THE SOFTER SKILLS AND THE SIGNALS BEHIND A SUCCESSFUL TRANSFORMATION

2024- A New Look at the Dynamics of Value Creation and Transformation by Navigating the Shifting Roles of Deal Teams and Operating Partners

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A fresh look at a problem after deeper reflection and consideration is valuable. In 2023 I authored the below blog to think through how value creation in Private Equity backed firms can be better driven. I put the responsibility for the management team and that is correctly where it belongs. IT requires transparent reporting, pushing through difficult challenges and aligning on metrics and priorities. 2023 challenged middle market management like never before. There has been a shortage of qualified CFOs for Private Equity. The difference in 2023 into 2024 has been that few are available who have led higher interest rate environments. Additionally, a similar comment can be made about a shortage of CEO and Chief Revenue/Commercial Officers who can be innovative and growth profitably in low growth environments.

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In 2024, there should be a renewed consideration about how Private Equity firms themselves align to drive speed to value with their portfolio company leadership.

Deal team participants and portfolio company executive teams own the value creation plan (vcp). The relationships formed during diligence and management meetings leading to closing will now be expanded, evaluated and other value creation participants introduced at some stage or due to a trigger event.

?These two stakeholders need to align early and usually happen since they have had a greater depth of interaction, Q&A and trust building during management meetings and the deal process. Depending on the Private Equity model the Operating Partner may engage in diligence and management meetings or their engagements start post-close and first planning process. The trust that is crucial Deal Team and CXOs at newly acquired portfolio companies is beginning to be borrowed upon for internal PE fund Deal Team and Operating Partner alignment for value creation.

Underwriting the right deal (and right management team for day 1) and having the right cadence of engagement post close will drive value and enhanced exit value. How does the Operating Partner tier align with the Deal Team to provide experience, relationships, elevate CXO skills and do it without overt ownership of the transformations??

Often the PE firm model will determine how and when the Operating Partner can be positioned for additive value to the transformation process. Trust internally at the PE firm with collaboration and leverage of each other can help provide the aligned areas where Deal and Operating Teams align for value creation.

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How can the Operating Partner Model Influence Trust and Partnership

?Core value creation areas of Growth-Finance-Technology Operations will challenge CXOs at portco early on and the weekly check ins and monthly reports will be eventually augmented with the Operating Partners. Private Equity Operating Partners build team trust by asking “where can help” rather than inserting themselves into where they may prefer to help. Areas of top line growth and the sub levels of it are usually areas of initial interest and popular areas. The potential for setting the wrong tone and alignment and partnership based on trust can happen there. There are plenty of areas in need of professionalization and process in a recently acquired firm. There are some areas where Operating Partner + CXO leadership can align, and they must also align Operating Partner + Deal Team. Some “low hanging fruit areas” that create the three-way alignment can include:?

1.???? Post – first board meeting; is there a way OPs can work with CXOs to professionalize the board deck into a better template.?

2.???? Can an OP (Generalist of Finance Centric) work with the CFO to strengthen the month-end reporting package??

3.???? Can an OP help strengthen and remediate areas in human capital assessment aligning value creation goals with the right people in the right seats and bridge an area of need between CXOs-Deal Teams-Operating Partners.?

4.???? Can an OP work to help a CXO team think through technology transformations of?ERP-CRM-Data Usage and help them own the key deliverables where appropriate, so it does not dilute a CEO and CFO.

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A revisit now to the June 2023 Blog

?The Private Equity deal process creates twists and turns from diligence to closing. Post close deal stages require the deal team and the executives at the portfolio company to align on what value creation and transformation will be (and how success and measures look). The plans of this team and third parties supply paths to value creation.

Value creation through the construct of equity value from Commercial-Financial-Tech Ops supplies clarity and core pillars of measurable business outcomes through KPIs.

This path to value creation requires focus and a need for leaning into the softer side skills and leveraging of the “PE library” of pattern recognition to be a thought partner with management and respond quickly to changing circumstances.

?1.???? What are the year 1-2 of new PE ownership initiatives aligned with executive leadership? Was the output agreed to and with measurable progress to results? The value creation process needs urgency, measures, and dedication from all stakeholders.?

2.???? Data Access must allow for rapid model building for all core value creation areas that CXOs need to track to. However, the data must be drawn from a single known good data set as source of truth. The leadership must find and remove all silos (especially the data silos) for greater collaboration. This is most at once understood and found through a quick gap analysis focusing on how data is gathered, used, audited, managed, and presented on demand.?

