Lessons from Private Equity any Company Can Use (Orit Gadiesh and Hugh MacArthur)

Lessons from Private Equity Any Company Can Use

In the last few years, key Private Equity players have shifted their focus from financial engineering toward creating operating value. They are creating operating value in a systematic and focused way. As such, they are making their companies more valuable, which is the most important task of a leader.


The most important lessons from Private Equity are:

  1. Define the full potential
  2. Develop the blueprint
  3. Accelerate the performance
  4. Harness the talent
  5. Make equity sweat
  6. Foster a results-oriented mind set


  1. Define the full potential
    1. Rigorously ask and factually answer the question: “by how much can I increase my company’s equity value?”
    2. Define Full Potential
      1. Questioning
        1. Why would someone want to own this business?
        2. What can this business become?
      2. Analysis of data
        1. Demand analysis
          1. What are the true underlying drivers of demand? How are they changing? How will these drivers affect demand?
        2. Customer analysis
          1. What are this business’s customers going to do?
        3. Competitive analysis
          1. What are this business’s competitors doing and how does it stack up against this business?
        4. Environmental analysis
          1. Are there technological, regulatory or other issues or trends that may affect future performance positively or negatively?
        5. Microeconomic analysis
          1. How does this business really make money and where?
    3. Use the fact base to challenge “business as usual”
      1. Incremental moves to make current activities more profitable
      2. Aggressive moves that will reposition some or all activities for future success
      3. Shifting of resources away from those activities that don’t represent the future of the company
    4. A focus on the right critical issues (no more than 3 – 5) is crucial to achieving success
      1. While defining the critical issues and initiatives, define what the company will not do
    5. Adopt a 3 – 5 year time horizon for the plan to materialize
    6. Do a culture check
      1. Where is the momentum of the status quo coming from?
      2. How can this be changed?


  2. Develop the blueprint
    1. The blueprint is your roadmap for getting to that full potential
      1. Goal of what the full potential value can be in 3 – 5 years
      2. Who, what, when, where, and how
      3. Zero in on the few initiatives identified above
      4. Detailed and complete
      5. Focus on actions
      6. Start macro and then get to the actionable to do list
    2. Budget 2 – 6 months to get the blueprint process together with the goal to launch the first initiative within the first 100 days
    3. Create a change oriented atmosphere and alignment to the goals


  3. Accelerate Performance
    1. Mold the organization to the blueprint and match talent to the key initiatives
    2. Make someone own each initiative
    3. Monitor a few key metrics to show the progress toward operational goals before it shows up in the financial results
      1. Forward looking metrics
      2. As an example, consider sales
        1. A more forward looking metric is: how many new customer contacts?
        2. A more backward looking metric is: what are revenues per customer?
      3. Tailor metrics to each business
    4. Beware re-organizations
      1. Often, just a distraction
      2. Rarely do they solve the underlying issues
    5. Use rewards to motivate and align
      1. Pay employees for what you want them to do


  4. Harness the talent
    1. Get great people and get them to think like owners
      1. “At cause” attitude (focus on rooting out and then resolving the root cause, rather than dealing with the effect)
      2. Leaders with the drive and the ability to make investments succeed
    2. Have the right incentives to recruit, retain, and motivate these talented folks
      1. Create the right culture
      2. Create an atmosphere that allows people to do the right thing by shareholders and to reap their just rewards
        1. Share equity with key people
        2. Reward boldness and success
    3. Assemble a “value-added” board
      1. Draw on their expertise
      2. Find ways to get the board to ask critical questions sooner


  5. Make Equity Sweat
    1. Leverage the business for cash generation and balance sheet discipline
      1. Aggressively manage down working capital
      2. Capital expenditures
        1. CEO’s to play active role in capital allocation
        2. Manage capital expenditures depending upon whether maintenance or growth component
      3. Dispose of unproductive equipment / facilities
      4. Dispose of businesses / division that are underperforming
    2. Invest capital with discipline
      1. Subject additional investments (follow-on acquisitions, growth capital expenditures, etc.) to high hurdles
      2. Will this new acquisition or this growth capital expenditure really result in significant financial returns?


  6. Foster a results-oriented mind-set
    1. The culture that needs to be developed has the right managers with a bias for questioning the status quo, getting the facts, ferreting out the root cause, and taking action
    2. Powerful focus on earnings and cash
    3. Develop a repeatable formula: repeatable within one activity and also across multiple activities
    4. Push accountability down to its most effective level
      1. General managers and all lines of leadership need to feel that they are on the hook to deliver results
    5. As a leader in an organization, you must communicate communicate communicate
      1. Explain the full potential of the business and the goal
      2. Articulate why there needs to be change
      3. Persuade the team that the changes to be done are needed to reach goals
    6. Set the right example
    7. Continued commitment to “reset the hurdles” to maintain focus

About David Shedd

David has been a President - CEO - COO of an up to $350M group of manufacturing, distribution, specialty retail and services companies, having led 22 different businesses from turnarounds to start-ups to fast growth companies.
This entry was posted in Business Acumen, Leadership. Bookmark the permalink.

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