With private equity investing on the rise and deal volume on the decline, general partners are focusing on creating value by improving business performance within their portfolio investments. This shift is underscored by the confidence of middle market deal making professionals recently surveyed by ACG New York, 83% of whom said they expect PE investments to outperform the S&P 500 this year.
The new emphasis on creating value on the operating side is illustrative of how the private equity role is changing. Currently, more than 50% of value creation in portfolio companies comes from operating improvements as opposed to multiple expansion or leverage. For private equity and venture capital firms, this proves that operating talent has become a recognized imperative and key differentiator in driving targeted returns. Yet, in its 2016 Global Private Equity Report, when Bain and Company analyzed the size and composition of resources committed to portfolio value creation at 40 major PE firms, it found that 25% had no dedicated internal portfolio resources at all.
And while the investment portfolio team is instrumental in helping to create the strategic blueprint for the portfolio company, they must rely on talent with specific functional or industry expertise to execute their plans and optimize results. Yet, Bain found that 47% of operating partners say the management team lacks the expertise to tackle significant initiatives.
In its report, Bain described four value creation models gaining popularity among private equity firms: general activist, maestro, adviser-led and the functional playbook. What each of these models has in common is the need to leverage outside experts and consultants.
Thus, looking outside the firm for executive talent, temporary or permanent, is fundamentally necessary, and independent consultants can bring much to the table. They offer both deep industry knowledge and extensive experience working through revenue improvement and cost reduction initiatives. And they’re more likely to provide pragmatic and honest recommendations which aren’t linked to securing additional projects.
PE and VC firms can find it difficult to hire independent consultants on their own. They may have trouble quickly sourcing the right talent. And even if they do identify potential candidates, they may have difficulty qualifying the executive’s capabilities. When the right individual is hired, General Partners or Operating Partners must then focus on structuring the project and providing oversight to ensure the independent consultant is achieving the desired objectives.
But firms can mitigate these risks by working with an agency that specializes in sourcing and managing top-quality, executive-level talent on demand. These firms offer several advantages, from rapid sourcing, vetting talent, project oversight, all drawing from a deep pool of talent ready for any type of challenge.
Such firms can operate as a virtual bench for deploying expertise that meets specific needs. At IQ Workforce, for example, our vast network of former management consultants and operating executives – many of whom hail from best consulting firms (Bain, BCG and McKinsey, Accenture and Deloitte, among others) – enables us to provide several candidates with precisely the qualifications required to meet the PE firm’s objectives.
Firms that work specifically with talent on demand also bring to the table unique expertise in managing executive talent on assignment, thus freeing PE firms from the burden of managing the consulting process and handling oversight.