Knowledge Center: Publication
Accelerating performance in private equity: From due diligence to exit7/25/2017 Todd R. Monti, Sharon Toye and Larry Oberfeld
Following three consecutive years of strong deal activity, private equity (PE) professionals are innovating their value-creation strategies to overcome market headwinds from high deal multiples, strong competition, and record levels of “dry powder” (money raised but not yet invested).
Against this backdrop, leading PE firms are focusing on four areas of corporate performance that Heidrick & Struggles research indicates are the most crucial for companies to build and change momentum more quickly than their competitors—and thus reduce time to value. As detailed in the book Accelerating Performance, coauthored by Colin Price and Sharon Toye, the four areas are:
- Mobilize—inspiring aligned action based on a compelling ambition and purpose and a simple set of strategic priorities
- Execute—fully harnessing and streamlining resources to consistently deliver excellence in the core business
- Transform—experimenting and innovating to create growth engines and reinvent existing businesses ahead of the market
- Agility—spotting opportunities and threats, adapting and pivoting faster than competitors to create competitive advantage
PE professionals have little time in which to accelerate the performance of their portfolio companies, and the four areas we have identified (summarized by the acronym META) can reduce their time to value at every stage of the investment cycle.
The investment cycle
While traditional due diligence identifies a target company’s risks, challenges, and opportunities, shortening the time to value requires experimentation and a culture of disruptive thinking. Innovative PE professionals challenge traditional growth strategies and create new revenue streams by developing a value proposition that focuses on how people, processes, and technology maximize value creation from day one.
"Day one" readiness
In PE, timing is everything. By the time due diligence is conducted, a bid is accepted, and the deal is signed, the target company’s competitive advantage can be lost. Regardless if it’s a desired capability, market, or technology, the elements that made the company an attractive investment must be mobilized before competitors inevitably catch up. Having clearly defined strategic priorities energizes management teams and aligns their actions to minimize business disruption during the transition.
The average holding period for a PE-backed portfolio company is three to five years, leaving investors with a short timeframe to execute their value-creation strategy through revenue enhancements, operational improvements, or cost reductions. The time to value for each of these crucial paths can be shortened by streamlining business silos and holding employees accountable for reaching straightforward goals that best drive enterprise growth.
When the time comes to divest, PE professionals look for the highest possible return on their investment, working hard to maximize exit multiples and boost enterprise value. Sellers with an agile exit readiness plan can quickly adapt to changing market circumstances by having the foresight to anticipate any market headwinds and quickly recover.
Accelerating performance in practice: Bain Capital Private Equity
The following example, drawn from Accelerating Performance, details how Bain Capital Private Equity has become a catalyst for acceleration and walks through a portfolio company case study to demonstrate how the META framework can be applied and reduce time to value.
Accelerating portfolio companies
Stuart Gent, head of Bain Capital’s European portfolio group, says it “tries to accelerate the results of a company quickly” through short-term levers such as pricing, procurement, cost reductions, simplification, and so on “to financially get ahead of our investment case, because then you have more time to think about the profound change you want to drive and you have more cash to invest in making it happen.”
Bain Capital starts by making sure the right top team is in place and then works very hard on getting alignment, first with perhaps the top 20 and then the top 100 or so people—based not on hierarchy but on their impact. “A lot of what we do may sound obvious, but companies rarely seem to drive change in such a focused and disciplined way,” Gent says. In addition, Bain Capital focuses not only on executing a plan but also on understanding how the plan, its team members, and their roles are determined. Gent says getting alignment up front is crucial because it allows for better interactions and much quicker decisions down the road.
Gent offers a wry observation about the need to put real talent behind the rollout: “When we look to build teams to lead key initiatives, I always question the first set of names discussed. Real change needs the best people in the company, and by definition, they are the busiest and so are rarely offered up for key projects.” Instead, the first names proposed are usually not as effective in their current roles and wouldn’t be missed.
