Private equity (PE) investors always aim for solid investment cases and high return on invested capital. PE investors have limited time for executing all planned development plans for value creation. That is why PE investors spend a lot of time and resources during preparation of a single investment. They need to understand thoroughly the relevant market, competition in the market and all relevant development opportunities for the company’s value creation.
Right people and team for the case is very crucial for a successful investment and very often one of the most important success factors. The team need to have relevant experience to support the planned changes in the company and the team must share a common view of the value creation plans as well as a common view of executing the plans.
Very often PE investors experience friction and slowness in executing decided plans early in the holding period.
Swift start of execution crucial for successful investments
Normally PE investors have some 4-6 years to form and execute all decided growth and development plans for value creation. As said, PE investors use a lot of efforts and resources in preparing the plans and they often utilize outside resources, experts and consultants for this.
According to a recent white paper study by EBRD, there are more than 20 common action items driving PE value creation and they can be grouped as follows: 1) operational improvements, 2) top-line growth, 3) financial engineering and 4) cash management. This empirical study tracked value creation action items but also execution of actions over time. One major outcome from the study was that it’s not the sample of planned actions that is relevant for value creation, but execution of these actions.
Execution has its own challenges. They can be caused by lost momentum and/or energy after thorough deal preparations and negotiations. Very often PE investors experience friction and slowness in executing decided plans early in the holding period. Execution might also be halted by resource or competence constraints in the beginning or later during the holding period.
Reasons for slow execution or in the worst case no execution, can in some cases be found in the strategy assumptions themselves or in unexpected market changes.
But mostly slow or no execution is a result of the following:
High investor returns driven by fast execution
Fast and efficient execution of value creation plans is the key for successful investments, whereas slow execution will lower the expected investor returns.
Slow execution of strategic changes will postpone value creation or in the worst case stop value creation. In most cases with slow execution, the holding period for a particular investment will be prolonged. This will negatively affect the investor return as a function of time. The slow start might also leave some of the changes unexecuted or badly executed, which will also impact the expected return negatively. One or more extra years without the desired development will easily destroy investor returns.
After 20 years in international executive positions, I have now spent 2 years supporting different businesses succeed in their strategy execution. Here briefly some of my learnings and observations.
Trailmaker has been cooperating with private equity for years and noticed that every private equity company occasionally struggles with a slow-progress case. Private equity investors are running their entry process systematically and professionally. Best available information and experts are being used. Despite this, some cases become slow-movers. Before the execution starts, it is hard to tell which one. A risk of delay lies in every case.
“We have completed financial- and legal due diligence processes and found only very minor red flags. Additionally, all our discussions with the management have been held in a very positive atmosphere. The target company operates in the same market as us and is familiar with the common customers.” - Does this sound familiar? Does this mean we have turned every stone and everything is lined up for another successful acquisition and integration?