The key reason a private equity firm would buy a stake in a portfolio company is to increase its value, then sell the company for a profit mostly within five to seven years.
For a private equity firm to get the highest return on investment (ROI), they often begin optimizing the operations of their portfolio companies immediately after they invest.
How do private equity firms optimize the operations of portfolio companies? Read on to find out.
What is the Optimization Phase of a Portfolio Company?
PE firms no longer just sign a check to their portfolio companies.
They get involved in management, strategy, hiring, brand building, training, and much more.
The private equity portfolio optimization process often involves the use of data and technology to improve operational infrastructure, risk controls, organization structure, functional process financial performance, talent and culture programs, etc.
This phase is usually conducted by the private equity operations team.
The private equity operations team is normally made up of accomplished executives who have a long track record in operations, management, finance, auditing, or human resource.
Ideally, the PE operations team should get involved in a portfolio company during the due diligence phase.
Getting the team involved early allows them to identify weak areas in a portfolio company and develop game plans to address the problems post-investment in the fastest time possible.
Key Things the Private Equity Operations Team Does
As mentioned above, the private equity operations team performs several tasks all aimed at optimizing the performance of a portfolio company.
Private equity firms will often deploy these individuals to their portfolio companies to do the following.
Foster good relationships with the portfolio companies executives
If the private equity management and the executives at their portfolio companies don’t get along, this could get in the way of the portfolio companies’ success.
So, the PE operations team is tasked with ensuring a cordial relationship is in place and everyone is working hard towards creating value for the business.
A recent survey by Kearney, a leading global management consulting firm, found that almost 90% of portfolio company CEOs expect to begin a relationship with the PE operations team during the pre-acquisition phase.
The minority want this relationship to be in place as soon as practically possible after they close the transaction with a private equity firm.
An example of how a good relationship between a PE firm and portfolio company can help improve a performance is, instead of exposing shortcomings and finger-pointing, the two can work to identify problems and solutions.
Get the right team in place
Private Equity firm executives are fond of saying “A great management team can make a good company great.”
That’s why when a private equity firm invests in a company they might let the current management stay on if their leadership positively impacts the company.
If the portfolio company is underperforming or at risk of having financial problems, replacing the management is often a top priority.
In the interim, members of the private equity operations team could take over the company and oversee the hiring of the right management.
Due to their experience, the PE operations teams are really good at finding top-notch talent that can grow their portfolio companies and give them the highest return on investment.
Coach portfolio company executives and staff
A portfolio company could be underperforming not because they have a bad product but due to leadership gaps.
Because a private equity operations team is made up of individuals with lots of experience in human resources and management they can easily identify the leadership issues and ways to address them.
For example, they could teach portfolio company executives industry best practices and growth hacks to improve the performance of their business.
Create a strong brand
Private equity firms know that a strong brand can survive product failures or economic downturns.
That’s why they are often keen to help their portfolio companies create brands that are people-focused and meet market needs.
The PE operations team usually has marketing and advertising gurus who can create strong brands, which when established can give a PE firm massive ROI.
Identify growth opportunities
One of the first things a PE operations team will do is look at opportunities their portfolio companies are yet to take advantage of.
The untapped opportunities could mean higher revenues for the portfolio company and better returns for the PE firm.
For example, a portfolio company could only be selling its products or services through a physical store.
A PE firm could see an opportunity online and develop a high-converting eCommerce website for the portfolio firm, which will increase their customer base and make the company global.
Boost productivity by using technology
One of the best ways to optimize private equity portfolio operations is by using technology.
The PE operations team often assesses portfolio companies’ operations and provides the best tools to eliminate repetitive and mundane tasks that don’t need to be done by humans.
They can also bring in technology that will help company staff communicate more easily, collaborate better on projects, and have all data in one place for easier and faster decision making.
Optimizing Private Equity Portfolio Operations With OpsCheck
Ops Check has customizable tools your private equity operations team can use to better collaborate and create more value for your portfolio companies.
For example, they can use OpsCheck to generate detailed information about a portfolio company’s processes. This information can be used to expose inefficiencies and redundancies which when addressed will streamline portfolio operations for better output.
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