARGETS Are you spending too much on sales?
Sales leaders are too busy How efficient is your sales force? Probably to optimise profitable revenue growth. They trying to hit their revenue less than you think, says Blue Ridge Partners are not built to optimise economic efficien- managing partner Jim Corey. Whether it’s cies. Sales leaders are so focused on making targets to focus on cost too much time spent chasing unpromising their targets that they tolerate lower levels inefficiencies, says Blue leads or inefficient go-to-market models, of performance. They think some revenue Ridge Partners managing sales teams can “accumulate layers of eco- from a weak performer is better than none partner Jim Corey nomic inefficiencies that begin to cost a [from an open vacancy]. material amount of money”, he says. Corey However, we often find by squeezing talked to Private Equity International about out inefficiencies there is the potential for how to cut out waste in sales and why CEOs 10-25 percent savings and reinvestment. In lack the experience to step in. that range they become material. The busi- ness could apply this money to new prod- Where do you find these inefficien- ucts, enhancements to current products, cies? entering new end-markets, being more The most important area involves human effective in cross selling or building new performance. In our experience, sales tools for their sales reps. people tend to spend dramatically less time selling then anyone would have envisioned. And what could be done with the We have found it averages about 30 percent. time? The leadership team is often surprised it’s Many sales organisations are struggling to that low. The rest of the time is spent under- hire new people. And when they do, they Sales taking a number of administrative and cus- experience a very slow ramp-up period organisations tomer service tasks that aren’t selling. This that is often twice as long as they expected. are built to hurts the economic value of a sales hour. Right in front of them are proven, experi- optimise profitable Often companies have the wrong people enced sales reps who, if they were released in sales jobs. For many of our clients we from non-selling tasks, could double their revenue growth. They conduct a ‘skill-will’ assessment and many selling time. That is so powerful. It’s not just are not built to optimise sales people, often a third, don’t have the about money; it’s about getting more out economic efficiencies right skills or aren’t making enough effort. of the current investment in sales people. Some of these people are just in the wrong role: they are ‘farmers’ employed as ‘hunters’ If the impact is material, why do to seek new leads, but they are never going businesses underestimate the value to be successful. of fixing these inefficiencies? And, sales people often waste time I’m quite sure all sales leaders are aware chasing unqualified leads. Because they that these inefficiencies exist, but they don’t are under tremendous pressure to show have time to fix them and they don’t know a pipeline of productive leads for fear of the economic value of them. They don’t have receiving unwelcome criticism, they over- the facts. They probably don’t even know invest in leads that never close. how much time is being spent [on each task]. Most sales leaders are very effective Why doesn’t management notice? at working in the business and can produce They do. These inefficiencies are seen revenue growth. They aren’t necessarily Corey: CEOs fear ‘touching the wrong wire’ but accepted. Sales organisations are built very good at working on the business. ›› october 2018 operational excellence special 2018 29
KEYNOTE INTERVIEW: BLUE RIDGE PARTNERS
›› That’s a different skill set and it’s hard to find a sales leader that can do both. THE COMMERCIAL EFFICIENCY FRAMEWORK
So why don’t chief executive officers Commercial strategy The tool to identify and prioritise step in? commercial efficiency focuses on Executive search firm SpencerStuart six key areas: Go-to-market model and sales structure undertook a study that revealed only 17 Commercial strategy – aligning percent of CEOs have direct experience in sales expenditures with the leading a sales organisation. The 83 percent aspirations, strategic actions who do not are very reluctant to wade into and economic expectations for People the sales organisation. a complex area where their sales leader is busy producing revenue numbers for fear Go-to-market model and of touching the wrong wire and losing cus- sales structure – customising the sales model for each tomers or their best sales people. major customer segment However, when you talk to sales people, Processes Tools and designing the most they are begging for help with this topic. economically appropriate sales They often believe they are being held back organisation. because processes are too complex or they People – recruiting, think the company isn’t giving them the Management and culture onboarding, developing, tools that they need or prices are set too compensating and retaining high. They are receptive to changes because sales personnel to provide the quantity and quality of skill they believe they are going to be helpful. sets required to economically Poor performers might feel threatened, but deliver on the commercial in many cases they are people that should strategy. be exited from the business anyway. Processes – establishing structured, scalable sales You say sales leaders are often reluc- processes that remove tant to dismiss weak performers. unnecessary complexity and What’s the solution? are repeatable across the sales organisation. Usually a sales rep quits or a company eventually gets fed up with weak perfor- Tools – providing sales mance and exits a person. The HR team reps and sales supervisors with automated support to kicks into action, understands what skill productively plan, execute and set is required, puts the spec together and monitor bid/proposal activity. finds candidates. Or the sales leader says Management and culture they might know someone. Typically, when – establishing a leadership a sales opening materialises there isn’t a style focused on openness, ready supply of qualified candidates. The accountability, high answer is to maintain a pipeline of potential performance and winning; candidates. This prepares sales managers to creating a culture that rewards success and has exit an underperformer as they know there real consequences for are other candidates that could be better. underperformance.
To help businesses cut inefficiencies, you have developed the Commercial
30 private equity international october 2018 KEYNOTE INTERVIEW:KEYNOTE BLUE INTERVIEW: RIDGE PARTNERS J-STAR
Efficiency Framework. What is it? Sales leaders opportunities otherwise sales organisations Sales organisations are very complex and they are very are not going to perform well. have lots of moving parts. In an effort to try Even so, they have to execute against and simplify it, we developed a framework effective at a sensible commercial strategy and know to identify and prioritise actions that can working in the business their sweet spot, where they are going to result in material savings by reducing eco- and can produce revenue win, where they are likely to lose, how they nomic inefficiencies. Of the six dimensions, are positioned against competitors. And, of the most important is the people, followed growth. They aren’t course, they need to be supported by pro- by the commercial strategy. A company has to necessarily very good at cesses, tools, management and culture. All have the right people in the right role spend- working on the business these six elements are highly intertwined. ing the right amount of time against the right Leaders have to assess the impact of changes in one area on all the others. That is why SALES EFFICIENCY CUBE it’s hard to squeeze out these inefficiencies. A For example, the sales commission and More More output incentive scheme is an important thread with more spending running through all these pieces. A com- B pany may believe its growth will come Relative from rolling out a new set of products, but spending Same More output level in with same sometimes sales reps can make more money sales spending selling older products and are not going to D C spend time selling the new ones. A business Less Declining Same output More output needs to design a compensation system that business with less with less lines spending spending helps it achieve its commercial strategy.
Less Same More Where should a business begin as Relative output from sales it seeks to make its sales organisa- In this sales output grid, where do businesses want to be? tion more efficient? In the lower right corner, where businesses are getting more and spending less. The first thing is to understand the facts In the middle of the bottom row, if your business is under some pressure and demand underpinning performance in each of the is weakening, you’re going to try to sustain flat level revenue growth but spend less to six areas. For the people element, we often get it. All the way over on the left you have a declining business. If a business is unwilling conduct a survey of sales reps to ask where to ring out these inefficiencies, or if they are unable or don’t have the time, they might they spend their time. That is often eye-open- migrate to the upper right corner, which is where a lot of companies sit. Businesses in ing for the leadership team. Another is to Cell A accept the existing cost structure. Our point is that it’s more sensible to move understand individual sales rep performance down the right-hand column by squeezing out some of the inefficiencies to help find relative to their cost. We have a return on those incremental expenditures necessary to grow. investment calculation that takes the gross margin dollars a person produces and divides How does this work in practice? it by their total cost, ie, their pay, including I’ll give you an example. A global provider of information services realised their base, bonus, compensation plan, all of their sales reps were not touching many of their high-potential prospects. As a result, the travel expenses and benefits. Then you start company wanted to increase the size of their direct sales team. This incremental cost to realise that a very large percentage of gross was largely offset by lowering the number and cost of non-quota carrying personnel margin dollars, it could be up to 90 percent, and reducing the number of sales reps assigned to low growth products. The result are produced by only 25 percent of your sales was a doubling of revenue growth rates with no increase in costs, Cell B. people. Then people realise that something different needs to be done.n october 2018 operational excellence special 2018 31 ASIA-PACIFIC
WINNER – LARGE-CAP KKR: Qingdao Haier
