Broadly speaking, private equity funds acquire firms with one ultimate goal in mind – to increase their value by improving their overall operations and strategic position with a view to selling their stake at a higher value and making sizeable profits in the process.
While it’s important to note that not all private equity-led turnarounds are successful, there’s no mistaking the fact that the vast majority of private equity firms are extremely effective at spearheading transformation and generating results. And as bold as it might be, it’s an approach that many businesses and key decision-makers can all learn from, particularly from the structured approach that’s applied in most instances.
What makes private equity-led transformations so successful?
In my experience, effective private equity turnarounds focus on sustainable value creation as a whole and tend to:
- Set the objectives and build a detailed strategic plan
- Foster efficient top-down decision-making and avoid procrastination
- Focus on sustainable value creation
- Ensure the right heads are in the right seats and empower the organisation
- Meticulously monitor progress, clear roadblocks and implement alternative options swiftly
- Invest in key areas and projects that will make the transformation a success
A case in point
Having a clear, detailed implementation plan was fundamental to the success we helped generate for one of our clients, the third largest dairy product producer in Europe, after they were acquired by a private equity fund. Several steps were taken to turn the company around, which included creating a transformation programme that focused on cost savings, improving working capital and repositioning its procurement and supply chain functions as high value adding operations.
The end result: over 12% savings on external spend and a 24% reduction in stock was achieved. As a private equity-owned business, the project also delivered considerable value for our client’s shareholders. (For more details about we helped achieve these results, read the full case study).
Key pitfalls to watch out for…
As with all major transformations, there are always risks involved – and private equity is no exception. Here are four key pitfalls you might want to consider before venturing into a transformation and/or improvement programme:
1. Prioritising short-term benefits over sustainable long-term value creation.
2. Failure to secure buy-in from key stakeholders across the organisation.
3. Underestimating the organisation’s readiness for change.
4. Lack of clear governance and effective decision-making processes.
Clearly, every business is different, which means every approach needs to be tailored on a case-by-case basis. It’s also widely recognised that such a transformation approach isn’t for all businesses. However, while it might not be for everybody, there’s no denying the fact all organisations can certainly learn and benefit from some of the elements and strategies that more often than not, result in successful private equity-led transformations.