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17.12.2020

One-year loss starts from entry

Strategies become reality in planned schedule far too seldom. This phenomenon is acknowledged by both corporate and private equity operators.

Trailmaker has been cooperating with private equity for years and noticed that every private equity company occasionally struggles with a slow-progress case.  

In the beginning TRAILMAKER concept was often used for speeding up cases that already had become “slow-movers”. Thus, over the years, we have examined some 100 slow-progress cases and analysed what is causing the delay.

Using this insight, we have been developing ways to solve this phenomenon. Nowadays TRAILMAKER is mainly used for eliminating these problems before they materialize.

Risk of delay lies in every 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.

Momentum for change is easy to lose

What causes the delay? In the 100 slow-progress cases we have examined, same signals repeat. There is a pattern of one-year loss, and it starts from thevery beginning. It starts from the entry.

Firstly, in the moment of transaction there is a major momentum. The management and entire organization are all expecting for a change.This momentum of expectant energy should be transformed into execution immediately after transaction. Once the famous 100 days are gone, the momentum is gone as well. And it is difficult to rebuild.

Secondly, having a private equity company onboard typically means change, in form of taking a positive leap to the next level: speeding up growth, profitability, internationalization and so on. Professional private equity players never invest in incompetent management. Thus, without exception, the management has a strong track of delivering results. This means that the management has been optimized for executing the old strategy. The new strategy by definition is different from the old strategy, and therefore also requires a new set of competences. Even if the logic here is strong, the execution of the new strategy often continues with existing competencies. And after a year or more, the need for reinforcement becomes evident.

Thirdly, even though plans have been made together, the true commitment and teaming up has not been reached.

So, the management goes back to do what they do best. This is, what they did before. Thus, nothing changes. The analyses and plans have been made thoroughly and professionally. But still, something is missing. This missing piece is common view. It cannot be achieved by making better plans. Common view is not mathematics. Common view is psychology. True common view ensures commitment to start moving towards the common goal.

Due to these three reasons, one year is easy to lose in the beginning. And of course, this lost year has a major effect on IRR.

TRAILMAKER concept is designed for capturing the momentum, for testing competencies and for forming true common view and commitment. Fast start to the right direction is the first common victory for the management and new owners. Worth trying?  

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