Getting More Value Out of Current Portfolio Investments
Don’t just take my word that Private Equity is retrenching with an operational focus, David Rubenstein, the co-founder of Carlyle Group and key figure in the Private Equity industry recently stated “Private equity firms will spend 70 per cent of their time shoring up their investments, 20 per cent of their time shoring up their investor base, 5 per cent trying to raise new money and 5 per cent trying to do new deals”. While part of that 70% will also involve financial restructuring, the bulk of that effort will be in creating value for that portfolio investment via new revenue generation or cost reduction.
While I have previously posted in an earlier entry referencing a WEF report that PE drives better management practices and worker productivity in their investment portfolio companies, There is still a theoretical upper limit for that improvement using the current internal resources. I am not queuing music for “March of the Consultants”, but I am saying there are many functions that can benefit from outsourcing services that support 12 month return on investments and free up significant working capital. This approach is not constrained to simple internal cost cutting, but also creating business models in new markets that had not been previously considered for entry. An example would be new shared services models across current competitors who previously had a desire to keep “it all inside the four walls” but now are looking at all options to keep ride out the current market. Private Equity is able to take long views with their holdings and consider aggressive value creation. It is this willingness to make bold moves which will help drive their portfolio holding companies.
While some can point to examples of “pass the parcel” investments (courtesy of Guy Hands, Chairman of Terra Firma) which create value only on a sale to the next buyer, the vast majority of PE investments are longer bets that create value for the workers and overall economy. Lagging companies create economic drag and inefficiencies which require shock treatment to increase competitiveness. It is refreshing for Mr. Rubenstein to highlight this point so directly. What are your thoughts?
