As private equity firms look to maximize value from their investments, it is critical to ensure that portfolio company management teams have the right capabilities to execute against their investment theses. Though in many cases the underlying premise will lie in backing an existing management team, it is increasingly common for private equity firms to bring in a new CFO early in the lifespan of an investment.
It should not be controversial to say that all organizations must be capable of some degree of innovation.
The battle cry of private equity, with clever financial engineering no longer a differentiator and much of the investable universe having shifted from mega-deals to the middle market, is anchored in portfolio value creation. Operating partners, predictably, are rising to corresponding prominence.
In a recent study which analysed 70 successful private equity deals, perhaps surprisingly, McKinsey found that the primary source of value creation in the majority of these deals was the out performance of the company – not price arbitrage, not financial engineering and not overall sector gains or stock market appreciation – just better management of the business.