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Building the infrastructure for repeatable value creation

Niclas Thelander

Niclas Thelander, Managing Director, Outsized Ltd


The competition for private equity deals is increasing. Growing levels of dry powder, more sophisticated sellers and the use of auctions have led to high entry multiples in many markets. For private equity funds, this means that the need for sophisticated operational value-add is greater than ever before in order to achieve target returns.

There is not a magic formula and each fund operates under its own specific circumstances. However, we can distil lessons learned from successful fund managers and look at some common denominators that will substantially increase the success chances for outperformance.


Fund managers that are successful over a sustained period of time have an approach to value creation that is explicit, and works across deal teams as well as sectors and geographies. From our research and discussions with leading funds investing in developed as well as emerging markets, four key success factors have emerged:

  • Early intervention
  • Focus and sequencing
  • Resource allocation
  • People and talent

Early intervention: It is worth confirming what most people in the industry already suspect: managers that hit the ground running in terms of performance improvement interventions consistently outperform their competitors. Bain & Company analysis concluded that the industry mean deal return was 1.4x compared to the top-quartile mean of 2.2x. However, this can be compared to managers with an early intervention focus, achieving a return of 3.6x.

Funds intervning early beat the rest

Focus and sequencing: Less is more when it comes to value creation. Successful funds prioritize and sequence initiatives stringently to avoid portfolio companies’ management getting distracted by too many priorities. This means that some value-add opportunities are foregone, but based on an active prioritization. The upside is that the key initiatives that are selected get full attention and can be executed successfully.

A survey of some 1,800 senior executives concluded that having too many priorities is their biggest area of concern.

Company Performance by Number of Strategic Priorities

Resource allocation: It is a natural tendency to focus resources on problem areas in the fund or allocate to the most vocal deal team partner. However, from an overall fund IRR perspective this may not be optimal. Scarce portfolio management resources and senior time should be based on where the impact is likely to have the greatest eff ect overall on portfolio performance. This means that managers need to monitor performance in a way that takes into account both the absolute size of the potential performance improvement and how likely it is to be realized. That can then be used to allocate resources and eff orts to the companies and initiatives where managers can achieve the most ‘bang for their buck’.

Anecdotal evidence suggests that many private equity funds can learn from the venture capital approach to focus most resources on winners. Doubling down on successful investments may take such cases from say 6x to 10x, which on a fund level could be better than bringing problem investments from 1x to 1.5x.

People and talent: Selecting targets with good management in place, sourcing new executives for key positions and, importantly, having a structured process to address ongoing development in the portfolio companies are emerging as important success factors not least for emerging markets managers. An increasing number of funds have hired senior-level executives dedicated to leadership and talent development in the portfolio. An active approach to portfolio leadership and functional talent development and sharing of best practices is key to long-term success.

Enabling value creation: Going from ad-hoc to a repeatable and consistent process

Most large funds have started to build value creation capabilities, but still only half of operating partners say they have a clearly defined model to create value in the portfolio. In smaller and mid-sized funds, the maturity is lower, but there are some initial steps to consider:

1. Formulate an explicit and agreed value creation approach. Rather than a black-box, opportunistic or ad-hoc approach, value creation needs to be a process-driven and systemized framework covering the entire deal cycle. Only then can funds repeat value creation by design, as opposed to by chance or be overly dependent on a small number of individuals. The starting point is clarity. Unless the key stakeholders agree on who should drive what part of the value creation activities in the due diligence (identification) and ownership (implementation) phases, successful value creation is hard to achieve as funds grow and expand.

2. Decide value creation: ‘buy vs. build’. There are a number of models that successful funds are following in terms of value creation resources, i.e. the mix between internal resources, proprietary expert networks and the use of external consultants. On the one extreme there are funds with large in-house portfolio teams with strategy and functional experts working fulltime on key initiatives in the portfolio. At the other end of the spectrum, some funds help bring in external consulting firms and experts where needed, but do not have any internal value creation resources, or even sit back and limit input to board-level meetings. What is right will depend on the sector focus, level of common needs in the portfolio, how hands-on the fund wants to be, existing expertise in the fund and so on. However, most funds do agree with the need for operational value add to drive IRR. An increasing number of managers are therefore seeking ways to extend their value creation capabilities in a flexible, low fixed-cost manner. This is where expert networks like GLG and Alpha Sights can help to find subject matter experts in the due diligence phase, or Outsized to access proven boutique consulting firms and independents to implement value creation initiatives.

3. Implement a three-tiered performance tracking framework. Unless a portfolio-wide performance monitoring system is implemented, it is hard to track and forecast progress on an individual company level, which makes it impossible to correctly prioritize time and efforts between investments. Managers need to track and monitor progress on three different levels: fund, portfolio company and key initiatives in each portfolio company. The key initiatives in each company is what will drive investee and ultimately fund performance and is an ‘early warning’ or indicator of what is to come. A common problem is that funds track performance mainly through monthly, often backward-looking, management accounts, but have no forward-looking KPIs in key areas linked to the strategic focus areas.

Preqin Solutions offers a platform that streamlines the collection and analysis of financial data, KPIs and ESG metrics from portfolio companies, meaning that managers can spend less time collecting and analyzing data and more time creating value and driving key initiatives. In today’s competitive marketplace, creating value is also only half the challenge, fund managers need a way to demonstrate the results of their initiatives to their LPs in a way that they understand and that diff erentiates them in the market. Preqin Solutions’ LP reporting suite adheres to industry best practices and incorporates the latest LP expectations for fund reporting to help fund managers with these investor relations challenges.

To conclude
The need for operational value-add will keep growing and each investor needs to find a strategy that works for them. Whether the answer is an in-house portfolio management team or relying on using expert and consulting platforms to extend value-add, or perhaps both, will depend on specific circumstances. The starting point is to actively address the topic and to make a conscious decision, to go from an ad-hoc approach to a repeatable and consistent process.

About Outsized

Outsized logoOutsized: Extending value add capabilities for investors and financial services organisations

Outsized was founded to transform the $250bn market for consulting services with key focus on financial services and emerging markets. Why? The current way of procuring consultants does not work very well – not for clients and not for high-quality consulting firms.

Until now clients wanting to bring in external expertise have been at an information disadvantage because they only using consultants infrequently in a particular sector, geography or part of the value chain. As a result, it is hard to know which consultants are best for what specific projects. Hence, many clients default to perceived ‘safe’ big brands, with sometimes generic insights, junior teams and limited implementation experience. Alternatively, clients have to go through risky and time consuming word-of-mouth searches. Both options are unsatisfactory in terms of project success consistency.

Outsized has created an alternative by building a curated network of rigorously vetted and quality-assured consulting firms and specialist freelancers across the financial services value chain. Utilising a combination of human curation and machine learning technology, the result is higher quality project outcomes driving IRR, quicker sourcing and with less risk..

Contact: Niclas Thelander · +44 (0)7751 723 992 · niclas@outsizedgroup.com · www.outsizedgroup.com

This article was written for the 2016 Preqin Global Private Equity & Venture Capital Report. For more information about the report, please visit www.preqin.com/gper or email info@preqin.com

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