How Private Equity Helps Companies Get Strategic
By: Nick Eskandari – July, 2015
Although US targeted M&A volume has surpassed $1 trillion in the first half of 2015, it’s still a seller’s market. To stand out in the sea of available capital, private equity firms are adding strategic planning to the list of what they can provide to would-be portfolio companies.
For competitive firms, however, strategic planning isn’t just a way to stand out–a developed growth strategy is essential to driving value creation, which ultimately, means higher returns for their investors. For private companies wondering what strategic planning entails exactly, they might consider that being backed by a PE firm can allow them greater access to operational support, external perspective, and detailed process counseling — all in an effort to maximize growth.
Why Private Companies Get It Wrong
Developing a growth plan is usually left to company executives and members of the board, but private equity professionals are finding their niche in situations where company planners hit a wall. It’s easy to see why strategy development causes anxiety among executives: it’s essential to company success, but there seems to be no end to the strategic planning tools that can provide a competitive advantage.
It’s easy for management teams to stay with what’s comfortable, but value creation doesn’t favor those stuck in an innovation rut. Whether due to lack of experience building a tailored strategy or an operational inabilities to connect analyses, company executives often lack what private equity professionals can quickly bring to the table having seen the outcomes of countless growth planning processes.
While lending an operating hand to portfolio companies has traditionally been an offering of larger private equity firms, it’s increasingly becoming a mainstay of the entire industry. These resources generally come in the form of access to and advice from former general managers, consultants, and a host of sector specific experts.
Although less common, some of the best private equity firms also offer analytic support and data collection expertise. Harnessing the vast array of big data in a way that companies can leverage in strategy planning is an often overlooked but increasingly essential key to value creation.
An External Point of View
For most private companies, strategic planning is a collaborative effort amongst the management team and the Board of Advisors. For both participants, it’s a delicate balancing act of wanting to maintain independence and cooperation while acting in the best interests of the company.
Though they’re invested, a private equity firm can serve as a somewhat external party, able to worry less about this balancing act when offering advice and insight in initial planning processes. Taking a more hands on approach is one of the most important value adds private equity can provide in the early stages of conceptualizing strategy for business growth and development. If done with respect, the constructive criticism brought to the table by a PE firm viewing things from “the outside” is critical in answering both granular and conceptual strategic questions that help set the framework to move forward.
In-depth strategic process development
Because private equity firms make a living maximizing value within companies, they have a wealth of experience optimizing and understanding the problems common to business operations. They’ve been down the road before, so offering in-depth guidance during the strategic planning phase is one of the most valuable and obvious contributions they bring to the table.
There are many ways to get strategic when running and growing a private company, but it starts with defining where the company is now, where they want to be, and what resources they need to get there. Leveraging the expertise and insight of private equity firms steeped in a company’s given industry or with specific experience with other companies in similar situations can help a company more fluidly get from Point A to Point B. Whether it’s identifying growth opportunities, developing an action plan, or helping design the feedback system for when things don’t work, private equity is increasingly becoming the way company executives fill in their resource gaps and become more strategic.