PE Portfolio Advancement Best Practices You Can’t Afford to Miss

4 Min Read

Think about the last time you considered buying a new product featuring technology beyond your expertise — for example, the Nest smart thermostat. It promises to deliver benefits like a lower electricity bill and energy conservation. But, you’re not an electrician, a tech expert, or an economist — the product’s promises are tough for you to validate. Is the technology ready? Is now the right time to buy?

Before making the jump, you turn to the internet to find expert opinions, validate your decision, and locate the tools needed to make Nest a reality.

PE firms face similar dilemmas when evaluating opportunities to advance their portfolios. To be clear, they are comprised of investment professionals who can identify opportunities that can bring them closer to improved operating efficiency. But no one can be an expert in every aspect of every industry. And, unfortunately, in PE, the answers needed are not a simple Google search away.

When evaluating portfolio advancement opportunities, there will always be strategic considerations that fall outside the expertise of your firm, and that’s where the decision-making processes get bogged down. For example, when a management team has questions related to strategic decisions, they often need information that falls out of their wheelhouse, like expanding into new technology or overseas operations. Or, when a PE firm needs to make decisions that address performance issues to advance company growth in a sustainable manner, they often need a discrete channel for portfolio managers to examine key drivers and roadblocks of portfolio company performance.

Without the right resources or experts, firms face the risk of not pulsing fast enough during the decision-making process. Hesitation can be a major source of value loss and if left unchecked, that waste leads to suboptimal management and performance of your portfolio companies.

In private equity, consulting with outside perspectives will help you evaluate and make informed decisions more quickly related to:

• New technologies, processes and methodologies
• Expanding to new end markets or adjacencies
• Developing an exit strategy
• Understanding changing regulatory shifts or industry complexities

The number one goal for evaluating an investment is growth. Knowing that growth includes a broad range of considerations, including market size and industry trends, Apex Leaders recommends looking to the right experts to get the best possible results. Here’s how to ensure you are tapping into quality human capital and unlocking growth possibilities in your portfolio companies.

Five tips to portfolio advancement best practices

Develop a testable hypothesis

As firms look toward a new opportunity to advance their portfolios, it is important to develop a testable hypothesis and not simply act on a vague desire to grow.

For example, a PE firm could identify multiple possible use-cases for an existing proprietary technology beyond its primary use. They could then test that hypothesis through a series of advisor calls to evaluate if the customer demand is strong enough to move forward without spending excessive time or resources.

Developing a testable hypothesis ensures a management team has the perspective it needs to make a decision and move the needle in the right direction.

Bring the right people to initial post-acquisition meetings

Post-close, it’s important to make sure PE and the management team are on the same page regarding the firm’s goals. Part of aligning the groups is having an understanding of where everyone’s competencies lie.

PE’s skill set and responsibility are to give the overall business rationale for their strategy during the life of the holding period. The CEO’s skill set and responsibility are to explain the intricacies of their industry and articulate the nuances and complexities of their company’s growth hurdles.

By having both of those skill sets at the table, you can narrow down knowledge gaps and identify key questions to be answered. From there you can formulate better questions and target the most relevant experts to guide your decision process.

Start small, iterate quickly

Starting with small requests enables primary research firms and portfolio companies to be successful in more complex problem-solving in the future.

At Apex Leaders, we find that while PE firms understand how to engage with research firms, their corporate management teams are not as adept. Starting small makes the process smoother, it’s easier to calibrate expectations and results, and allows the research firm to learn about the company and issues it needs to address — ultimately allowing them to iterate quickly and speed the pace of discovery.

Over time, a primary research firm will learn the nuances of your business to proactively serve up advisor introductions, take on complex new requests, and become a consultative thought partner who prompts you to think about your requests from multiple angles.

Start exit planning early

As reported in the 2018 Private Equity Global Divestment Study by Ernst & Young, “the percentage of PE funds relying on opportunistic buyers has fallen from 54% to 21%. PE funds are spending more time positioning the business for an exit, with a sale strategy established well in advance.”

As opportunistic exit potential shrinks, it’s more important than ever to keep an eye on the broader marketplace, and validate market trends and competitive dynamics to understand your divestment options.

Knowing that exit strategy often sits with the deal team who are generally more focused on investments than exits, it’s important to engage expert advisors and socialize opinions on the market well before your intended exit time frame.

Get the right help at the right time

All firms need help at different times, and the specific help and answers you seek will vary if you’re looking at R&D, exploring new markets, or divesting. Getting the right help at the right time is imperative.

With more PE firms adopting buy-and-build strategies driven by the increase in multiples, private equity firms need to adopt value creation activities beyond the traditional LBO model. To maximize growth (and rate of return) in the middle period where growth needs to occur, there are strategic considerations that inevitably fall outside the management team’s wheelhouse. By injecting industry research and speaking with niche experts during this period, you can more confidently accelerate internal decisions and steer the company into value-creation activities.