White goods manufacturer Qingdao billion) to 159.3 billion yuan, a com- world renowned brand. This would Haier was already a leading name pound annual growth rate of 21.5 not have happened 30 years ago.” in the Chinese consumer electron- percent. The company also further The deal resulted in approxi- ics market when KKR acquired a expanded into Europe, East Asia, 21.5% mately 10 billion yuan in revenue 10 percent stake in June 2014 for South Asia and Australia. synergies and 1 billion yuan in cost $603.5 million, one of the largest One transformative M&A was CAGR synergies. “We basically put every- Top-line revenue private equity deals by KKR in China that of Louisville, Kentucky-based growth thing into several buckets – legal/ at that time. GE Appliances. Qingdao Haier compliance, finance, HR, produc- The Shanghai-listed company bought the unit from parent com- tion and manufacturing, procure- was looking for a global partner to pany General Electric for $5.4 billion ment and supply chain, sales and expand and accelerate its growth in 2016, one of the largest overseas marketing, and channel distribution ambitions as domestic competition transactions by a Chinese company network and collectively decided to increased. The KKR deal offered at that time. The acquisition brought 14.8% start refining our governance model, the most compelling vision for its a number of strategic benefits to the CAGR as well as integrating procurement EBITDA growth future – a global network and indus- company – an expansive distribution and the supply chain network.” try expertise, as well as operational network, wide product portfolio, In line with KKR’s commitment improvements and transaction inte- and most notably, a US presence to ESG, the firm led Qingdao Haier’s gration led by KKR Capstone, a team that would provide Qingdao Haier brand transformation into building of 60 full-time expert operating pro- with a key market for white goods smart and more environmentally- fessionals across the Americas, Asia supply and demand. 41.7% conscious products. The team over- Increase in and Europe dedicated to support the Cathy Cai, a director of KKR employee saw investment in product research firm’s portfolio companies. Capstone, notes that this was the numbers by exit and development to design, manu-
In just four years KKR signifi- highlight of the transaction. *Figures from 2014 facture and sell products that are cantly grew company revenue from “It was a landmark deal where a to 2017 more efficient and cost-effective. 88.8 billion yuan ($13 billion; €11 Chinese company was able to buy a From 2014 to 2017 the firm’s other notable operational initia- tives also included a two-year mate- rial cost reduction plan in which KKR Capstone worked alongside Haier to consolidate its expansive supply chain network for its air conditioning manufacturing unit, as well as implementing large-scale cost resource bidding. Under KKR, Qingdao Haier also launched at least one new high-tech and high- performance product every year in six major categories. Qingdao: a high- KKR has been offloading its stake end brand with environmental in the last year and continues to hold focus minority ownership. n
32 private equity international october 2018 ASIA-PACIFIC
WINNER – UPPER MID-MARKET Partners Group: Trimco International
Apparel label and brand identifi- cation solutions provider Trimco International is no stranger to pri- vate equity ownership, having previ- ously been owned by Navis Capital Partners since 2005. Swiss invest- ment firm Partners Group tracked the asset through its private equity business in Asia, which helped to start an early dialogue prior to acquisition in April 2012. When it acquired the Hong Kong- based company, its operations were local but it was ready to expand beyond Asia. Over the course of the firm’s more than six-year investment in Trimco, which was made from a number of funds, including the €1.5 billion Partners Group Direct Invest- Trimco: from travelling the world together to iden- pricing review initiatives and cross- Asia-centric to ments 2012, it transformed a strong global leader tify add-on acquisitions and working selling between Clotex, Labelon and local leader into a global leader. side by side in the integration work, A-Tex. Florian Marquis, senior vice- Marquis says. “It was a very collabora- In terms of corporate govern- president, private equity Asia, at Part- tive approach.” ance, Partners Group implemented ners Group says this was achieved by To support international expan- new enterprise resource planning “helping Trimco’s regional and local sion, Partners Group focused on systems across the globe as well as management teams build a global 3.4x building client relationship teams in global transfer pricing policies. footprint in production, sales and Return multiple key markets in Europe and the UK. The winning factor was “the client coverage, mainly in the UK, It also expanded its manufacturing strong international growth and continental Europe and the US”. footprint in key apparel hubs across strong improvement in profitabil- Under Partners Group the com- Eastern Europe, Turkey, China and ity together with a focus on strate- pany quadrupled the business via South Asia. The firm completed three gic rationale”, says judge Veronique strong organic growth and a series 28% bolt-on acquisitions of more than Lafon-Vinais. of meaningful add-on acquisitions. Its IRR $100 million: UK-headquartered Partners Group worked with revenue grew at a compound annual Labelon (2012), Bangladesh company Goldman Sachs in the second half of growth rate of +33 percent between Enam Labels (2014) and Denmark- 2017 to run a targeted exit process. 2012 and 2017. And its workforce headquartered A-Tex (2015). These It sold Trimco in January this year expanded from about 400 to 1,500 contributed meaningfully to the to Hong Kong buyout firm Affinity employees in the same period. +33% EBITDA margin uplift. Equity Partners for $520 million, The firm also worked hard with CAGR The firm also worked on opera- generating a 3.4x investment mul- the founder Miranda Kong and Top-line revenue tional improvements across the plat- tiple that represented a 28 percent growth between management team, spending time 2012-17 form such as in-sourcing/customer internal rate of return. n october 2018 operational excellence special 2018 33 ASIA-PACIFIC
WINNER – LOWER MID-MARKET/SMALL-CAP Mekong Capital: Traphaco In frontier markets, corporate gov- ernance can be tricky to get right. But for Mekong Capital, a prag- matic approach to compensation, personnel and board structure at Vietnamese pharmaceutical business Traphaco yielded impressive results. When Mekong acquired a 24.99 percent stake in Traphaco in 2007, the company was ranked among the top 20 pharmaceutical businesses in Vietnam, with revenue and net profit of $33.4 million and $2.4 million, respectively. The firm’s ownership of Traphaco would come to be a tale in three acts: building a foundation for growth, breakthroughs in perfor- It was in the second act that Traphaco: came in 2016 as Mekong prepped leadership mance and pre-exit shaping. Mekong utilised governance to max- transformed by a the company for exit. Mekong trans- While the company enjoyed a imise Traphaco’s growth. In 2013, the non-exec board formed the company’s leadership modest 10 percent CAGR in the two firm introduced Phan Quoc Cong – model by creating an independent years after Mekong’s investment, it founder of ICP, one of the largest and non-executive board of direc- was not until 2009, when the firm personal care product companies in tors and prompting them to set up introduced a new staff remunera- Vietnam and a former Nestlé man- human resources, strategy and audit tion system and performance-based ager – to Traphaco’s board. Cong committees. The board also rede- bonus scheme linked to net profit overhauled the distribution network signed the salary and bonus system, growth, that its financials really took by refocusing its sales policy to go while boosting alignment of interest off. Its annual net profit more than direct-to-pharmacy, rather than via by ensuring management owned an doubled from $2.9 million in 2009 wholesalers, and implemented a unusually high 10 percent of share to $6.1 million in 2012. system to track regional sales. capital. This early period of growth was Mekong also introduced Paul The proof is in the pudding. Net also compounded by a radical change Lagewag, a member of Mekong’s revenue climbed to $83 million at to the value chain. At the time of value optimisation board and former exit in November 2017, while net Mekong’s initial investment, tradi- general manager of Unilever Vietnam, 6.3x profit rose at a 16.9 percent CAGR tional medicine accounted for 80 who identified a lack of success- Gross return to $11 million. Under Mekong’s percent of Traphaco’s total revenue ful products at Traphaco. Lageweg multiple ownership, the company had become and was manufactured by its sub- prompted the company’s manage- the second largest pharmaceutical sidiary, CNC. In 2011, Traphaco ment team to shift its focus to launch- company in Vietnam by net revenue. increased its stake in CNC to 51 ing new products and utilise market The firm ultimately divested its percent, providing better control data to better understand consumer holding for $64.5 million, realising on production quality and efficiency, preferences and behaviours. 27.7% a 27.7 percent gross IRR and 6.3x with higher profit margins. More governance improvements Gross IRR gross return multiple. n
34 private equity international october 2018 ASIA-PACIFIC
EDITORS’ AWARD LeapFrog Investments: Mahindra Insurance Brokers Always be prepared, as the saying LeapFrog’s tenure as owner was function that improved sales by goes. LeapFrog Investments took not without its difficulties. A heavy enabling Mahindra to reach more these words to heart in 2009 when monsoon season in 2014-15 saw potential customers and chase insur- it acquired a stake in Mumbai-head- motor insurance claims for vehicles ance renewals, while reducing costs. $200m quartered Mahindra Insurance Bro- such as tractors become a signifi- The firm exited Mahindra in Value of business at exit kers, a subsidiary of Indian finance cant operational problem, while the 2017 through a sale to global rein- giant Mahindra Group. Indian government’s 2016 demoneti- surer XL Group. The deal – which At the time of LeapFrog’s entry, sation drive voided the vast major- valued the business at $200 mil- Mahindra Insurance was heavily ity of India’s paper currency, leaving lion – generated a high multiple for focused on its traditional motor many rural consumers without cash LeapFrog, with Mahindra’s top-line business. Given that adverse weather to pay insurance premiums. revenue and EBIDTA recording a 20% conditions can lead to volatility in These headwinds did not stand in 14 percent and 20 percent CAGR EBITDA CAGR the tractor insurance market, the the way of organic growth. Mahindra respectively during its ownership. company’s new investors saw a need expanded its distribution network by More importantly, with a to diversify through India’s 900 mil- increasing its branches to 450 from “responsible exit” model, the firm lion-strong rural population. 200, while conducting numerous ensured Mahindra would continue Market research identified key insurance distribution marketing to make an impact. By exit the com- areas where the insurance market campaigns to strengthen the brand pany had more than doubled the was failing to meet consumers’ needs and add new product lines. number of people it reaches to 12 adequately: healthcare, weddings sav- LeapFrog also worked with million, of which 7.5 million were Mahindra: ings and education savings. Mahindra to digitise the company. low income, and provided jobs for impressive impact from $2 per LeapFrog worked with Mahindra This included a customer relation- more than 1,000 people – up from month hospital Insurance to develop a $2 per month ship management and call-centre approximately 550 at entry. n cover hospital cover plan that would reach one million emerging consumers and their households by the time of its exit. The firm also helped launch a cashless health insurance solution that was 40 percent cheaper than competitors and had a waiver on pre-existing conditions. There are currently 300,0000 policies accessed via 4,000 hospitals, in a market where formal access to healthcare remains limited. It was this impressive impact on poorer consumers, many of whom couldn’t afford a conventional health plan, that ensured that LeapFrog picked up the Editors’ Award for Asia-Pacific. october 2018 operational excellence special 2018 35
EXPERT COMMENTARY: RSM
ADD-ON ACQUISITIONS Value-creating merger strategies
