Is there ever going to be a change of power/pay/prestige from Transactions teams to Operations teams at PE firms?
From PEI:
Dealmakers are from Mars, operators from Venus? As private equity firms supplement existing M&A specialists with operational experts, marrying the two very different attitudes and skillsets presents a significant challenge, according to speakers at our Operating Partners Forum last week in London.
Just as early astronomers argued about the correct celestial composition of the universe, many fund managers are struggling to harmonise the talents of both dealmakers and operational experts.It’s harder than many realise, in part due to the way the private equity industry has developed over the years, what levers were pulled to produce market-beating returns and what sort of professionals were pulling them. To get a sense for this, we took a quick look at the backgrounds of the most senior figure at each of the top 20 firms in our most recent PEI 300 ranking. Just five came from consulting or industrial backgrounds, four from investment roles and the remaining 11 were all investment bankers who had specialised in M&A. It’s a back-of-envelope piece of analysis, but still seems to support the idea that some of the largest, oldest firms in the industry – for those tend to lead the league tables – were formed with a strong sense of adding value via M&A.
Today, however, the industry has reached a stage where a typical private equity firm is no longer just a collection of former investment bankers that fancied trying their hand at buyouts. That is in part a reflection of changing market environments: you’d be hard pressed to find a GP today that tells you multiple expansion and leverage are the road to returns. Indeed, a Partners Group study earlier this year suggested 75 percent of expected value creation would be generated by direct operational improvements at portfolio companies.
So while executives with M&A-orientated skillsets still feature prominently in many firms’ rosters, those from operational backgrounds are increasingly finding their way into private equity (and indeed, many of those top 20 firms we mentioned have led the way in strengthening and formalising operational capabilities).
nice article. It's definitely a changing industry right now, PE. Financial engineering no longer leads to profitable portfolio company exits,so improving the companies once you own them is becomign very important. Makes like tougher for those in the industry to be sure, but i think on the whole, it's a good thing, as improving companies is really what PE is about at its best.
Have heard that 75% figure being tossed around a lot at my fund as well.
Also, nearly every good fund I know is increasing its operating staff. At KKR for ex, they're pretty integrated with the deal team, even getting carry on the investments. At other places they're less integrated and the ops guys are definitely a rung lower on the ladder, but I think that this is gradually changing with time, out of necessity.
But at the junior levels, it doesn't seem to be changing much with c. 80% coming from M&A teams.. 15% from other IBD teams.. and the last 5% mixed between consultants, Big 4 accountants, and others..
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