The Evolution of Portfolio Operations within Mid-Market Private Equity

According to a recent article published in the Harvard Business Review, the Private Equity industry is navigating through its mid-life crisis. Per the HBR piece, a recent study found a meaningful drop in average buyout performance of six percentage points between the 10-year annualized return in 1999 and the comparable return in 2019. The challenges that face the industry are two-fold, both financial and operational. We still find ourselves in a seller’s market with multiples remaining at record highs and that, combined with a reduction in effectiveness of traditional PE financial tools (i.e., leverage and price arbitrage), has created an environment for PE where it is more difficult to maintain high performance levels. These financial head winds are being accelerated by operational inhibitors as well. HBR suggests that “Global competition and commoditization make it harder for products to command a premium price, which squeezes margins, and often a business’s easy-to-accomplish cost savings have already been collected by previous owners. A classic PE strategy — integrating small acquisitions into an existing business — still offers revenue growth and other benefits, but its popularity raises the prices of these acquisitions, so returns naturally fall”.

These factors and market conditions facing the Private Equity industry have forced firms to evolve in their thinking around value creation and where it can be generated for each of their investments. What we are seeing with many mid-market PE firms is that the traditional model of equipping former CXO’s with Operating Partner titles but deploying them in an advisor capacity is losing favor. More and more firms are creating Portfolio Operations teams comprised of former executives, consultants, and operators. The key difference in the Portfolio Operations model vs. the traditional Operating Partner model is that these folks are required to roll up their sleeves and get busy creating value, prioritizing initiatives, and achieving alignment with portco leadership. There are both specialist and generalist operations models that exist in mid-market PE and these teams are deployed across the portfolio to execute on Value Creation Plans (VCPs). These initiatives can range from ERP deployment to M&A synergy capture, to procurement. All of which are worked on in hopes to increase efficiencies within the investment and ultimately complete value that can no longer be attained through traditional measures mentioned in the first paragraph.
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At Treya Partners, our work is oftentimes alongside mid-market portfolio operations teams. As portfolio operations practices mature across mid-market private equity, we expect to see a continued shift where teams will be comprised of more generalists who will then bring in trusted 3rd parties to serve as force multipliers on their initiatives. The PE operating model is continuing to evolve not only as to how the team is comprised, but also how they engage with portfolio companies. Working alongside executive teams and finding the right balance between creating value and finding alignment with portfolio company leadership is a major key to success for PE Operations teams. A Kearney study that polled PE backed CEOs was called out some best ways for PE operations teams to engage. Per the Kearney study, “The vast majority of CEOs (nearly 90 percent) think the PE operations team should get involved during the pre-acquisition due diligence phase. The rest want interaction to start as soon as practical after the transaction closes”. This is indicative of a conclusion that we at Treya Partners have drawn in assisting PE operations teams engage with their portfolio companies, assess their spend, and execute where opportunities exist alongside portco leadership. Our conclusion is that the sooner a PE operations team can get engaged and present value to a new investment, the better. It is crucial that value creation teams are engaging during this honeymoon phase where a company is going to be most willing to embrace the ways in which their new private equity ownership can immediately benefit from being a part of their new portfolio. The same Kearney study goes on to illustrate which initiatives portco CXO’s require the most support and where PE Operating Teams tend to deliver it:
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​Additionally, challenging the status quo and bringing fresh ideas to the table in a collaborative fashion has also shown to be strongly valued by CXO’s:

In our experience, a PE operating team bringing a new portfolio company on to Treya’s leveraged private equity small parcel contract shortly after onboarding has been an effective way to score a quick win and establish a collaborative relationship. Saving a company a few hundred thousand dollars with the stroke of a pen and minimal business disruption goes a long way to establishing credibility for a PE operating team and set the stage for future willingness to engage further at the portco level and leverage more of the value creation tools in the PE firm’s toolbox.
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The continued maturation of the PE industry, combined with the increased competitiveness we are seeing in the deal markets, is going to force the hand of more and more firms to equip themselves with folks who are exclusively focused on creating value for their investments. It will be exciting to track the evolution of different funds that are different stages of this cycle. I would expect to see most mid-market firms with no dedicated operating teams begin bringing on operations focused individuals in house over the next 5 years. For those firms with existing PE operations teams, the maturation process will consist of continued work within their portfolios which will provide valuable lessons learned. I expect they will also work towards striking the most effective balance between building out in house resources and partnering with 3rd party resources to serve as arms and legs for certain initiatives. This is the function we at Treya Partners serve with most of our Private Equity clients. Most operating teams that we work with have realized they are most valuable and effective when working on high profile initiatives in collaboration with the Investment teams and they lean on trusted 3rd parties for projects that create value and with the right partner, can be repurposed over and over again within the portfolio to drive optimal value. We relish in our role as an extension of PE operating teams and are looking forward to next few years as more firms adopt this model and continue to fine tune the delicate art of PE operations.

By Chris Tasiopoulos

About the Author

Chris has over 5 years of management consulting, client relationship managment, and business development experience.  In his role as Business Development Manager at Treya Partners, Chris is responsible for client relationship managment, Private Equity client cultivation, and development.  Chris has led numerous strategic relationships and worked closely alongside both investment and Operations teams at Private Equity firms incluidng Waud Capital, Trive Capital, Trivest Capital, HCI Equity, Greenbriar Equity Group, Heartwood Partners, etc.  At the portfolio company level, Chris has worked closely with exectuive leadership to identify cost reduction opportunities and marshalled the Treya deliery team to execute on these opportunities.

Chris joined Treya Partners in 2020.  Prior to joining Treya Partners, Chris was an Associate with an energy brokerage firm working closely with cities, towns and medium to large businesses to manage risk and reduce utility spend.  Chris holds a Bacehlor of Science in Finance from Stonehill College where he played four seasons of NCAA Ice Hockey.  Chris was the 2015 recipient of the Fr. William Gartland Award at Stonehill College awarded annually to one male and one female student-athlete who have achieved excellence on the playing field over the course of their career recognized on the basis of athletic accomplishments, citizenship and character and personality.