More than two-thirds of The growth of add-on acquisitions has been direction, and an integration management bolt-on acquisitions don’t explosive. But integrating two companies office to drive delivery and workstream into a synergistic platform remains one of leads for all major departments to execute. achieve the expected the most difficult aspects of a deal. More On day one, the company must be pre- synergies, largely because than 70 percent of post-merger integra- pared to seamlessly deliver to its customers. buyers don’t plan the tions fail to capture planned synergies and It is essential that the plan for the combined integration properly, says value. Why? Because buyers underestimate companies is communicated clearly to all the effort they need to truly merge two employees, both in the platform and the Jon Caforio of RSM companies, and they don’t spend enough add-on. For employees to fully execute on time planning the integration. As a result, the plan, they must understand it. the companies never fully merge. Customers and the marketplace should To successfully complete the post- not be left out of the communication loop merger integration process, start the plan- either. Delivering a clear message internally ning process during the due diligence phase and externally allows management to mitigate – before the deal is completed. operational and process risk. However, this The lines are frequently blurred between takes deliberate planning. Many merged com- pre-deal synergy planning and actual day panies lose out on real value creation because one execution, making it imperative that they underestimate the time it takes to com- management and employees are ready to municate effectively with the various parties. execute before day one in support of the Quick wins are most often the immedi- value creation strategy. ate operational decisions that can be capi- Consider what needs to be ready both talised on with little effort or investment. before and after the acquisition. When Quick wins are generally focused around building the timeline, management has to integrating technology and back office func- consider plans and milestones for day one, tions such as finance, risk, human resources business continuity, quick wins, the 100-day and facilities functions. But don’t overlook plan and long-term initiatives. the front office functions of marketing, sales and customer service as well. Examples of RISK MITIGATION quick wins can be as strategic as expanding Business continuity and risk mitigation the geographic reach of an existing prod- are extremely important parts of the ini- uct or service by immediately enabling the tial phase of the integration process and expanded sales team or as tactical as lev- should be addressed with priority. Look eraging new revenue streams and services into any financial changes that can affect provided by the other company. transacting with customers on day one, and make sure regulatory approvals are in place, ATTAINABLE GOALS essential IT systems and infrastructure will There’s no question that planning for day function as intended, and critical financial one is time consuming, still management reporting requirements can be met. Man- cannot stop there. A comprehensive plan agement should have an integration gov- for the first 100 days also has to be set ernance structure and workflow process into motion prior to day one. The first 100
Caforio: don’t confuse quick wins with long- in place on day one. This structure should days are critical because they will deter- term integration plans encompass a steering committee to oversee mine whether the transaction will indeed
36 private equity international october 2018 KEYNOTEEXPERT COMMENTARY: INTERVIEW: J-STAR RSM
THE POST-MERGER IMPLEMENTATION PROCESS
OPTIMISATION Completion of integration projects and execution IMPLEMENTATION of strategy that optimises Execution of integration the business. INTEGRATION projects required to begin integrating those PLANNING parts of the organisation DUE DILIGENCE Prepare for the first day considered high priority. of the new organisation Determine the value of though detailed the acquisition target and planning of the activities identify synergies, risks required to complete and integration costs. integration and realise the benefits. deliver value as the buyers intended. Goals The lines are buyers meet their long-term optimisation for the first 100 days should be short-term objections. and attainable. For the 100-day plan, man- frequently The integration management office agement should conduct initial functional blurred provides the process, tools and resources integration workshops and develop a list between pre-deal required to orchestrate the necessary of initiatives that will be completed in activities to capture deal value and realise approximately one to three months. synergy planning and an optimised future state. The buyers and The first 100 days are also critical actual day one execution senior leadership of the combined entity because it is when management is most establish a vision for an integration from the likely able to effectuate change. Employees very beginning. Without a well-coordinated are expecting change during this period of The first 100 days and quick wins should effort to drive this vision into the projects time. Changes that are made during those not be confused with long-term integration being executed by individual departments, first 100 days are more likely to last than plans and transformational change. During it can never be realised. Some projects changes made down the road after the first the first 100 days, the goal is to execute pro- may be expected to take two or three 100 days when it is common to see a return jects which meet critical business require- years. Those projects require extra focus to a “business as usual” attitude. ments and capture quick-win synergies to ensure they stay aligned with the value During the first 100 days, management from the combined company. During this proposition of increasing EBITA, reducing should confirm the merged company’s long- time, departments can develop their future risk or remaining compliant – which should term integration plans, including the pro- operating models and begin to transition translate into an increased enterprise value cess and technology efforts that need to be towards a combined state. and successful liquidity event. completed. During these early phases of the Long-term optimisation initiatives are Having a well-managed post-merger integration, many different factors have to put in place to capture the full synergy integration effort from the beginning means be carefully managed such as external and and value that management is expecting “planning for success”. n internal communications, change manage- to achieve. Working with a strong integra- ment, legal and regulatory issues, costs and tion management office from start to finish Jon Caforio is a principal with the management and financial analysis. will facilitate the focus required to help technology consulting team at RSM. october 2018 operational excellence special 2018 37 INTERVIEW
GENERAL PARTNERS ‘Everybody talks a good game...’
… but what are GPs really doing to drive performance? team that the GP brings to the company, LPs must be prepared to ask some tough questions, or the company or its management using their network resources or a combination, says Joncarlo Mark, a former senior portfolio manager is more relevant than before. More than at CalPERS ever there really has to be meaningful oper- ational improvement for the GPs to meet the return expectations of their investors. Joncarlo Mark is used to looking beyond the fashion, whether they boast about their hype of general partners. As a senior portfolio operational backgrounds or ability to find How do LPs diligence operational manager with the California Public Employ- good operators to run companies. capabilities? ees’ Retirement System, he was responsible However, the implementation of opera- That is the exact objective of the course I for investing in global private equity partner- tional expertise and value-add has acceler- teach at the ILPA Institute called ‘A Frame- ships and direct investments, with a portfolio ated exponentially over the last 15 years. It’s work for GP Value Creation’ – helping that exceeded $48 billion of exposure. He driven by the efficiency of the market. The enlighten LPs on the kinds of questions left CalPERS to set up investment advisor bottom line is 15 years ago you were paying they need to ask managers, management Upwelling Capital Group in 2011 and is one high single digit multiples in a traditional teams and other people involved in the of the judges of this year’s Operational Excel- buyout. Today, average leverage in mid- diligence process. lence Awards for Private Equity International. market buyouts is six times, and purchase Everybody talks a good game – it’s really He tells Isobel Markham why operational price multiples are well into the double understanding what that means. It can’t just improvements have become the benchmark digits. Whereas in the past, I think it was be ‘we have a group of operating partners with which to measure a GP’s capabilities. easier for GPs to make money on the buy, that are affiliated with our firm’. That looks the efficiency of private equity – as so easily good, but almost everyone has that these When did you first start seeing pri- identified through the pricing – has made days. It’s really identifying the exact work. vate equity firms pitching their it much more difficult for private equity to Some private equity firms are incredibly operational capabilities? just think they can buy a company cheap heavy-handed in their operational engage- There’s always been GPs positioning them- and sell it at a higher multiple. ment at a portfolio company, to the point selves as operationally-oriented in some What that means is you still are back- that it may create some friction with the ing management but the low-hanging fruit management team – which can be good or of buying cheap has gone away. Now even bad. Others are primarily financial buyers, before you buy the company you have to they have a network of operating people have a real clear vision of what needs to they can tap but they’re not so engaged. In happen operationally and how to execute these cases they’re probably buying more on that. healthy, growth companies and really just getting behind the CEO to drive perfor- Is the 100-day plan still in play? mance. Then there’s people in the middle The traditional line you hear is the that want to be a resource to management 100-day plan but it may be a two-year plan and help execute, but do not want to tell or it may be the first 30 days or the first six management what to do, because at the end months. I don’t think it’s just the 100-day of the day the CEO and the senior team is plan any more; companies aren’t fixed in accountable for the plan. 100 days and their value hasn’t been maxim- Where the operational value-add role ised in 100 days. The operational element, might be most important is in the develop- Mark: LPs need to be prepared to probe whether it’s driven by an internal operating ment of the plan as opposed to its execution.
38 private equity international october 2018 INTERVIEW
What are some questions LPs can ask? It’s about differentiating what a firm does, what they say they do, and if they really do execute. If a firm says they’re operationally- oriented, what does that mean? How do they execute it? And how does management respond? How do they track and measure operational improvements? When you’re talking to management, ask them ‘what is the resource that your operating people bring to bear? How often do you talk to them? At what level is there engagement? For example, are they helping your general plant manager figure out a way to fix the production line? Is all the dialogue between the operating resources at the senior-most level? Do you wish the support from the general partner from an operational standpoint was more? Do you find what they bring to the table most suitable? Are there other outside parties that are better at that operational piece?’ Those are a few key questions I would encourage LPs to ask.
