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12/07/2016

Private Equity and the company: a winning choregraphy

These are exciting times for entrepreneurs and Private Equity teams but how do you master the challenges of critical mass and the urgency to strengthen management and operations? Let VISCONTI help!

We have reached a favourable conjuncture in the relationship between entrepreneurs and investment funds (Private Equity). On one hand, available funds have never been so abundant even if they are somewhat hidden. On the other hand, a new generation of agile entrepreneurs are driving SMEs, progressively replacing those who led the growth from 1980 to 2000.

The uncertainty generated by this conjuncture sometimes makes us overlook that well managed risk taking is a significant value creator. The current generation of entrepreneurs know how to take the risks needed to generate growth in their companies.

They are the new incubators of innovative ideas that serve as the force multipliers of growth, leaving behind the previous notion of linear growth.

In the world of Private Equity, capital risk and development focus more and more on value creation through operational improvement and ambitious growth. An IRR of 17% or an ROI multiple of 3 was the objective in the past but now the realistic objective shared with entrepreneurs is an ROI multiple of 4 or 5 in less than 3 years.

Developing a common path to ambitious growth, the reorganization of companies, the rapid financing and execution of innovative projects and external growth projects based on solid fundamentals have become a new source of value creation.

Risk taking is becoming more and more rewarding in our tight economy. Fast action and agility have become the keys to operational excellence. Funds have never been more abundant to finance new projects that can generate quantum leaps of growth. Private Equity delivers typically a higher return than that of other investment vehicles such as the stock market.

These are exciting times for entrepreneurs and Private Equity firms but how do you master the challenges of critical mass and the urgency to strengthen management and operations?

Lessons learned over the last 8 years

The Private Equity market is rapidly transforming after a very profitable period. Following the financial crisis of 2008, risk capital has become a favoured instrument to finance growth. Its returns exceed those of the stock market and the recent financial exits continue to be achieved on healthy EBITDA multiples.

Entrepreneurs are also benefitting from capital risk financing. Many Private Equity teams have given the strong support and new perspective needed by business executives which in turn has allowed many of these companies to achieve growth and profitability.

This has helped business executives to add financial competences to their existing commercial development talents. Investors are achieving attractive returns and their financial exits over the last 3 years ensure the continuation of an abundance of funds for companies.

The growing trend of many Private Equity firms is to encourage the CEOs of their portfolio companies to be accompanied by a business coach. The choice is for business coaches who were CEOs themselves, who have already succeeded with the many challenges faced by the current CEOs, who are well schooled in operational risks, who are familiar with the requirements of rapid value creation and who are focused on accelerating both the performance of the management team and the operational excellence of the company.

Business coaching helps develop a more professional and efficient governance which promotes better understanding and management of risks and an improved relationship between management and investors which is both calm and stimulating at the same time.

The results of a coached entrepreneur are remarkable in terms of ROI, profitability, rapid growth, the development of the management team and the proactive relationship with the board of directors.

Implications for entrepreneurs and CEOs

Private Equity remains a viable avenue for entrepreneurs and CEOs to achieve their ambitions for two principle reasons:

  • Banks are less willing to make loans. Low interest rates have driven banks to speculate with sophisticated financial instruments rather than make loans to companies where the success is uncertain. These loans are not profitable enough for the banks and the risks are seen as too high in the absence of an experienced Operating Partner like VISCONTI.
  • Private Equity firms are willing to invest if they can create value by making rapid operational improvements and by strengthening the management team to enable an ambitious growth trajectory.

This change is a growing trend and we are proud to accompany it.

What risks for Private Equity

Most Private Equity firms with which we have met are confronted with 3 challenges that are starting to monopolize their focus:

  • A turnover of fund managers in the next 5 years including some industry consolidation. The older generation of leaders with operational and industrial experience is retiring. They are being replaced by a young generation of brilliant financial managers and start-up specialists who lack the diverse operational experience that comes from having managed companies. The challenge is to instil the operational intuition of the departing older generation into a dynamic and professional Private Equity firm at a time where deals will be more competitive and where ROI multiples will be challenged.
  • Private Equity firms have a greater need to move beyond financial controlling and to begin operationally accompanying their portfolio CEOs, creating better governance and operational risk management.
  • Most importantly, Private Equity firms need a capacity to project ambitious operational trajectories and to help put the management teams of their portfolio companies on the right track. They must move beyond classic incremental forecasts to the type of strategic visualisation methods used by VISCONTI. They must move beyond classic salary packages to understanding the right motivation levers with the types of methodologies used by VISCONTI. They must move beyond classic operational audits of the past to new proactive governance methods. They must develop leadership in the management teams of their portfolio companies and help them to take growth to unexpected levels in order to reach ROI multiples of 5 over a short time span.

Since 2010, VISCONTI has worked in this conjuncture between business coaches, entrepreneurs and Private Equity. We have put in place replicable methodologies for operational value creation, for the acceleration of performance by CEOs and their management teams and for the visualisation of potential growth trajectories along with their associated risks.

This convergence of VISCONTI business coaches and methodologies, entrepreneurs and Private Equity is a true success both in terms of operational and financial results and in terms of developing management teams beyond their current knowledge, beyond their limits and sometimes even beyond their dreams.

Please contact us to learn more about our experience and references.

A memo by Patrick BUFFET, VISCONTI executive coach

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