Success in Private Equity

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Private Equity: The Key to Success

Private Equity: The Key to SuccessRecent reports of Wiggle’s £8 million profit after barely breaking even last year highlight the benefits of Private Equity firms in business today.  But with over 2,000 Private Equity firms in the UK, what is it that separates the most successful of these firms from their lesser counterparts?

There are six key practices that can be found in the PE firms leading the market.

Strong Leadership

All profitable organisations attribute a large share of their success to the vision and direction of the person at the top.  Private Equity practice is no exception. Leaders with even- keel demeanours who empower their employees invariably get more from those that work for them.  Strong leaders within the PE sector are quick to implement changes to existing management and establish cohesive teams that work in alignment with shareholder wishes.

Identify growth potential

The key in PE practice is to be able to identify growth potential that your competitors do not see.  An attractive company, one with a good product and good management will most likely generate a high return on an investment.  But, the greater financial reward will be found by increasing the outperformance of a business that has not yet realised it’s potential and is therefore, undervalued.  Identifying these companies is the real skill of the PE partner. The most successful firms commit more time to this part of the process than anything else, often screening upwards of 12 companies for every deal they engage in.

Complete in-depth research

With any PE deal, there is the potential to unearth red-flags within the company.  A sound due-diligence process can save both time and money. The best firms create an exhaustive list of potential issues before systematically prioritising each item.  Each potential concern is then tested against a range of possible scenarios to predict the financial impact on the investor. Those firms who excel, are accomplished at utilising the expertise, experience and extensive networks of contacts within the industry.  These firms gain an unparalleled insight and understanding of the current market. The top PE partners invest their time into a company, typically meeting daily with top executives in the first 100 days of a deal, developing relationships and gaining a first-hand understanding of the internal workings of the business.

Create a comprehensive business plan

The best deal partners create detailed plans that they then revisit and revise as the transaction progresses.  A set of key performance indicators are identified early and growth is measured against these throughout. Successful partners are flexible in their approach to some parts of the plan but remain focused on the goal, the time frame and the return on capital employed. They plan for succession upon exit and put in place PE operations teams to improve the sometimes-difficult communication between an existing CEO and a PE firm.

Utilise effective incentives

In any organisation, the use of incentives, when effectively implemented will motivate a workforce and increase their output.  Incentives that are spread too widely and do not consider personal circumstance are much less useful as a motivational tool. In the most successful PE firms, the use of incentives is substantial and performance driven.  Those eligible tend to be the company’s leading officers, and the reward can be as much as 20-30 % of the total equity. A personal financial commitment at senior level is often expected of the CEO, and this ensures accountability and serves to motivate the organisation lead.

Implement a considered exit strategy

This is the final part of the PE firms journey on a transaction and is definitely the most critical stage.  If this is well constructed it can result in an excellent return on the initial investment, without this, deals can fall short of expectations.  PE firms typically have an investment period of five to seven years before they look to exit after making a substantial profit. To ensure that this process is as financially beneficial as possible there are three things outstanding PE firms do.  Firstly, 18 months before the desired exit a readiness scan will be completed to ascertain suitability. Secondly, final value adding performance improvements are made to make the deal more appealing to prospective buyers. Lastly, communication with interested parties will be open and honest, to increase trust between the interested party and the PE firm.  The top firms recognise the importance of this strategy in adding final increases in the rate of return and so maintain high energy levels in this final holding period.

In 2017, just over 3000 PE deals generated $440 billion of profit.  In this fiercely competitive million-dollar business, there is no better time for PE firms to be at the top of their game.