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A renewed appetite for private equity investors - Private equity drives fundamental change - EY - United States

A renewed appetite for private equity investors (North American study)

Private equity drives fundamental change

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In order to support and provide resources for fundamental change, PE is also increasingly bringing talent in-house.

Summary: This year's study also focused closely on the levers that PE is using to generate outperformance. PE has a clear and increasing focus on making fundamental changes to the underlying operations of portfolio companies — a trend we noted in last year's study.

This was accelerated by the crisis and in just three years, its toolkit for creating value has expanded and become more sophisticated. Having taken on board some of the lessons of the past few years, PE is now implementing and developing several leading practices that drive operational performance and form the strategic direction of the companies in its portfolio.

The right management team is paramount

As we find year to year, backing the right management team from the outset of the investment is paramount. Our study found that changing management team during the investment increased the holding period by up to two years, in many cases resulting in reduced returns – a similar finding to our European results.

Management teams with the relevant industry knowledge and experience, or those that have previously executed on a similar strategy, were invaluable. Our study also provides evidence that the most effective management teams were flexible and able to meet the challenges of growing the business.

The experience of the downturn has focused PE's attention on ensuring management has the necessary skills and bandwidth to implement improvements and direct strategy. Enhancing and expanding the management team has become a more vital part of PE's active ownership model than in the past.

Management: a vital part of PE's ownership model

PE is routinely changing the composition of management teams, taking a more customized approach and bringing new skills and experience to portfolio boards to provide a more strategic focus. We have seen 100-day plans become a standard practice on new deals as a means of executing change rapidly and focusing management's attention on the execution of the company's strategy.

The use of 100-day plans was more prevalent when cost control initiatives were being implemented and their use also correlated to outperformance in EBITDA growth. In order to support and provide resources for fundamental change, PE is also increasingly bringing talent in-house.

Our research found an increased utilization of operating partners and consultants, who work closely with investee companies to drive business improvement — across all enterprise sizes. In line with our findings in Europe, these resources were found more often in portfolio companies where management teams were changed, with operating partners used at about half the frequency of external consultants.

Clearly, there is no "one size fits all" approach. However, our research suggests that, where PE invests in businesses with multiple value-creation levers and where leading practice is followed to exploit these opportunities, it is able to unleash and significantly increase value.

Our research points to an industry that is on track to emerge stronger from the downturn and leaving nothing to chance. It has learned some valuable lessons along the way. A prolonged focus on achieving organic revenue growth, balanced with effecting operational efficiencies, should continue to benefit PE through another period of uncertainty.

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