3.???? The skill of problem solving must be made a priority of the leadership team. Problem solving cultures are value creating cultures. Underwriting management has always been a challenge for Human Capital specialists and deal teams in PE. While analytics tools have helped show leadership gaps with organizational health warnings; the PE firm and board must early on see successful decisions leading to value.?

Executive teams must prove early, easy, and measurable wins that can be replicated on a scale. The debrief, the data and alignment to year 1-2 priorities must be clear. There are no shortcuts to value creation but rather discipline, data management and resilience to the focus.

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Year 1-2 Successes drive value creation and position for the end in mind

?Value Creation initiatives can take many forms, but they will fall into three large areas with human capital choices accelerating the outcomes.

Commercial: Driving of top line growth both through organic growth focus and M&A.

Financial: Finance effectiveness and strategic partnering with the CEO. This area is driving the EBITDA growth.

Tech/Tech Ops: The right sized cost-effective operating model for the growing business must be supported by a tech stack. The tech stack provides speed to information, data to analyze and consistent KPIs.

Early alignment of PE and leadership should focus on agreement to the known good dataset and a reporting format and cadence to inform and debate. A year one and year five plan developed in the first 3-4 months of ownership should be the goal, The above three pillars of value creation (and human capital changes) should be fully deconstructed. To save time it would be valuable to audit data sets in use, focus on developing the month-end reporting for the PE Fund and use these data sets to drive decisions and KPI development. The unified agreed data drives dialog and KPIs early on in ownership leading to transformation streams developed quicker. While early success is the key, all parties just keep thinking about the growth plan, the measures to track value creation and the evolving story that will result in a successful exit.

Two key stakeholders must be found:

1.???? Who will own data management and the known good data set driven by TechOps??

2.???? Who will ensure silos are broken down around data and reporting?

?Data – Data Everywhere but we cannot seem to get it right

There is an early responsibility for Private Equity’s deal team and operating resources in the first stages of ownership. Both these groups had management and diligence access through the LOI to close stages. There needs to be a consensus if the data presented through the data room will inhibit the speed of value creation and if the management team is going to be a strong stakeholder in the transformation process.

Decisions about enterprise software, infrastructure and how to have agility in the technology stack must be measured alongside the fuel (the current legacy and new data) of the business.

The PE firm should be able to supply structure, templates, and expectations around what the business plan should include and look like at presentation. The underlying data needs will drive the business plan. The earlier the silos and historic reports are deconstructed, the sooner a stakeholder or transformation leader can coordinate resources and processes with stronger and aligned month end reporting requirements. From the acceptance of that current and aspirational state reporting is made clear, the data mining to run the business can more easily take form.

There must be a commitment to the process and resources to fulfill the task. This will need to include:

1.???? A leader (and team) to be connective tissue between PE Firm and portfolio company and between all areas of the organization. The cross functional leader will be a Chief Transformation Officer operating in a cross functional and cross visible role.

?2.???? The CFO and PE firm will need early agreement on the month-end reporting package. While those documents are mostly financial in nature, the CFO’s alignment with the CEO and all CXOs will yield requirements for other KPIs including Sales Pipeline, Headcount, Benefit Load, OPEx and CAPex analysis, etc. The integrated use of the single data set will accelerate reporting, value measurement, and bring clarity to the work streams driving transformation.

Problem Solving Cultures are Value Creating Cultures

To solve problems on a scale and quickly requires trust, collaboration, and alignment between all parts of the organization. The CEO needs to set the path and tone by being a champion of data management and focusing on goals of the transformation streams. The value creation triangle (Value through Commercial-Financial-Tech/Tech Ops) does not work in isolation. There are interdependencies that trigger large successes.

For example, an ERP or FP&A process enhancement for Finance value acceleration has a large TechOps success part. FP&A excellence requires modeling with the Commercial organization. The art of struggling together and breaking down barriers to alignment is the essence of problem solving. For this function to take root, it is important that the problems to be discussed are the core agreed areas of the Transformation process. This will create focus, urgency, and measures.

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John Bova is a Transformation, Commercial Excellence, Growth and Value Creation Leader in Private Equity Firms and Portfolio Companies. John has played many roles in the private capital space over 30 years Including senior executive to fast growing middle market companies, Independent Sponsor, PE and Family Office Advisor and Consulting Practice Leader driving value creation through technology enablement and an attitude of delivering measurable outcomes and “speed to value”. https://www.dhirubhai.net/in/johnabova/

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