What is an "operationally hands-on" PE firm?
Question in the title - what makes a "good" PE firm from the portco's perspective? Surely the PE firm's 26 year old associate isn't expected to tell industry veterans how to run their factories or whatever?
I think you're severely overestimating how good "industry veterans" are at running their factories...
More seriously, being operationally hands on is understanding the balance between being involved and not being too involved. For lots of these portcos in the middle and lower middle market (harder to be operationally hands on in UMM/MF) the management team has likely been at this company for a very long time and really don't know what "good" looks like. It seems silly, but that 26 y/o associate has seen a lot of factories and probably has portco's with better run facilities (and I guarantee his VP and Partners have). So a lot of it is knowledge sharing and best practices with a management team that probably hasn't optimized their facility in 20 years and likely isn't tracking (or not tracking correctly) any KPIs.
Last point I'd add is a big part of being "hands on" is bringing in the right consultants. The associate likely knows little about operations, but he can hire and direct a six sigma consultant on the outcomes the company is trying to achieve and let them do the work.
That's super interesting, thank you!
Would the "hands-on" people at a firm usually be PE ops vs the investment team?
No problem. It depends on the firm. My LMM is pretty small so we don't have an ops team, it's just the investment team that handles operational initiatives. Believe there are some hires planned in that direction with our next fund raised lol
To build on this, many very successful LMM PE firms are founded by people who worked in an industry and sold their company. I know of at least 2 of these just in the city I work in which is a tier 3-4 city. They don't come across as "financy" to potential portco's and have real industry and best practice knowledge where they crush it returns wise gobbling up underperforming, random industrial/manufacturing companies that are family run like it's 1985.
Jman_PE's response is a good one and is accurate. I'm also in the LMM PE space...you'd be surprised at how many management teams have done something for one way for many years and have never thought about how a process can be improved upon. For that same reason, many entrepreneurially run businesses also don't ask themselves the hard questions or have motivation to dive deeper into tracking KPIs and digging into the data that could otherwise help them improve their business.
Along these same lines, a lot of small business grow over time by linearly scaling legacy processes, but never pick their head up to think through how they can leverage economies of scale in the business (i.e. throughput in my factory is 3x higher so now the payback on automation equipment makes sense)
A few answers:
All this is to point out in theory what hands on operating looks like. That said, a few things that occur in reality:
Truthfully, I think the lack of understanding of getting what PE “ops” looks like is because many young professionals don’t understand how long business problems take to solve. Like to accurately gather a company’s historical data and forecast, it could take months of 70+ hour weeks to solve, which is something undergrads tend to have a hard time wrapping their brain around. Often the work is just to organize a company to be able to get to the point where you can make a strategic decision, or the work done is something that needs internal organization and just lots of hours to fix, so they throw a highly motivated PE associate at the problem.
And thank God for this. I can't recall how many sponsor portcos I sold in my 10 years in banking where the sponsor made no/few underlying operational changes, but still realized a massive MOIC exit due to multiples arbitrage, cheap leverage, and a 10-year run of increased consumer spending. Now we get to see which sponsors are truly "operationally hands-on"
Two ways to make money in PE:
It will be interesting to see how the landscape changes when the first bullet ceases to be true due to competition and rates. Are longer holds and consulting going to be higher valued? Intuitively it seems like that would be the case, but it’s interesting thinking about how private market investing will change in a post 0 rate or declining rates environment.
You should tell my VPs and MDs that I shouldn't be handling management and heavily involved in operations. Would save me tons of work and late nights
Rem assumenda et deleniti repellat dolor at non tempore. Harum omnis illo totam dolor amet. Sit sed aperiam voluptas accusantium consequuntur.
Natus omnis fugiat et perferendis molestiae iure. Dolorem modi eum sint sint. Voluptas delectus omnis porro quia aliquam occaecati.
Eaque velit dicta sunt nisi. Corrupti assumenda vitae aliquid porro. Rerum quia illo qui nihil.
Veritatis animi ipsa magnam laborum. Omnis nostrum minus odit recusandae nobis voluptas sunt. Nesciunt sed non repudiandae vero rerum. Rerum nulla id voluptas maiores voluptate qui sapiente ut.
See All Comments - 100% Free
WSO depends on everyone being able to pitch in when they know something. Unlock with your email and get bonus: 6 financial modeling lessons free ($199 value)
or Unlock with your social account...