Ecock - The operating partner in private equity : successful strategies for value creators

THE OPERATING PARTNER IN PRIVATE EQUITY

Successful strategies for value creators

Edited by

Tony Ecock, Welsh, Carson, Anderson & Stowe

Published in October 2011 by

PEI

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2011 PEI

ISBN 978-1-604-696-97-1
eISBN 978-1-908-783-54-7

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PEI editor: Wanching Leong

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Figures and tables

Figures

Figure 17.3: Change in cohort churn for a monthly subscription business

Tables

Table 8.2: Sales compensation plan diligence items

About the editor

Anthony Ecock is a general partner with the private equity investment firm Welsh, Carson, Anderson & Stowe (WCAS) in New York, which he joined in 2007. At WCAS, Tony leads the Resources Group, a team of generalists and specialists responsible for helping portfolio companies improve growth, EBITDA and cash flow. From 2003 until joining WCAS, Tony served as vice president and general manager of Enterprise Sales for General Electric (GE) Healthcare, a $17 billion division of the General Electric Company. Prior to joining GE Healthcare, he was senior vice president and global general manager, Patient Monitoring at Philips Electronics, Agilent Technologies and Hewlett Packard. Tony spent 12 years at the consulting firm Bain & Company, where he was a partner, practice leader for Information Technology and programme director for Consultant Training.

Tony has an MBA from Harvard University, where he was a Baker Scholar, and a BS in Economics with majors in Finance and Accounting, with honours, from The Wharton School of the University of Pennsylvania.

Tony is the founder and leader of the Private Equity Operating Partner Executive Network (PEOPEN). Founded in 2008, PEOPEN serves as a networking forum for the sharing of non-proprietary best practices and proven external resources related to private equity portfolio company management, operations and value creation. Membership now consists of over 350 full-time, in-house operating partner members globally. Qualified applicants may join PEOPEN at www.peopen.org or on LinkedIn.

Foreword

By Richard Zannino and Karl Kurz, CCMP Capital Advisors, LLC

It has become all the rage in private equity over the last few years. The days of financial engineering are over. Going forward, were going to make money the old-fashioned way. We have to get back to the roots of private equity.

Not only are general partners saying it, but investors are nearly unanimous in their demand for it; not as a competitive differentiator as in the past, but as table stakes: if youre not doing it you wont get their commitment.

The premise is that by applying world-class operating expertise to portfolio companies, private equity firms can more rapidly grow revenue, earnings and cash flow to make portfolio companies inherently more valuable. In our view, and surely in the view of the many talented contributors to this book, The Operating Partner in Private Equity, the application of operating expertise to portfolio companies indeed helps (more on this qualifier in a bit) generate much better investment returns. This idea is backed by empirical evidence as well. In a recent study of drivers of private equity returns, 124 deals in the 2006 to 2009 time frame were analysed. The conclusion was, on average, almost 60 percent of the gross investment returns in those deals was driven by strategic and operational improvement. This level increases to 65 percent in top-quartile and 69 percent in second-quartile deals. Operational transformation is clearly not a passing fad; many private equity investors, including the authors of this book, have been employing this strategy for a long time.

It is important to note here that operating expertise helps drive better outcomes. It is our opinion that when it comes to the most successful private equity investing, two brains are better than one and the very best outcomes will be driven by a combination of investment and operating acumen. This view is also backed by the aforementioned analysis which found that, on average, about 35 percent of gross investment returns were driven by extra leverage which, when well practiced by our investment professional brethren, adds substantially to investment returns. So, while operating expertise helps, the best outcomes have been driven by a tag team comprised of both investment and operating professionals.

This book is about how to best apply operating expertise. Questions and methodologies abound.

First, what kinds of operational improvements are we talking about? Is it simply making factories run faster and better? As the authors highlight in this book, it is that and much more. It encompasses everything from hiring the right management team to tax planning.

Second, what is the best operating model? Some private equity firms employ a stable of senior advisers with deep industry expertise and accomplishments that can be called on depending on the applicable industry vertical or operating need (for example, to support diligence, turnaround, growth or interim C-suite executive gaps). Other firms build out internal staffs of operating consultants comprising the best and the brightest from the top consulting firms that they mobilise as tiger teams to tackle diligence and operating issues. Yet other firms weave operating expertise into the very fabric of the firm, hiring operators with experience and accomplishments all through the organisational stack to partner with their colleagues on the investment side throughout the entire life cycle of an investment, from sourcing to evaluating, managing and exiting deals.

Another question is how aggressively to apply the operating expertise: are you directive, collaborative or merely suggestive in your partnership with management?

There are many different operating models and each private equity firm will have its own preferences for which one to employ. Likewise, each firm will also have its own view of how aggressively to apply its model. For new acquisitions this should depend on the strength of the management team and its strategy; weak teams or teams with weak strategies should get relatively more direction. For existing portfolio companies, the degree of operating involvement should depend on their performance versus expectations.