Operational Improvement: The Key to Value Creation in Private Equity

Gary Matthews, Mark Bye and James Howland

Journal of Applied Corporate Finance, 2009, vol. 21, issue 3, 21-27

Abstract: With credit tightening having reduced the availability of leverage and intensified the competition for new deals, the economic recession has caused many companies in private equity firm portfolios to under‐perform. These changes are forcing the private equity firms to depend even more on their ability to improve operating performance to achieve their investment goals and generate attractive returns. But few PE firms have proved capable of achieving such improvements in portfolio companies consistently over time. In this paper, the authors discuss several ways that private equity firms use their operating expertise to drive value in their portfolio companies. They also examine the analytical framework used by some PE firms when assessing and prioritizing the many operational initiatives that could be undertaken within a newly acquired company. Part of that examination involves a detailed look at how private equity firms assemble an attractive mix of operational improvement projects in their initial 100‐day plans. Finally, the authors explore one of the challenges faced by private equity firms when attempting to implement operational enhancements in newly acquired companies: bringing about change without alienating company management. The real‐world application of this approach is demonstrated with a case study that shows how one private equity buyer put its operational skills into practice to help create value within a mid‐sized portfolio company.

Date: 2009
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