If you find a firm that is more of a financial support at more value as opposed to utilising GPs attract the right managers? Here we buyer that has the right people either on the GP’s affiliated entity?’ That’s a process are focusing on operational value add, but their team or in their broader network of of reporting: what’s the outcome? How has maybe one of the more important things executives, that may be as effective as the the company performed? is the reputation of the general partner to firm that’s got 100 operating people. Theoretically the investment manage- be able to attract the right CEOs. Because ment team is more aligned with the LPs the CEO community is pretty close so Do LPs have concerns about the because if the company doesn’t do well, it there are few secrets that a prospective costs associated with operational doesn’t matter whether or not the affiliated CEO can’t pick up with a few phone calls resources, particularly affiliated entities? entity made money on it – their economics in the market. If a firm has a bad reputation, Some firms, for good or bad, treat operating are driven by the overall investment per- CEOs are probably going to be reluctant partners like investment partners. It’s very formance. to work for that manager. How does the important that the operational people dem- general partner attract the best? You can onstrate, if it’s an internally-driven piece, Are there any new frontiers of value always pay people, but I think the most suc- that indeed they’re value-add. These are the creation we’re just beginning to see cessful executives want to work for people kinds of questions an LP is going to want firms explore? who have a reputation for supporting CEOs to ask. Did you find the affiliated operating One is geographic value creation; today, and providing the appropriate resources – team to be productive? Where were they even middle market firms are much more not being overbearing and being someone strong, where were they deficient? LPs are global, or are certainly transatlantic. How they can work with when things maybe acutely aware that affiliated operating part- does the market in Italy or Spain compare don’t go well. ners or external consultants are a cost to with that company trying to develop a busi- One of the big developments that’s them at times. ness in the US? What are the nuances in occurring is the development of internal Sometimes operating people are salaried labour relationships in Germany and how HR departments at the GP: dedicated employees and it’s just all rolled into the man- do those compare with opening up a facility hiring of HR professionals whose sole job agement fee. The real potential conflict is in Mexico to support a global company? is to find talent for their portfolio com- ‘X portfolio company is paying the affiliated Another is aligning management. If eve- pany managers. That’s a huge development, operations firm to do operating consulting ryone agrees that getting the right manag- particularly if one believes that the most work or is engaged at a personnel level; ers is critical to executing an operational value a GP can add is through backing great could that company find better operational plan, then how do they do that? How do management teams. n october 2018 operational excellence special 2018 39
KEYNOTE INTERVIEW: COMPLETESPECTRUM
M&A STRATEGIES How brand integration drives value Developing a successful brand can bolster buy-and-build strategies by creating a platform that is more attractive to acquisition targets, says Phillip McMillan, CEO of strategic growth consultants CompleteSpectrum
As GPs struggle to find assets on the cheap, multiple from a buyer, in order to partner branding is increasingly seen as a way to with a platform that has a vision for their create the growth necessary to warrant enterprise. the cost. But what are the integral com- ponents to deriving ROI from portfolio Matthew Stein: Whether it’s the first buy company branding? CompleteSpectrum’s or the 12th bolt-on acquisition, private CEO Phillip McMillan and executive vice equity firms have to pay attention to how president Matthew Stein have worked with these platform companies are seen in the a number of private equity firms and their market. But they also have to heed how the portfolio companies to deploy brand strate- brand is communicated to staff and future gies that drive top-line growth and ROI. acquisition prospects. We sat down with them to discuss how to make branding work for the unique needs Why does it matter how the brand of the asset class. is communicated to staff? MS: In-house talent is critical to represent- In your experience, how are GPs Tapping brand ing a company’s brand in the marketplace. thinking about brand equity now? equity can They touch the customers directly and Phillip McMillan: Broadly speaking, brand- certainly help bring the brand to life. As things shift in ing isn’t part of their playbook, when they terms of brand, they need to be kept up- should be seeing it as an untapped source top-line growth, but the to-date so they’re able to stay aligned with for growth in many investments. The effort best strategies will move the strategy that’s devised in the C-suite. should start with an assessment of each the needle in terms of and every one of their portfolio companies. ROI as well PM: And that in-house talent is often part of Then they should use that information to the value of any acquisition. The brand has develop road maps and strategies to go to Phillip McMillan to be communicated to the staff of a target, market more effectively. to keep them excited about the change in Take buy-and-build platforms, which ownership. Otherwise, they’ll start looking are popular these days. There are a lot of for opportunities elsewhere and in this job forks in the road, a lot of decisions to make market, they’ll probably find them. on how best to integrate those companies quickly, and in a way that makes them more Over the life of an investment, when than what they were individually. should GPs look at brand equity We spend a lot of our time on the M&A issues? side, and work with how best to brand that MS: The best time is prior to signing the platform in a way that encourages more deal, so brand-centric data like market per- acquisition opportunities and drives growth ception and customer purchasing prefer- objectives as the platform is built out. A lot ence becomes part of the decision-making of acquisition targets will accept a lower process on whether to go forward. There’s
40 private equity international october 2018 KEYNOTE INTERVIEW:KEYNOTE COMPLETESPECTRUM INTERVIEW: J-STAR
also an opportunity if new leadership is Can you give an example of what introduced to a portfolio company, or when this strategy looks like in practice? the deal team is devising the first 100 days’ PM: We worked with one organisation that plan. through an aggressive buy-and-build strat- I’d add that every time they explore a egy accumulated 32 different brands in one bolt-on acquisition, they should look at platform over just 12 months. The first step their brand strategy. was to try to understand how the market Beyond the initial due diligence phase, saw that platform organisation. The reality an annual pulse check on a company’s brand was the platform had no identity of its own. equity is worth doing. It’s not always to make And for a private equity-backed com- changes. Sometimes it’s to report back the pany, that’s a serious liability. To be able to success of current efforts or to align to new exit that investment, they have to convince a bolt-on opportunities in the acquisition strategic buyer, or other financial investors, pipeline. Then when planning for the exit, or the public markets, that this platform Stein: assess your brand strategy with each bolt-on acquisition it’s critical to take a look at the market and makes sense, as built. what investors are spending on, and align So, we devised a strategy that reduced branding expert and another one that the branding to that. those 32 identities into four key brands, understands analytics. Specialised branding with a simple tagline that explained what firms can offer that, but a smaller middle Some GPs may assume they already that parent company did for those four market company might not. And honestly, focus on branding. How does this brands. We easily measured the value, quan- GPs need to look at opportunity cost. What kind of brand strategy review differ from titively, through subjective studies of how isn’t getting done because someone at the their existing efforts? people articulated the brand. And then we firm or inside the portfolio company is PM: A lot of firms may include a generic made sure that everyone, both inside the focused on a branding initiative? And can brand survey as part of market diligence to company and out in the market, understood they think outside the box of “what has help with the valuation, but that tends to that new identity through a robust go-to- been done” versus “what should be done”? focus on the risk. But they aren’t looking market strategy. for the opportunities. How do you tailor a branding strat- We’re looking for untapped value here. Can GPs tackle this in-house? egy specifically for private equity? We’re looking at integration of, say, multiple MS: Most of our work is in the PM: Every day, decisions get made that brands. What are the costs, but what are the middle market and we rarely see this kind of reflect the relatively short-term holding opportunities to access new verticals? Our expertise there. Brand equity work like this time of private equity. There are branding processes are built around growth and how requires rolling up research and data points opportunities that require a long runway, to build awareness so that brand strategy into actionable insights. And what the vast but that investment won’t make sense if the creates value. majority of in-house marketers do is focus payoff is years down the line. We always aim to ask questions that get on things like traditional lead generation. The best branding strategy is about pre- answers that drive a concrete action. At its This is a very different flavour of market- paring firms for their next stage – whether best, branding is about understanding how ing that translates consumer interactions, they go public, or are bought by a strategic, a company is perceived by the market and preferences, desires and competitive sets or jump up to a larger fund, there must be a shifting strategies to meet or exceed those into new tactics to go to market. branding message that will resonate in those expectations. management presentations. Tapping brand It’s about heeding the reality of how the PM: And that requires a team. There needs equity can certainly help top-line growth, market sees them – and finding opportuni- to be a digital marketing person who under- but the best strategies move the needle in ties to expand the reach. stands that realm and then a customer terms of enterprise valuation as well. n october 2018 operational excellence special 2018 41 ANALYSIS
HUMAN CAPITAL The value of diversity
No longer simply a compliance item, diversity is now recognised as a value creation driver. Victoria Robson outlines the seven steps you need to take to ensure an inclusive workplace
The #MeToo movement that began with Diversity provides a licence to operate in individual revelations of sexual harassment the community.” in the workplace has triggered a society- In a fast moving, highly priced trans- wide discussion of gender inequality at action space requiring GPs to execute work. Across the world, diversity is in aggressive value creation plans, employ- the spotlight. At the same time, increas- ing a diverse workforce also contributes ing LP pressure, particularly among large to increased understanding of the cus- US pensions eager to see the mix of their tomer/client base; more creative think- beneficiaries reflected in investment teams, ing and innovation; enhanced employee is forcing GPs to address diversity and engagement and reduced churn; and a inclusion internally and at their portfolio healthier ability to anticipate market shifts companies. and future customer needs, among other The big European pensions are also value drivers. active in talking to GPs about gender and “Diversity is critical; you need people cultural diversity at the board level and to look at problems in a different way,” says below, amid a series of studies showing Andros Payne, managing partner at consult- that there are better returns if diversity is ants Humatica. taken into consideration. Clients and customers also expect it. Among them, McKinsey’s Delivering Diversity and inclusion typically fall under Through Diversity report demonstrates the broadening umbrella of environmen- anti-discrimination policies, whether diver- companies in the top quartile for gender tal, social and governance commitments sity is discussed at the board level, whether a diversity at the executive level are 21 per- businesses are expected to make. They are business has any initiatives such as diversity cent more likely to generate above average linked to “the transparency and trust dis- champions, and if it is a UK business whether profits than those in the bottom quartile. cussion and the credibility of a business”, it has met its gender pay gap reporting obliga- For ethnic and cultural diversity, top quar- says Graeme Ardus, head of ESG at Triton tions, says Caroline Löfgren, head of respon- tile businesses are 33 percent more likely Partners, which has set a target to appoint sible investment at HgCapital. to outperform on EBIT margin. at least one female board member at each And even if those questions are not With a deeper understanding of the portfolio company. asked directly, “consideration of diversity environment in which businesses oper- Here are seven steps GPs can take to is implicit in the value creation plan”, says ate, a diverse team can better identify the ensure increasingly diverse and inclusive Ralf Schremper, partner at Oakley Capital. right investment opportunity, says Adiba workplaces at the portfolio company level: “It comes into the assessment of the man- Ighodaro, Actis’s head of investor develop- agement structure and key talent.” ment group Americas. “That sets you on a ASSESS DIVERSITY PRE-DEAL path to great value creation. It’s important 1It is never too early to consider diversity. START AT THE TOP to avoid groupthink around risk and to have To get a sense of a company’s profile at due 2As the McKinsey study shows, reaping people bring different ideas to the table; to diligence, managers can ask questions address- the financial fruits of diversity begins with be not only in the market but of the market. ing diversity and inclusion procedures, any the executive team. Leadership clones “can
