Private equity survey: To increase value, private equity firm shift focus to operational performance improvement

• Survey of 56 private equity (PE) executives across all industries in Europe, Switzerland, Russia and the USA
• Improving operational performance is becoming more important as attractive acquisitions and profitable exits have become more difficult
• Average investment period is expected to increase to 5 years (2006: 4), giving investments more time for performance improvement
• Private equity firms are working more professionally, drawing up 100-day plans for nearly all of their investments (2004: approx. 50%)
• Although PE firms use operational levers more often and earlier, they still assign one single team for the entire investment lifecycle (95%)

The private equity industry is not dead at all. But a new Roland Berger Strategy Consultants study shows that the preferences are changing as the financial crisis fully unfolds: The importance of operational performance improvement is rising as attractive acquisitions and sound exits have become more difficult. The Roland Berger survey of 56 private equity executives in Europe, Switzerland, Russia and the USA has produced interesting results: First, private equity firms hold their investments longer and focus more on operational performance improvement. Second, they use more professional management levers to increase the value of their investments, and, third, they seek high-impact representation in their management. Still, nearly all private equity firms assign one single team for the entire investment lifecycle – this team is also responsible for performance improvement.

"Private equity companies expect the average holding period of portfolio investments to increase from 4 years in 2006 to 5 years today," says Thomas Rinn, Partner in Roland Berger's Operations Strategy Competence Center. "This shows that sound exits from PE investments have become more difficult and more time is devoted to operational performance improvement." Therefore, increasing the value and performance of investments during the holding period is becoming more important.

Private equity management is becoming more professional

Nearly all private equity firms today (86%) draw up 100-day plans for their investments (2006: 62%, 2004: 44%). "Private equity firms with a large-cap focus are increasingly professionalizing their support capabilities for operational performance improvement," says Rinn. "97% of them have a 100-day plan, but only 85% of the mid and 74% of the small-caps have such a plan." Performance levers are typically addressed in several waves at the beginning of the investment. "In the first wave, private equity firms optimize procurement management, overhead structures and working capital. In wave two, they go in for portfolio, footprint and supply chain optimization. In the final wave, they optimize sales and R&D." To improve performance, operational levers such as working capital and procurement optimization are always applied, whereas structural levers such as footprint or supply chain optimization are used selectively.

One team for the entire investment lifecycle

Private equity executives are more and more willing to take an active management role in their investments to ensure they stay on course for value growth. Although they try to ensure board representation, they do not focus sufficiently on employing specific experts for each phase of their investment. 95% of private equity executives say they assign one single team for the entire investment lifecycle. 75% of them do not work with specialized teams for the acquisition, holding and exit phases of each investment. "As the trend toward more professionalism continues, we will probably see a narrower focus on each investment period with different teams and experts supporting each individual phase," says Rinn.