There’s often a mismatch between what a private equity firm wants and what its new portfolio company wants in the first 100 days of their partnership, so it makes sense for both sides to focus first on relationship building and having an open discussion about the path forward, specialists said in a Dechert webcast.
The PE firm will typically come in with plenty of resources to help the company address weak areas and build on strengths, but if it moves too aggressively, it risks damaging the very thing that attracted it to the company in the first place.
“If you do more than two or three [priority initiatives] at a time, you run the risk of breaking the portfolio company in a way that it’s potentially not recoverable from,” said Tracy Burzycki, senior operating partner at private equity investor Graham Partners.
Like many in the PE space, Burzycki's firm has people who specialize in controls, pricing, product commercialization and other functional areas and also has access to legal, accounting, and other types of external help. For a relatively young startup, these kinds of resources are invaluable, and part of the reasoning behind the investment deal in the first place, but the decision of what issues to focus on, and when, should be led by the operating company, she said.
“We try to provide the resources, advisory and sounding-board resources while making sure the company feels they own the deliverable and the execution of it,” she said.
That doesn’t mean the PE firm doesn’t have its own playbook for getting the portfolio company ready to start creating value, she said. But that playbook should be for the integration that has to come before the company is ready to execute on its growth strategy.
“We have an operational value creation matrix where there are certain value streams and work streams that we’re going to work on,” she said. “We’re very clear these are some of the things we’re going to do, just to make sure you’re onboarded to us in a way that all of our companies are onboarded.”
How long it takes the operating company after onboarding to execute on growth will depend in part on its maturity, said Andrew Szafran, CFO of digital business platform company AHEAD.
“You want to move things along but be mindful that management is tired from the [pre-closing] process itself,” he said. “You want to balance surrounding the company with advisors with what we call giving the bear hug of death — wanting to help so much that you kind of suffocate the patient. The management team may reject all the help if you come in too hard.”
The new partnership will also need time to make sure there are no surprises that escaped the pre-closing due diligence process, but there invariably are.
“I know where there’s smoke there’s fire,” said Szafran, “because not even everything that gets identified [is clear of problems]. Sometimes it may be a little bit of a problem but there are other things on the periphery of that issue.”
Burzycki said she worked with a company that was claiming during the due diligence process it was going to boost the profitability or its after-market service from 3% to 30% over a four-year period. Once the deal closed, though, it wasn’t clear the company had a path for that.
“Having run an after-market service business, I knew to get to 30% profitability in after-market service in the business they were in was not going to be that easy,” she said, “so I already had some concerns.”
After digging deeper into the claim, she learned the division responsible for that business had some issues from a productivity efficiency perspective.
“How they were assessing costs on their general ledger was completely discombobulated,” she said. “You want to be thoughtful and measured, but as we uncover stuff, it’s certainly going to heighten the sensitivity on making sure those types of things get taken care of quickly.”
Even the CFO position, if the PE firm brings in its person or the position is newly created for the operating company, can be a factor in how quickly the company can move through onboarding to get to strategy.
“You want to understand, ‘Okay, I used to go to this person; now I go to these two here,’” said Szafran. “You want to get oriented and spend time understanding the capabilities and who you turn to for what purposes.”
Bottom line, success in the first 100 days comes from transparency. “If you have an open and transparent dialogue, while you’re building these relationships, it leads to how you’re going to tackle this stuff together and it gets done efficiently and in the right way,” said Szafran.