42 private equity international october 2018 ANALYSIS
values that often drove the client base,” says Cindy Casciani, managing director at non- DELIVERING executive director search company Equity THROUGH Chair. “It should be a yearly conversation.” Other ways to assess ongoing com- DIVERSITY mitment to diversity include conducting exit interviews on departing employees Companies in the and assessing how hard individuals are to top quartile for gender replace, she says. diversity are RECRUIT CREATIVELY 4To tap into the range of talent in the 21% market place, GP clients are requesting a more likely to generate more diverse list of candidates, says Cas- above average profits ciani. “They want to see us be creative.” than those in the bottom Using a variety of recruiters, hosting quartile recruitment forums, establishing female networks, using anonymous assessment For ethnic and cultural software and hiring heads of talent all serve diversity, top quartile as routes to identify leaders from alterna- businesses are tive backgrounds. Setting targets provides a clear goal against which to measure pro- gress, says Ardus. “If you don’t set targets, 33% you won’t move forward.” more likely to outperform Businesses require “robust competen- on EBIT margin cies to execute the value creation plan”, says
Source: McKinsey Payne. “Closing competency gaps is almost always linked to diversity and getting people that are not a clone of the current team.” make a company single-focused”, says Désirée important. Boards and managers haven’t To do so, businesses need to “look for areas van Boxtel, partner at Karmijn Kapitaal, a appointed enough females.” where there is a monoculture; a blind spot”. female-led GP that invests in Dutch SMEs Uniformity can be a barrier to recruit- with a balance of male and female leader- ESTABLISH DIVERSITY AS A CORE ment. “In the war for talent candidates have ship. Enhanced performance results from 3VALUE a choice, and choose to work for businesses combining management styles, for example, Establishing a robust set of business values, that take inclusion seriously. This is impor- long and short-term outlooks, risk-taking which includes diversity and inclusion, is tant at the firm and portfolio company and risk management, and a results-driven essential to leverage the benefits of differ- level,” adds Ighodaro. versus client-orientated approach, she says. ent working patterns and approaches. Mar- And while management spearheads shalling the talents of an eclectic group of BUILD A CULTURE OF INCLUSION diversity initiatives, the board has a role employees “is a huge leadership challenge”, 5For businesses to benefit from a in ensuring it remains on the agenda irre- says Payne. “The most diverse organisations diverse workforce “an important prereq- spective of whether it is a live issue. Here have the most consistent values,” he notes. uisite is an open and collaborative culture”, GPs can wield significant influence. “It has And once established, businesses need to says Schremper. This requires encouraging to start at the top,” says Christian Sind- ensure they retain those foundational values employees to speak up and a leadership ing, head of equity at EQT. “We undertake that have underpinned growth. “As a business secure enough to be challenged. a clear mapping of the board, which we scales and grows and recruits more people “The level of participation and trans- populate ourselves. Gender diversity is most it becomes more difficult to stay true to the parency over how a business arrives ›› october 2018 operational excellence special 2018 43 ANALYSIS
›› at conclusions and takes decisions is important,” he says. “If management is not driving that behaviour it’s hard to enforce. If the same [type of] people have the decision- making power, the business culture won’t change.” Instead of flourishing, “a team that is very diverse may also die fighting”, says van Boxtel. In addition to establishing a core set of values, mentoring and coaching helps a business take advantage of differences in employee style, personality and approach, she adds. Training, for instance on the benefit of quotas, is key “so that the firm and senior col- leagues on the board of portfolio companies are aware of the context and importance of initiatives and are receptive”, says Ardus. The need for awareness extends to the workforce as a whole, where employee engagement surveys are useful for assessing the broader business culture, including diversity, he adds. In the war LEAD BY EXAMPLE As an example of how a GP can apply for talent, 7Many GPs have teams comprised of a internal best practice to its portfolio, Actis’s variety of international backgrounds and leadership has participated in unconscious candidates have industry experience. However, women are bias workshops that the firm intends to roll a choice, and choose to scarce. They occupy only 5 percent of senior out at its portfolio companies tailored to work for businesses that roles in European private equity, according their particular markets, says Ighodaro. to Invest Europe. “The challenge for many “There is no point in having diversity if take inclusion seriously. PE houses has been the historically low level you don’t get the most out of it,” she says. This is important at of women involved in private equity, which the firm and portfolio to some extent has made them a bit cau- LOOK TO THE FUTURE tious about preaching the benefit of diver- 6Working towards greater workplace company level sity to portfolio companies if they feel their diversity today enhances the future talent Adiba Ighodaro own houses are not in order,” says Alison pool. “As we exit or individuals leave, we Hampton, founder of responsible invest- are building a network of people who we ment advisor Alma Verde Advisors. could hire again,” notes Ardus. Talent attraction and recruitment strat- And while the profile and attitude of egies are key in redressing gender imbal- senior management is critical to trickling ance, says Löfgren. Encouraging greater down a diversity culture, businesses also need diversity ranges from including more to consider a variety of entry-level candi- images of diverse teams on the firm’s web- dates. Embedding diversity from the bottom site and using inclusive language in job up is key to succession planning. “Entry-level descriptions, to asking senior women to people are going to be the business leaders of participate in candidate interviews, she says. tomorrow,” says Casciani. “You want to make By offering ongoing support, devising sure there is a succession [cohort] coming family-friendly policies and sharing best up, otherwise it’s going to be impossible to practice with their portfolio companies, find leaders that are diverse.” managers can lead by example. n
44 private equity international october 2018
EXPERT COMMENTARY: EFFICIO
TECHNOLOGY Are my procurement savings hitting the bottom line? The lack of effective systems to record and track procurement cost reductions has long been a source of frustration for private equity owners. One answer is to invest in a technology platform capable of monitoring standalone and portfolio wide performance, says Declan Feeney of global procurement consultancy Efficio
Finding ways to reduce costs and increase savings opportunities to be identified and profitability in their portfolio companies a strategy developed to achieve them. An is a key focus for private equity groups – implementation plan is agreed, contracts are which is why so many are leveraging pro- signed and the plan – which may include curement to achieve their savings goals. rationalisation or replacement of suppliers, Procurement spend typically accounts tenders and negotiations, new or revised for up to 70 percent of revenues in a manu- specifications, and more – is implemented. facturing business and around 30 percent At the end of the financial year how- in services businesses. It’s often the case, ever, it’s not uncommon to find a mismatch however, that procurement isn’t fully opti- between the identified savings and what is mised within an organisation, presenting shown in the P&L. It’s not clear whether private equity groups with significant cost For the first the savings were achieved but aren’t easily reduction opportunities. Yet while identify- identifiable – or if they didn’t happen at ing savings opportunities may be achievable, time, CEOs, all. Either way this can be a tremendous making sure these savings flow through to CFOs and source of frustration for both the portfolio EBITDA can be more challenging. That’s private equity owners company and the private equity owner. why CEOs, CFOs and private equity com- Ultimately, CFOs need to be in a posi- panies are increasingly focusing on tracking have full and centralised tion to take procurement savings out of reductions in spend to the bottom line. visibility of procurement budgets so that they can increase profit- initiatives throughout ability. But before they can remove savings WHERE HAVE MY SAVINGS GONE? they need to be sure that the savings were An all-too-common scenario is for an oppor- their lifecycle actually achieved. tunity assessment to take place, significant Declan Feeney WHY HAS THIS HAPPENED? There can be many reasons why planned savings don’t reach the bottom line. Among the most common are lack of engagement with, and support from, the business; poor implementation of the new deal; and lack of compliance from the business – all of which can result in ‘leakage’ that erodes planned savings over time. Add to this a lack of effec- tive systems to record and track savings, and the challenge is clear. It’s often impossible to get a single, accu- Tracking performance: a dashboard can monitor the progress of savings initiatives Source: Efficio rate view of how procurement initiatives ›› october 2018 operational excellence special 2018 45
EXPERT COMMENTARY: EFFICIO
›› and the procurement function as a whole SAVINGS EROSION are performing, and whether savings are Ways to reverse leakage and add value being realised. But without this informa-
Value tion, taking timely action to stop the leak- age and get things back on track can be a major challenge.
WHY ARE PROCUREMENT SAVINGS SO HARD TO TRACK? Until relatively recently the strategic value that procurement can add has been largely overlooked. So there has been an absence of technology solutions to effectively track and manage procurement initiatives. Companies have instead had to rely on manual, offline processes with large amounts of time and effort being spent Typical decrease of the value developing and maintaining savings after a sourcing programme spreadsheets. As a result, data has been Time Opportunity Strategic Contract fragmented, unreliable and not very rich, Implementation Assessment Sourcing Signature with little or no information on project risks or actions. This has made it difficult How procurement can boost bottom line to quantify savings or measure the value Identifying additional opportunities as market Maximising value of savings delivered develops that procurement is delivering. Identifying potential savings and delivering Managing implementation, supplier them sooner Project management software is typi- performance spend and compliance cally too expensive and complex for this
Source: Efficio purpose. Moreover, there has been little or
HOW TO INCREASE VALUE THROUGH PROCUREMENT
For a savings plan to work effectively, there are five points to to sign new contracts. In our experience, success relies on consider: buy-in from the management teams involved rather than top- down imposition of new supplier terms. For example, some 1. Understand spend in each portfolio company. By knowing companies may require more bespoke services or products how much each company spends and on what, it’s possible to than a blanket arrangement may provide for. In addition, this identify areas where this could be reduced through negotiat- kind of shared arrangement requires internal champions who ing new contracts with suppliers. are enthusiastic about the benefits, while the imposition of 2. Work out which categories or areas could be negotiated terms can be viewed as unnecessary tinkering by private equity on a shared basis. Once savings have been identified at an owners. individual company level, it’s clearer where there is potential 4. Provide a focal point for companies to share best practice to help companies work collaboratively to negotiate bulk pur- on procurement. This could be through the creation of net- chases. Given that private equity groups may have a variety works and events, so that those responsible for procurement of companies from different sectors, it may be that it is only a in portfolio companies can build relationships with each other viable strategy for one or two categories, such as, for example, and feel comfortable sharing knowledge and information. IT hardware or travel. 5. Facilitate negotiations for portfolio companies. Produce 3. Don’t force the issue. Private equity firms that have achieved standard contracts that companies can, for example, access the smoothest and best outcomes have offered their port- online to help them negotiate and secure better terms from folio companies opt-in schemes rather than requiring them their suppliers.