NXP began in 1953, when Dutch giant Philips N.V. set up an electronics business. A group of private equity firms, including Bain Capital, acquired 80% of Philips Semiconductors in 2006, valuing the entire company at $9.4 billion right before the Great Recession struck the global economy. The business, renamed NXP, went public in 2010 at a 46% discount to its initial stated offering price, but the business had gone through a transformation that positioned it well. NXP is now the fifth-largest semiconductor maker in the world, outside of the memory-chip sector—it is known for chips for cybersecurity, for cars, and for digital networks. In October 2016, Qualcomm announced that it will acquire NXP for $47 billion—five times its initial purchase value.
During the four-year stretch that Bain Capital was involved with NXP, partners worked closely with Ruediger Stroh, who was brought in from LSI Corporation. He began by taking his top 50 on a four-day trip to Spain that forced people out of their routines, disoriented them to break down barriers, and resulted in a tight-knit team.
“Our CEO said, ‘Are you nuts? We’re almost bankrupt, and you want to do what?’” Stroh recalls. “I said, ‘Do you think you could win a Super Bowl with people who haven’t met each other? Well, how can I turn the business around with a team that doesn’t know each other?’”
He had set an ambitious goal of at least 1.5 times the market share of his nearest competitor, up from roughly 0.8 times the market share the company had when he took over.
The group focused on role-modeling crisp behavior. “We don’t just make decisions,” Stroh says. “We make fierce commitments.” He said his team is like Yoda, who told Luke Skywalker in The Empire Strikes Back: “Do. Or do not. There is no try.” Stroh says, “Once we commit, we go for it.” He insists on delegating to get decisions made at the right level.
Stroh’s team developed standards for how to conduct meetings and scores itself in each one. “When we have meetings that suck, we address the issue,” Stroh says. He puts three empty chairs in each meeting, to stand for other team members, for shareholders, and for customers. He sometimes has someone sit in one of those chairs and advocate for whomever it represents. His mantra is “Focus. Speed. Customers.”
Employees responded: his division went from the bottom quartile to the top quartile in Gallup’s employee engagement surveys. Stroh says employees bought into his vision that radical growth was possible.
Of course, getting the team dynamics right is just the start. There are a lot of effective teams in Silicon Valley, where Stroh has lived for 20 years, that don’t accelerate, because they don’t navigate the fast-changing technology market well enough. Stroh decided that his division was just cherry-picking and looking for high-end markets, which tended to be small. Having spent so much time raising the ambitions of his people, he needed to find mass markets and build the capacity to dominate them.
He pushed in several areas, including smartcards that, among other things, can be read by scanners and used as tickets on buses and trains. He also saw, back in 2009, how important cybersecurity would be and has won big with the sorts of chips that are used in bank cards, including in China’s massive market.
Stroh’s division worked closely with customers and prospects to anticipate their needs, because lead times on new products can be exceptionally long. A new chip may contain billions of transistors, and manufacturing is devilishly complicated at the start—manufacturing tolerances may be measured in widths of atoms. Any new chip also has to be designed into whatever system the customer is building. The work with customers went so well that NXP’s Net Promoter Score rose from 5% to 42%.
Stroh achieved his targets—and then some. He went from 0.8 times of his biggest competitor’s market share to 3 times the share in some lines and 8 times in others.
As Stroh says, “Impossible is really just an opinion.”
Heidrick & Struggles has worked with Bain Capital enough to know that it drives progress, while facilitating learning, by putting a number on everything. That means no describing likely results with qualifiers such as “well” or “better.” The organization holds everyone accountable by demanding precision, and then fine-tunes its approach based on how close performance is to the predicted number. Many of the principles that have driven results in the Bain Capital portfolio overlap with our META concepts and, as seen with NXP, have significantly reduced time to value and maximized returns for investors.
About the authors
Todd Monti (firstname.lastname@example.org) is a managing partner in Heidrick & Struggles’ Private Equity Practice; he is based in the New York office.
Larry Oberfeld (email@example.com) is an associate in the New York office and a member of the Private Equity Practice.
Colin Price is an alumnus of the London office.
Sharon Toye (firstname.lastname@example.org) is a partner in the London office and a member of the Leadership Consulting Practice.