5 THINGS YOU MISSED: Transformational Value Creation You Paid 10X, Now What?

Missed last week’s ACG New York Value Creation Event? Here are five top takeaways from the panel. Prepared by TresVista

  1. Cost reduction remains a major theme in Private Equity: Middle market companies tend to leave room for improvement on the cost side by not testing their multi-generational supplier relationships and renegotiating for better terms. Jake Wojcik of Insight Sourcing Group, believes that cost optimization remains the quickest way to drive EBITDA improvement, given it can yield significant results within a few months. Private equity investors can also look at pool purchasing to drive procurement synergies if portfolio companies have common direct raw materials. However, focusing on optimization of a single portfolio company is a relatively easier task.  Moderated by Bob Fitzsimmons, Managing Partner, High Road Capital
  2. Focus on organization design: Human capital and resources management remain the key to success of small and middle market companies. “Organizational design, we find, is one of the biggest elements, especially from the smaller- to mid- market companies. Often companies do not have the right resources and the skill set in order to really move the ball forward in terms of support of their strategic intent,” said Don McNichol of Performance Improvement Partners. According to David Reynolds of Venetia Partners, private equity investors could reap further benefits from their portfolio companies by better understanding the intricacies of their processes.
  3. Investor focus on IT: Private equity investors have increased their focus on IT infrastructure considerably, and undertake diligence to find possible red flags before investing. This approach is a tectonic shift from previous years, when investors audited IT only once they had C-level executives in place after acquisition. According to John Bisack of Performance Improvement Partners, investors have gone from not wanting to do IT diligence to consciously looking out for IT risks. He said, “As a general comment, private equity folks from the get-go in today’s age want to know how we can leverage technology and secondly, how can we do it efficiently. So, it’s a change in dynamic.” Moderated by Corey Massella, Partner, Katz, Sapper & Miller
  4. Software development and value creation: Michael Goldman of TM Capital said, “Value creation requires time, effort, people, and money.” Value creation can be achieved with a strong software development team. Jared Ruger of Bertram Capital believes in the thesis that paying a software developer a premium (1.5x-2x the industry average) results in higher productivity. Incentives on carry and on completion of the projects also motivate the team.
  5. Best practices in hiring key professionals: Tim Foster of Sales Benchmark Index (SBI) suggests, “Tie your Chief Marketing Officer’s pay to your VP Sales’ pay.” This helps align their interests as they work hand-in-hand. “At the senior level, such as the CFO or Chief Human Resources Officer – if they don’t have private equity experience, and if they don’t know how to manage cash, or to recruit people who know how to do that, you are setting yourself up for maybe the right people on the wrong business,” said James Rosener of Pepper Hamilton. Out-of-box hiring also helps bring in different perspective. However, problem-solving capability is on top of the requirement list.

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