46 private equity international october 2018 EXPERTKEYNOTE COMMENTARY: INTERVIEW: EFFICIO J-STAR
It’s often TASTING SUCCESS AT MEC3 impossible to After Charterhouse Capital’s 2016 acquisition of MEC3, a global man- get a single, ufacturer of ingredients for artisanal accurate view of how gelato, MEC3 moved to increase its strategic position by acquiring two procurement initiatives complementary businesses. These acquisitions provided the opportu- and the procurement nity to create efficiencies and free function as a whole are up cash, with procurement being a key focus. As MEC3’s existing pro- performing, and whether curement team was small and had savings are being realised a largely non-strategic focus, Char- terhouse engaged Efficio to help. Efficio identified significant opportunities for cost reductions and ensure that savings can be sustained in and rolled out a series of strategic sourcing initiatives to transform MEC3’s approach to procurement. the long term. It also allows senior manage- To accurately measure the resulting savings and to enable MEC3 and Charter- ment to see, at a glance, which initiatives house to quantify the return on their investment in the procurement transformation will deliver the most value so that they can programme, Efficio implemented a new measurement approach and savings tracking prioritise resources accordingly. tools. The savings on spend were outstanding. Importantly, this drives better engage- ment with business stakeholders. With nothing developed specifically for procure- – for example, private equity groups improved visibility of results, stakeholders ment – until now. can track savings delivery across their can better understand the impact a pro- At Efficio, we’ve seen transformative entire portfolio. curement initiative will have and their role results from Pulse, a standalone compo- in it, which further helps to ensure savings nent of our eFlow technology platform. Perhaps the most important benefit of are achieved. Pulse provides businesses with a simple a procurement platform is the visibility it The potential for procurement to add and effective way to track the progress of provides. For the first time, CEOs, CFOs real strategic and bottom line value to busi- procurement initiatives and monitor the and private equity owners have full and cen- nesses is increasingly understood. But the achievement of savings targets. There are tralised visibility of procurement initiatives ability to realise that potential has often clear advantages to using this type of tool throughout their lifecycle – a single source been hampered by the lack of effective to meet the needs of procurement projects: of truth, all accessed from one place. tools to ensure the benefits flow through • Simplicity: Ease of use – a simple, This gives CFOs and private equity to EBITDA. flexible user interface allows updates owners proof of the value that the pro- That barrier has been removed with on savings, progress and actions to be curement strategy is delivering and the development of procurement track- entered, while reports and updates are evidence that savings targets are being ing platforms, which have been success- easy to understand. achieved. In turn, it provides them with fully deployed in businesses over a range • Flexibility: Savings can be tracked over the confidence to take the savings out of of industries and sectors. They are trans- the full procurement pipeline; they can budgets – a key step in ensuring they reach forming the ability of those businesses to also be aggregated to allow focus on the bottom line. track and manage key procurement initia- different categories or business units. From a management perspective, this tives and converting planned procurement • Timeliness: Status reporting provides allows risks to be identified early on. For savings into bottom line benefits.n up-to-date snapshots on progress. Risks example, lack of compliance within the
can be flagged and mitigations identi- business may be putting savings targets at Declan Feeney is private equity advisor at Efficio fied early on. risk. If left unchecked, this will continue and specialises in issues around value creation programmes and post-merger integration. He joined • Scalability: Option to use on a single to erode savings. But with early warning, in 2012 after 13 years in private equity at Permira initiative or across multiple projects actions can be taken to address the problem and Fondinvest. october 2018 operational excellence special 2018 47 ANALYSIS
OPERATING PARTNERS The new player in the deal team
Operating partners are A decade on from the global financial crisis, signed, operating partners are increasingly increasingly involved operating partners are a common sight at involved pre-deal. portfolio companies. Absorbed in the nitty- This can be as early as bringing opportu- before a transaction closes, gritty of transforming a business during nities to the deal team, says Gail McManus, write Victoria Robson and the ownership period, they have become managing director of private equity search Graeme Kerr a major cog in the value creation engine. firm PER. “The operating partner will sit As the number of operational specialists down with that team and say, if we want to employed by GPs rises, the scope of their invest in this industry, these are the things participation is also expanding. that really matter, these are the trends, this Fierce competition for assets, high pric- is where the sector has problems, this is ing and the need to originate more off- where the opportunity might lie. Let’s talk market transactions, as well as investment about what we might do to take advantage managers’ increasingly sector specific focus, of that. They are bringing knowledge and are stretching the presence of operating expertise. They are not there to grind out partners across the investment cycle. No the deal.” longer confined to stepping in on specific Using their bank of industry experi- situations once the deal documents are ence, operating partners serve as a valuable
Team effort: dealmakers still ‘call the shots’ but operating partners are getting more involved in M&A
48 private equity international october 2018 ANALYSIS
sounding board for investment partners that is competitive in a market that is very scouring for deals. “When the guys go out hot”, says Amanda Good, HgCapital head of to the market to look at potential invest- operations innovation team. Increasingly, ment targets, they come back to us and operating partners are “being asked to find ask us about our experience within the change agendas where the deal executives industry, within similar management teams, can make sure they win the deal”. [and] do we have any ideas on what kind of But ultimately, “it’s the deal team that value creation initiatives the company can calls the shots”, says Edward King, partner take on,” says Ewa Bielecka Rigby, head of at executive search firm McLean Partner- value enhancement at Lloyds Development ship, “sometimes much to the annoyance Capital. of portfolio and operations guys”. The relationship between the operating QUESTION TIME partner and the deal team is “quite key”, During due diligence, operating partners says Fredrik Bürger, EY EMEA private ask a diverse and different set of questions equity value creation leader. “We see oper- McManus: pay is structured ‘completely differently’ to the investment team, says Fredrik Hen- ating partners more and more frequently zler, co-head of Partners Group’s industry getting involved pre-deal, actually thinking value creation team. “The investment side through what can be done with a busi- is very much on the cashflow, the quality ness, be that from a growth perspective, of earnings and the ability to repeat margin or a cost reduction perspective, whatever improvement. The operating and industry the investment thesis is. In my experience side more often than not takes more time the most effective partnerships between to look at whether this is the right segment operating partner and deal teams are when of the industry that we want to play in. they work as one team and you don’t know While we’re looking at the same topic, we who is who.” are taking different approaches to looking This level of pre-deal engagement at it. We believe that makes a better invest- requires juggling time and focus. “It’s always ment decision.” a bit of a difficult decision, shall we get Operating partners are now present at more involved pre-deal, because it takes our In my the first management team meetings, notes time [away from] working for our current experience the Blue Ridge Partners managing partner Jim portfolio companies,” says Rigby. Corey. “One, that helps them build a trust- At one time, her team was involved in most effective based relationship with the management one out of 25 deals the firm executes annu- partnerships between team earlier in the process. It also allows ally. Now, she says, they participate in all operating partner and them to make judgments about whether major transactions. She believes it is worth this management team is change ready and it. “The earlier we can get to work with the deal teams are when willing,” he says. management teams of our potential invest- they work as one team It is a two-way street. While operating ments, the better results we can get out of and you don’t know partners have always interacted to a degree ownership.” with the deal team, “what’s changed recently Bringing in an operating partner early who is who is that there has to be an underwriting case accelerates the instigation of business ›› Fredrik Bürger october 2018 operational excellence special 2018 49 ANALYSIS
If we look at the ›› transformation initiatives once the deal business and hopefully come up with the closes. right price to pay for it,” says Mike Mills, model currently, “You can put together a plan before you target value leader at KPMG. we have own the company so on day one you can go “You don’t often have people who have operating partners and ahead and start implementing,” says Rigby. been in there, done that and [have] run Investment partners may be very wel- businesses in the industry and have really deal doers. We’re going coming of the additional support provided deep operational expertise. And that is to see a convergence of by operating partners in generating deal- exactly what operational partners are those two separate skills flow, setting the scene for value creation doing, either from a sector perspective sets into one role and securing the asset, but the two roles or from a functional speciality – pricing, remain very different. supply chain, procurement, whatever it Paul Reading “In private equity houses you have a happens to be.” lot of really smart people who are great The jury is still out on the appropriate with numbers and working out a great way operating partner model. “A number of of being able to fund an acquisition of a funds have chosen to outsource their opera- tions team to consultants, and not have it in-house,” says King. “It’s a cost save, they THE PAY DIFFERENTIAL don’t need them there permanently but perhaps on a deal-by-deal basis. They are The different approaches of on retainer and the funds use them when investment and operating necessary.” partners is reflected in the Paul Reading, partner in EY’s private compensation packages, which are structured “completely equity value creation team, draws a fur- differently”, says Gail McManus ther distinction between operating partner of private equity search firm styles. “For some private equity houses, it’s PER McManus. Generally functional specialists, to some it’s general- speaking, she says: “Many ists. What’s more important than the model operating partners are often itself is that the model is aligned to the paid as consultants and may or may not be an employee. firm’s investment thesis,” he says. They are probably paid a Looking forward, some industry par- proportionate rate for days ticipants predict that eventually the role involved. They’ll have some sort of investment and operating partner will of retainer or monthly fee.” merge. “If we look at the model currently, Operating partners tend not to be employed full-time or we have operating partners and deal doers get a bonus, she adds. “They and in many ways they are in two separate will receive carried interest camps,” says Reading. or co-invest in the deal.” The In future, there could be “operational potential for upside rather than deal-doers, or deal-doers with more oper- cash compensation, “that’s the ating experience. So we’re going to see a win”, she says. convergence of those two separate skills sets into one role”. n
50 private equity international october 2018
EXPERT COMMENTARY: TBM CONSULTING GROUP
OPERATIONAL DUE DILIGENCE An end to the easy gains
