"Mr. Lewis and I are going to build ships together, great big ships"
- Pretty Woman, 1990
Flying home recently I was talking with the guy next to me and the subject got around to my company. When I happened to mention that a major market focus for us was private equity his immediate comment was "ah, financial wheeling and dealing, huh?" His reaction was natural since many people today still associate private equity with KKR, LBOs and - yes - Richard Gere's ruthless "buy 'em and scrap 'em" millionaire businessman character Edward Lewis from the movie "Pretty Woman".
The fact is the vast majority of private equity firms in the last 2-3 years have introduced a far more operational aspect to the acquisition, management and eventual sale of the companies in their investment portfolios. Major players like TPG, Blackstone and Carlyle all have all built in-house operations groups with a focus on driving bottom line cost savings in portfolio companies through initiatives such as cross-portfolio leveraged procurement. The realization is that these operationally focused programs will ultimately drive more tangible and sustainable EBITDA increases (you knew I'd pull that term out, didn't you?) than any financial wizardry and sleight of hand manipulation of debt to equity ratios and derivative utilization. Smaller, mid-market PE firms are also making strides by appointing "operations czars" to coordinate cross-portfolio cost savings programs and in many cases hiring PE-focused consulting firms to help plan and manage these programs.
Over the next few weeks I will be featuring guest commentaries from several PE firm operations executives who have been given the responsibility of spearheading various types of cross-portfolio cost reduction initiatives in their organizations. They'll give a fresh take on how more and more PE firms today are driving genuine value creation and leaving firms in a measurably better state post-divestiture than before they acquired them.
I guess it wasn't just Edward that Vivian saved.
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The move towards an operational mindset in PE has probably been driven by the state of the economy. As a consultant who has spent over 10 years in the operational cost savings space it makes sense to me that PE firms would look to strategic souring type programs to create value. What I've never been sure of is who pays the consultant, unless it's as you say and they are doing it themselves internally. Would the PE firm pay or the portfolio companies? My company tried something in this space with a PE firm. I wasn't directly involved but I believe it fell apart because the PE firm and the companies couldn't agree how to pay us.
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