Private equity’s operating environment continues to provide a range of challenges. While fundraising continues to set new records and financing for deals remains widely available, competition for assets is pushing M&A valuations to levels not seen since before the financial crisis. This rise is driven by historically high levels of PE dry powder and corporate acquirers responding to tepid organic growth prospects by pursuing M&A opportunities. Family offices, pension funds and sovereign wealth funds are all increasingly seeking direct opportunities as well. Most PE firms are underwriting limited or negative multiple expansion. Many expect that acquisitions made now will need to be held through a prolonged market downturn.
As a result, firms are looking to value creation in order to continue to deliver the returns that limited partners have come to expect. They’re pulling a number of levers to help create value. Some tactics include sales force optimization, changes to pricing and product mixes, data-driven margin optimization, leveraged sourcing and cost rationalization initiatives.
It all starts with proper planning
Whatever the strategy, it often starts with the 100-day plan. This widely popular and important tool helps identify key value drivers and create a road map for future growth. Creating a 100-day plan provides firms an effective and strategic way to quickly establish a relationship with management, to accelerate their understanding of the business and encourage teams to exhibit the same ¬– if not increased – intensity for the months after the deals closes that they had during the diligence process.
Regardless of whether the plan that is developed is executed to perfection, or whether firms have to flex and adjust in light of changing circumstances, it’s the process and narrative of creating it that imparts the most value. By visualizing forward and detailing the steps, the process provides firms and management teams clear goals and benchmarks and allows them to be agile and responsive when the inevitable obstacles arise.
Key elements and steps toward operationalizing
First and foremost, different firms can take very different approaches. For some firms, it’s what they execute in the first 100 days. For others, it’s creating a plan during the first 100 days. While for others, it might be a “rolling” 100-day plan.
Plans can vary widely, but at their core they begin with a single element that forms the foundation and supports the investment thesis: a shared set of facts. These include macro factors affecting the business; some form of market and competitive analysis; management perspectives; insights from customers, suppliers and other stakeholders; and a deep understanding of the company’s position in the market.
This shared fact base better enables teams to reach a consensus on the company’s strategy. These include financial objectives, non-financial objectives and a multidimensional view of the opportunities for the business – some combination of revenue growth in the core business, new growth opportunities, and opportunities for cost improvements and other process or capability improvements. Key considerations include:
- What do initiatives look like?
- What’s the rationale behind them?
- What’s the size of the prize?
- What resources will be required to achieve them?
- What are the potential risks?
- Can they be mitigated?
From there, an estimate of the expected value created from these initiatives can be developed, followed by an action plan that includes timelines, assignment of ownership for key initiatives, interdependencies and key metrics that can be implemented.
What makes a good 100-day plan?
Leading practices in development and execution
Develop an operating perspective early on
Planning for the next 100 days should ideally start at the time of due diligence. Action items and areas of improvement should be properly identified from financial and operational benchmarking of the asset. Often times, it’s been the financial due diligence that has taken priority over the operational diligence. However, this is changing as firms think increasingly about value creation earlier in the investment life cycle.
Prioritize value creation levers
Success lies in the ability of the PE firm to clearly identify and prioritize the highest impact levers for the business. Additionally, populating the plan with a mix of two or three longer-term, more difficult projects along with several “quick-wins” can help in better executing the plan. Quick wins, for example, might be focused around renegotiating supply deals, putting contracts out to bid or augmenting the sales force.
Continuously monitor and measure
Once the blueprint is laid down and the top priorities are identified, making it successful requires a laser focus on monitoring key performance benchmarks. In addition to financial metrics, operating metrics should be also be clearly defined and agreed upon between board members and management. Indeed, the inclusion of operating metrics can send a signal to management teams that firms are focused on more than just financial engineering. Once defined, PE firms should review the list rigorously (at times meeting weekly) and even aggressively with company management to monitor progress and take prompt action at the first sign of trouble.
Effectively address the human element
One of the most important outcomes of the 100-day planning process is that it sets the tone for the relationship with the management team. PE firms often choose between two clear forms of engagement ─ true collaborator or benevolent dictator. The choice is often contingent upon the PE firm’s confidence in the management team and how they perform out of the gate, based on their performance relative to the objectives and KPIs in the plan.
Having the right talent, both from the fund and within the company is imperative for any 100- day plan to succeed. While the most senior-level people from the deal teams are responsible for closing the deal, PE firms need to involve operating partners or resources for effective value creation. For instance, a number of leading PE firms now deploy functional specialists to directly and proactively address issues in IT, HR and marketing. Furthermore, PE firms should recognize and take advantage of management strengths and build-out to rectify any gaps in human capabilities.
Communicate changes with a unified voice
An effective communication plan to manage stakeholder issues is critical. Rules of engagement should be clearly defined and clearly communicated, with specific and definitive accountabilities. Frequent interaction between PE firms and management teams can help ensure alignment and transparency. Most importantly, it’s critical that the plan is seen as “management’s plan” and not something externally created by the PE firm. Everyone needs to be assured and buy into the fact that management and the company “own” the plan.
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