Maximising operational Every private equity deal today has some year of economic expansion – reminding value is essential in this measure of operational value factored into everyone that a market correction is likely the investment thesis. For manufacturing to occur sooner rather than later – are era of high multiples and companies – especially those that have complicating private equity deals in the recession planning, says already gone through one or more buy- industrial space. Gary Hoover of TBM outs – the easy gains have been realised. Whatever the triggers might be, private Consulting Group That leaves more complex and challenging equity investors are anticipating a slowdown opportunities. These deals require owner- within the three- to five-year holding period ship with deeper expertise to quickly grow of any new investments. That possibility is both revenue and EBITDA. shifting deal teams’ focus to recession-resist- Because time is always of the essence, ant sectors, according to one senior oper- operational due diligence often starts ating partner at a large US private equity before the letter of intent is signed. A thor- firm with whom we work. When evaluating ough assessment only requires enough time potential deals, they ask if the targets still for site visits and data analysis to develop look attainable – especially at such high valu- a clear estimate of a deal’s operational ations – after factoring in the possibility of risks and opportunities. For example, we a down period that it takes a year or more recently assessed the leadership capabilities, to recover from. In many cases, they don’t. plant conditions, current performance and Today’s high multiples and economic improvement potential of a company with uncertainty decrease the margin of error six plants on four continents. We identified and make operational improvement and $9 million-$14 million in achievable savings effectiveness even more critical during the within six months of the deal close and an holding period and divestment. In the event additional $1.1 million in working capital of a slowdown and declining demand, well- reductions, which we detailed in a recom- structured and effectively managed portfo- mended go-forward plan. lio companies will respond quickly, ratchet- Comprehensive post-LOI operational ing down fixed costs to protect earnings. due diligence will include an execution plan that goes beyond reducing costs and DAILY OPERATIONAL DISCIPLINE provides a detailed evaluation of leadership There are three main opportunities for effectiveness, the target’s M&A capabilities growing EBITDA that we quantify and and pipeline, and organisational readiness prioritise during the operational due to support growth plans. diligence process: One-time cost savings, The prospective acquisition’s true performance gains that deliver long-term potential is revealed by overlaying the due margin improvements, and daily manage- diligence and the executive team’s plans ment effectiveness (see table on p. 52). The with what support the PE firm can offer third, and often neglected, opportunity for to help the target move toward its goals – driving significant financial improvements and beyond – as quickly as possible. is how well the target company is managed on a day-to-day basis. We refer to this as its CHANGES IN INVESTMENT STRATEGIES “management system”. Record levels of dry power, high deal multi- A company’s management system – Hoover: PE investors are anticipating a slowdown ples, and the fact that we’re now in the ninth whether it’s recognised by business ›› october 2018 operational excellence special 2018 51
EXPERT COMMENTARY: TBM CONSULTING GROUP
THE THREE EBITDA DRIVERS REVEALED DURING AN OPERATIONAL ASSESSMENT
OPPORTUNITIES CHALLENGES One-time cost savings One-time cost savings in a manufacturing These opportunities exist in all businesses business include plant consolidation, supplier and can deliver substantial one-time benefits. rationalisation and shrinking inventory levels, While the potential operational and financial which will lower operating expenses, material impact can be significant, they require effective costs and working capital requirements, planning and project management to fully respectively. Aggregating spending across capture. The challenge is identifying what portfolio companies to achieve volume-based impact each initiative will have within 12 to 18 price concessions is another example. months. Performance gains that deliver long- Examples of performance gains that can yield If unplanned downtime is high, it can be a term margin improvements long-term financial benefits when sustained warning sign that machine maintenance has include reducing scrap rates, improving been deferred to save costs in the short term. quality, increasing productivity, speeding Increasing equipment utilisation by improving up changeover times and improving overall maintenance practices and reducing setup equipment effectiveness. Operational times can free up capacity. These capacity excellence and continuous improvement gains can be used to grow sales and avoid or efforts tend to focus on these areas. delay unnecessary capital investments. Daily management effectiveness Daily management miscues and process Symptoms that a company’s management (management system) failures are often overlooked during the due system could be improved include short diligence process, but they can add up over but frequent line stoppages and lengthy the course of a single shift or week. Accounting equipment changeovers. Others are habitual for the extra effort required by employees to rework, excessive operator movement and the respond, fix and ship quality products on time, intermittent disruption of material flow because these performance leaks can reduce daily of poor lineside material-stocking practices. productivity by 5-15 percent.
›› leaders or not – is how value is cre- company performance, quality issues are ated and how orders get shipped out the being reported but they aren’t being ana- door every day. An effective management lysed or resolved, and improvement projects system is an integrated set of management have been identified but they haven’t been processes that align the company strategy prioritised or assigned. and annual objectives with daily activities, For another recent due diligence pro- performance monitoring and corrective ject, we evaluated the target company’s actions. A disciplined management system operational effectiveness, prioritised reduces daily firefighting and provides a potential cost improvements and consid- foundation for managers and employees ered the growth potential of the current Today’s high to make process improvements and sustain leadership team. The company was a solid multiples and forward progress. performer but had plenty of areas where its The signs of a poor management system financial performance could be improved. economic are often invisible to anyone without opera- These included a variety of management uncertainty decrease the tional expertise. For example, many manu- system-related shortcomings: excessive margin of error and make facturers post safety, quality, productivity, direct labour, set-up times that could be cost and other metrics on bulletin boards reduced 50-60 percent and high levels of operational improvement beside production lines and work cells. machine downtime. and effectiveness even These can make everything appear like In the final report we estimated that they more critical during it’s under control and moving in the right could improve operating profit from 12 direction. Probe a little deeper, however, percent to upwards of 19 percent without the holding period and the shortcomings appear: perfor- any top-line growth. After the deal closed and divestment mance measures are not linked to plant or we helped implement a daily management
52 private equity international october 2018 EXPERT COMMENTARY:KEYNOTE TBM CONSULTING INTERVIEW: GROUP J-STAR
system, reduce set-up times and completely The signs by 25-35 percent, double raw material revamp the company’s maintenance prac- of a poor inventory turns, improve finished goods tices. The company achieved the targeted turns, and revamp the quality system to improvements and the increase in EBITDA management eliminate the need for 100 percent inspec- identified during the due diligence process. system are often invisible tion of incoming material. They achieved all to anyone without of these goals. During the first 18 months ACCELERATING VALUE CREATION the company also completed two comple- So far I’ve primarily focused on cost-savings operational expertise mentary acquisitions, one for $40 million opportunities. A comprehensive operational and the other for $150 million. assessment also offers valuable insights into The company’s valuation quickly dou- the potential acquisition’s management plan offer clear synergies and measurable bled and then took off when several large team, growth potential and the M&A pipe- financial benefits? We then look at how corporations made competing buyout line and integration capabilities. experienced and capable the operations offers. Over three years the company’s valu- Starting with the COO, VP-level opera- team is of capturing those benefits in a ation increased over 500 percent and the tions leaders, site leaders and the continu- relatively short timeframe. We also estimate private equity firm ultimately realised a 5x ous improvement team leaders, we look what must be done to improve productivity, gain on its initial investment. at each individual’s experience and track free-up capacity, and create flexibility and record. Our objective is to determine if they responsiveness for the organisation to suc- SPEED AND EFFECTIVENESS will be able to fill the role if revenue grows cessfully absorb change and grow without PE firms that consistently achieve superior as projected. Do they have the ability to adding costs. risk-adjusted returns must create value accommodate and lead change? If there’s During operational due diligence for through operational improvements. As I one constant in private equity, it’s that there another client, we identified significant noted above, today’s acquisition oppor- will be change. You must have leaders and opportunities in all of these areas. Like a tunities at the current multiples require managers in place who will be excited by lot of companies that aren’t in the midst active ownership with deep expertise to and embrace that change. of a market crisis, they were doing many grow revenue and EBITDA. This demand There are several ways that the opera- things well. The plant was organised and the is even more urgent today because of the tional assessment contributes to estimates equipment was well maintained. Order-fill potential for an economic slowdown. of a company’s growth potential. On the rates were best-in-class (greater than 99 In this environment, generating the nec- order fulfillment side, as noted above, manu- percent). essary value and acceptable investor returns facturing lines are often running well below What the company lacked was a clear is a function of speed. It comes down to maximum utilisation levels. With uptime vision regarding its cost to serve and flex- how rapidly your firm can assess potential improvements and setup time reductions, ibility. A lukewarm embrace of operational targets, finalise the deal, launch your 100- we find that the true production capacity excellence had left some major opportuni- day plan and continue to push meaningful is typically 30 percent to 50 percent higher ties. Specifically, based on the due diligence performance gains throughout the three- than what current leaders believe. analysis, we estimated that total capacity year holding period. n That value can be captured in a number could be doubled with minimal capital of ways. First, manufacturers can grow sales investments. In fact, the current footprint Gary Hoover has over 25 years of experience work- and margins by taking advantage of the could support a 4x capacity increase. Better ing as a senior operations executive, management newfound capacity without any increase in inventory management would free up mil- consultant and as a military officer. He currently leads fixed costs. Second, they can avoid or delay lions of dollars in working capital. TBM Consulting Group’s acquisition and integra- tion practice. investments in new equipment, thereby Based on the due diligence recommen- preserving working capital. dations, after the acquisition was finalised, TBM is a global operations and supply chain con- sulting firm for manufacturers and distributors. Ser- On the operational side, when it comes the private equity firm made a number of vices include operational excellence, supply chain to the mergers and acquisition pipeline, we key leadership changes. On the operations management, management system implementa- tion, operational leadership, and acquisitions and look at the in-house team’s capabilities and side, the new management team’s objec- integration for private equity firms and their portfolio strategy. Does the near-term acquisition tives were to improve labour productivity companies. october 2018 operational excellence special 2018 53 GUEST COMMENTARY
