When it comes to the deal process, standardization is taking place in three areas: postclose planning, performance monitoring during the holding period, and professional development of the portfolio company management team. While nearly all the firms we analyzed are standardizing these three processes to some extent, there is broad variation in the degree of standardization and its overall robustness.
We identified three standardized approaches to postclose planning:
The postclose strategy day, in which the private-equity firm’s deal team and (if present) operations team meet with company management to reach agreement on the company’s general strategic direction and identify a limited set of critical strategic initiatives (without going too deeply into how those initiatives will be implemented).
The 100-day program, in which the private-equity firm and company management develop a detailed action plan for operational improvements to be implemented in the first three months after the deal closes (sometimes with the help of an external consulting company).
The value creation road map, which is a comprehensive long-term action plan for realizing the company’s strategic agenda—complete with critical milestones, a timeline, designated responsibilities, key performance indicators (KPIs), and links to the company’s budget and business plan.
In our experience, most private-equity firms use at least one of these three mechanisms for postclose planning. But, of course, these approaches are not mutually exclusive. Each has a different time horizon and each tends to go progressively deeper into the nuts and bolts of operational value creation in the portfolio company. One key trend in the standardization of postclose planning will be to integrate each of these approaches into a more comprehensive planning process. In this integrated approach, the strategy day focuses on aligning the key players around the long-term strategic direction, the 100-day program focuses as much (or more) on figuring out how to implement the initiatives necessary to execute the strategy as it does on achieving quick savings, and the value creation road map guides the company’s activities throughout the holding period.
In today’s highly volatile economic environment, however, firms need to be prepared for the fact that portfolio companies may have to adapt their strategy multiple times throughout the holding period. As a result, postclose planning will increasingly extend until exit, with the value creation road map being revisited at multiple points as changing business conditions require. This iterative planning process will conclude with the ever more important task of exit preparation—that is, reviewing the business plan and key value drivers 12 to 18 months prior to a planned exit in order to test whether the company is attractively positioned for likely buyers.
When it comes to performance monitoring, we also found a range of standardized approaches. While nearly every firm we looked at has some standardized approach to tracking KPIs at their portfolio companies, the comprehensiveness of those KPIs varies greatly. Most firms track financial reporting, a process that in some cases has become completely automated. But only some regularly track operational KPIs (for instance, operating income or industry-specific indicators such as same-store sales in retail), which are absolutely critical for monitoring ongoing operational value creation. Finally, relatively few firms have taken the additional step of systematically tracking leading indicators that would allow them to identify problems in the business before those problems start showing up in downward-trending operational KPIs. Leading indicators might include macroeconomic factors (such as inflation rates) or industry-specific factors (such as order intake and stock levels in the automotive industry). In the future, we expect to see comprehensive standardized monitoring of portfolio companies, including automated monthly reporting, standardized cross-portfolio metrics, and company-specific leading indicators.
The professional development of the management cadre at a private-equity firm’s portfolio companies is probably the area in which there is the least amount of standardization today. Most firms do an initial assessment of management during the due diligence process or, if they choose to go outside for management, before they hire a new team. Many complement this initial assessment with ongoing performance reviews of the CEO. But relatively few have instituted standard reviews of C-suite employees across all their portfolio companies.
As operational value creation becomes more central, private-equity firms will need to take a much more active approach to encouraging the professional development not only of the top teams at portfolio companies but also of the broader management ranks. That will be a big challenge because private equity has had something of a blind spot when it comes to talent management. When value mainly came through leverage and holding periods were relatively short, the development of talent seemed like an investment that firms could safely avoid.
But as top-line growth becomes more important and holding periods grow longer, building a strong management bench even down into the middle ranks of portfolio companies will be core to successful value creation. Systematic professional development will help to ensure that firms are getting the most out of the people at their portfolio companies. What’s more, we believe that standardized approaches to people development will eventually cover all employees at portfolio companies. (See “Bridging the Talent Gap.”) For example, one large private-equity firm we studied has a proprietary professional-development process that includes an employee-training program and online surveys to gauge employee satisfaction at portfolio companies, the results of which are integrated into the firm’s reporting system.