BIG DATA Private equity’s impending disruption
The operating model for sponsors has held steady for 30 years, but data science advances are set to change all that, say Ian Picache and Sajjad Jaffer of Two Six Capital
Seven years ago, Marc Andreessen issued a possible. In the public markets, hedge funds warning when he wrote that “companies in have already tapped into advances in big every industry need to assume that a software data and analytics to carve out a unique and revolution is coming.” In his op-ed, published material edge. Private equity’s impending in The Wall Street Journal, the co-founder of innovation wave will similarly be powered the influential venture capital firm Andrees- by the cloud and data science. sen Horowitz then went on to provide no fewer than 15 separate examples of how soft- EXPONENTIAL GROWTH ware was transforming different industries, The scalability of cloud and parallel com- from media and entertainment to autos and puting facilitates the ability to ingest billions oil and gas. The private equity industry at of rows of data. Excel, in contrast, becomes large apparently missed the memo, as few, noticeably slower at approximately 100,000 if any, firms have moved beyond Excel as an rows. Alongside the exponential growth in analysis tool within their business. Of course, computing power, the explosion in data revolutions don’t exactly knock first before volumes and data types allows investors turning an industry on its head. to apply statistics at scale – assuming, of To be sure, the private equity industry course, they have the capabilities to do so. has evolved quite a bit over the years. Firms Again, public investors have already lever- As Wharton professor and Two Six research continue to refine their operating capabili- aged big data, whether it’s through satellite advisor Eric Bradlow says: “Whether you ties, develop new specialisations or add com- imagery of parking lots that can pinpoint have 100 customers or 10 million, profits plementary products to their fund lineup, retail sales trends or website scraping that are made one customer at a time.” be it private debt vehicles, longer-life funds identifies otherwise unseen movements in or something else. Yet the business model, sentiment. For private capital investors, how- PREDICTIVE ANALYTICS itself, has changed very little over the past ever, data science and engineering can help The data, which can be cut an infinite 30 years. In its current state, private equity sponsors arrive at a differentiated and con- number of ways, also reveals metrics around very much remains a relationship-driven clusive view of a company’s intrinsic value, customer behaviour trends over time, the business dominated by outsized personali- providing a better foundation for entry valu- channels that produce the most profitable ties with deep financial acumen. ations, value creation and exit timing. customers with the highest ROI, as well as This is about to change. Advances in tech- Alternatively, hard data – and the abil- insights on product lifecycle and SKU ration- nology have opened the door for capabilities ity to leverage the flood of information alisation. The ability to harness predictive that couldn’t exist until now. As data vol- to understand distinct business drivers analytics can then allow for scenario-building umes have grown and as computing power, – instills a far deeper conviction around offering a roadmap for growth. through the cloud, enables ever-deeper anal- valuations. And this provides a basis for At the outset, insights can inform thesis ysis, GPs have at their disposal data-driven everything else. Applying statistical models development for sponsors and strengthen insights that can materially optimise the developed by professors at The Wharton due diligence efforts. It can tell prospec- factors that drive performance. School and using data stores inclusive of tive acquirers when to pay a premium for Several factors speak to why the industry transactional PoS, CRM and ERP data can assets, or conversely, at which point valua- is ripe for disruption. Most notable is that deliver a very granular view into the value tions introduce too much risk. the tools available today have altered what’s of each and every customer and product. It’s akin to a watchmaker, or horologist,
54 private equity international october 2018 GUEST COMMENTARY
house requires a deep investment and skill- sets not typical to private equity. So while GPs have at the evolution may be more protracted than their disposal say the disruption facing bricks-and-mortar data-driven retail, PE’s operating model of the future will over time better resemble the agile insights that can structure of a technology innovator, with materially optimise cross-functional teams of deal professionals, the factors that drive data scientists and engineers. With a data science backbone in place, performance the GP of tomorrow will be more scal- able, requiring fewer people to produce higher conviction, faster decision making and differentiated, alpha-producing insights. Private equity, a model of active manage- ment, will see the potential for added value become more pronounced through operational dashboards offering real time feedback and agility. And the very culture of the industry, long reflecting an invest- ment banking and consulting lineage, will see a noticeable shift as deal and operations who can take apart a vintage mechanical Real-life applications, however, better teams collaborate far more closely with data timepiece to understand what works, what demonstrate the true utility of data sci- science professionals. doesn’t and any potential vulnerabilities. ence. For instance, co-investing alongside The same way Bain Capital reimagined Most assume everything is in working order a large international PE firm, we worked the PE model around consulting capabili- if the second hand is moving; the horolo- with a global software company to assess ties, technology will usher in the next era gist, though, understands how the 300-plus the scope of the opportunity. Prior to acqui- for the asset class. In addition to better moving parts work together. sition, third-party consultants had surmised returns through data-powered investing, The ability to manipulate and unpack that the US was oversaturated and offered these capabilities will eventually create a such large volumes of data can also be little white space for the company. The data barrier to entry that separates the leaders instrumental in value creation through said otherwise, allowing the investor group from the laggards. supporting resource-allocation decisions. to pay more for the asset and underwrite an In today’s data-rich and fast-computing Again, the applications are almost limitless, untapped (and significant) growth strategy. world, those who can monetise this philoso- but at a high level, analysis arms marketing, Post close, the data further guided manage- phy should enjoy a long-term competitive finance and product teams to improve cus- ment to refine its target markets, focusing advantage. And just like the PE pioneers, tomer segmentation, identify new markets on global regions with the highest ROIC, data will allow tomorrow’s top quartile to or cross-selling opportunities, or optimise while mapping out a path to adopt a sub- see value where others don’t. The difference R&D spending. Moreover, sponsors can rec- scription model that both stabilised and is that it will also allow these firms to see ognise the appropriate inflection points at grew top- and bottom-line performance. and build value in ways others can’t. n which to exit an investment, thus maximis- While the need for technology becomes ing returns and providing the next owner a more acute and the capabilities exponen- Ian Picache and Sajjad Jaffer are managing partners and co-founders of Two Six Capital, which has framework to realise similar gains. tially more dynamic, the challenge for spon- developed a proprietary technology platform that All of this sounds good in theory. sors is that to build this kind of platform in leverages big data and research from Wharton. october 2018 operational excellence special 2018 55 LAST WORD
OPERATING PARTNERS View from the forum The key takeaways from Europe’s leading value creators at our Operating Partners Forum in London
Private Equity International’s Operating Part- operational executives have a greater say in businesses and former CEO of supermar- ners Forum, held twice a year in London investment decisions and “investment teams ket chain Sainsbury talked of risk and the and New York, has established itself as the have more of an operational angle”. ‘ridiculously challenging’ conditions in the leading event for value creators in private UK care sector. Private equity firms are equity. At the seventh annual Operating THERE’S FRICTION BETWEEN CEOS much more conscious of “binary” market Partners Forum Europe in London in AND OPERATING PARTNERS risk than they were before the global finan- May, more than 250 of the industry’s lead- A survey of CEOs and operating partners cial crisis, he said. “We’re seeing much more ing operational experts met to discuss all by Blue Ridge Partners unveiled at the circumspect leverage on businesses, because matters related to operational expertise. conference found there was friction in the people are more conscious of the fact that Here’s a round-up of some of the things relationship between the CEO of a portfolio there might be binary risk that is genuinely we learnt: company and the operating executives sent beyond their control that can expose the in to ensure the business meets it targets. A financing structure.” OPERATING PARTNERS HAVE A degree of friction between CEOs and oper- GREATER PRE-DEAL ROLE ating partners is “unavoidable”, said Blue DIGITAL IS SEEN AS DRIVING VALUE There was widespread consensus that Ridge co-founder and managing partner Digital improvements are seen as an operating partners are playing a far Jim Corey. The key, Corey said, is to build increasingly crucial part of the operational greater role in the due diligence stage a “trust-based relationship” where each toolkit, according to conference delegates. pre-deal, with panellists suggesting that understands their own role in the value Asked to name the most important value the roles of deal partners and operating creation process. creation lever, 27 percent of the delegates partners could eventually merge. Operat- said organic revenue growth, followed by ing partners are now routinely consulted PRIVATE EQUITY HAS BECOME ‘MORE digital improvements named by 20 percent. by investment teams, said Fredrik Bürger, CIRCUMSPECT’ Two traditionally important value creation EY’s EMEA private equity value creation. In an interview with PEI, keynote speaker levers – improving management practices He sees a “hybrid” model emerging where Justin King, Terra Firma’s head of portfolio and procurement improvements – lagged in third place, both with 13 percent.
BUT DIGITAL CHANGE SHOULD BE INCREMENTAL The word “digital” is attached to virtually everything, said Rob Hornby, the chief digital officer at AlixPartners. This has put competi- tive pressure on conventional companies to transform – with very mixed results. Fail- ure rates in “digital transformations” range from 50-90 percent, he said. Highlighting common mistakes in digital strategies, based around “unrealistic expectations”, Hornby advocated a more incremental approach using a basic cloud-based approach that aims for a major transformation with a more real- istic two to three years. n
56 private equity international october 2018 Edited by Tony Ecock, The Carlyle Group the operating partner in private equity Volume 2 Advanced strategies for value creators
content highlights:
• Dan Colbert discusses how The Riverside Company built and refined its operating approach with key lessons for achieving success.
• Scott Glickman, Dan Soroka and Sara Boyd of Graham Partners outline a programme for proactively identifying and reducing business model risks.
• Mark Gillett of Silver Lake Partners and David Moss, an independent adviser, provide a framework for assessing and implementing transformational versus incremental change.
• Sandy Ogg of The Blackstone Group, proposes three action points for ensuring the portfolio company CEO search and selection process is successful.
• Matt Sondag of West Monroe Partners provides useful tips for how to select and optimise the emerging role of the IT operating partner…plus much more
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