It’s a pivotal time period for value creation: directly following the close of the private equity deal, that establishes the cadence between the financial sponsor and the newly incentivized management team. In the first of a four-part series about the art and science behind executing an effective 100-day plan for operations improvement, Rob Ospalik of Baird Capital, Ed Kleinguetl of Grant Thornton, and Jack Purcell of Ridgemont Equity Partners discuss how this strategy sets the precedent for getting the most value out of a transaction.
David Snow, Privcap: We are joined today by Rob Ospalik of Baird Capital, Ed Kleinguetl of Grant Thornton, and Jack Purcell of Ridgemont Equity Partners. Gentlemen, welcome to Privcap today. Thank you for being here. We're talking all about a term that one hears with increasing frequency in private equity, the 100-Day Plan. It seems that everybody has a 100-day plan system in place. Or if they don't, they say they do. So, I'm interested in learning more about the importance of this sort of tool of value creation that has evolved in private equity. And of course, we're going to hear about how all of you think about it.
Maybe starting with Rob. How is it that we got to a place in private equity where everyone says they have a 100-day plan and LP's are really interested in it, and it's become sort of the central way of kicking off an investment in a company?
Rob Ospalik, Baird Capital: Sure. I can speak to our experience in developing a 100-day plan process. From our standpoint, we found that it's just an absolutely critical time, that you're coming through, in some cases, a fairly arduous process of going through the diligence investment process. Sometimes, it's a very rushed process, depending on the type of soft side process that you're participating in. You may have a very constricted timeframe. So, what we found is that 100-day time period is really a crucial time period to sit down with the management team and say okay, now, we're all on the same side of the table. We're past the diligence. We're past the negotiation. We're past any posture that may have been taking place. Let's talk about what is now the more fun piece of what we do, which is how are we going to grow the company. What did we see when we invested in your company?
We went through an extensive due diligence process. What did we hear from other people? What did we learn? Share that with management. And what do you, management team, see as the opportunities? And let's get aligned on that. And let's develop a plan to execute on that. And then, it's also a time that we're doing some of the more mundane aspects of our job, such as the reporting that we want to put in place that tracks all those things, some of the clean-up items from due diligence. But I think more so than the specifics of a plan, in my personal opinion, is really important about the 100-day plan process is that during that, you're in the honeymoon phase during that 100-day plan period. And what is really occurring to a large degree is you're learning how the management team's going to react to you as investors and as board members and as value-added investors, hopefully. And management is coming to conclusions, in terms of how and where you're going to be involved with the business. And basically, how you're going to partner together over the next several years of your investment. So, it's a really critical timeframe to just align expectations.
Snow: Jack, is that the experience-, you're from Ridgemont, sort of the centrality of the 100-day plan in overall plan to create value at the portfolio level?
Jack Purcell, Ridgemont Equity Partners: Yeah, it definitely is. And I totally agree with Rob's point about establishing that cadence between you as the new owner or new investor and the management team as the operators, the guys on the ground that actually need to get the work done. That first three or four-month period just establishing that dialogue. If I'm the management team, what do I expect from my new owner? If I'm the new owner, what do I expect from my management team? That's really important.
I think Rob also made a good distinction between sort of the tactical aspects of 100-day plan, you know sort of the checklist items. Let's clean up all the junk we need to clean up from our diligence. Let's put the board package together, the monthly reporting pack the way we want. That's an important component. But it also sort of allows you to that first or second chapter of what's really the strategy for creating value in the business? And so that 100-day plan allows you to sort of oscillate between the tactical elements and the strategic elements.
Snow: Ed, work with a lot of private equity clients. And so you're able to sort of ride above the market and see trends over the long term. How have you seen the understanding of and the use of 100-day plans? Maybe there's different lengths of times for different firms. But how have you seen that evolve in the way that private equity firms define their role as investors?
Ed Kleinguetl, Grant Thornton: I think what Rob and Jay have said is exactly right on. The magic behind the 100 days is at the day of closing, that is the greatest opportunity for change. And if that change doesn’t happen within the first 100 days, typically, it kind of dissipates and people go to business as usual. So, it's the most important time to say this is the way things are going forward.
Jay had mentioned the reporting, for example. There were be definitely board reporting and different things that will be in place. And that's the time to put those changes in place. If they're value creation or growth strategies, that's the time to articulate a plan to make the changes in the organization to drive it forward and get the value out of the business.
Some people have told me, well, we have two years to figure it out. The reality is if you don't figure it out in the first 100 days, it probably isn't going to happen as successfully as it could be.
Snow: Do you see distinctions in how firms structure the way that they approach the 100-day plan or whatever they call it?
Kleinguetl: There's a variety. Some people take it more seriously than others. And I think some people say, like you mentioned, it's the honeymoon period. But it's also the time to really drive home some changes and build that relationship of working together. I've seen in the past people didn't necessarily take it as seriously. And you also see it sometimes that the owners with liquidity event, they feel like oh, I can take a pause in my business. I built it for X number of years. And okay, I've got new ownership in place and partners. But the reality is it's an important time to press forward, not take the foot off the pedal.
I remember one person coined, a CFO from a private equity firm coined it the best and said sometimes, the former owners had this going-to-the-beach syndrome. And that's what is can be ill afforded if you want to get the value out of a transaction.
Snow: Does this sound familiar as a potential challenge in a post acquisition period?
Ospalik: It can be. I think it's where you're going to learn how committed your management team is to sticking with the investment and to moving forward. But I think what we found is there's a level of excitement from management teams at that point in the investment, especially, if you capitalize on it properly, that this is really a time where we've got a blank sheet of paper.
Entrepreneurs can struggle with it. Folks who are used to not having the board structures, maybe they've never been through a strategic planning process or what we call our path-to-value process. So, it can be, perhaps, a little bit unsettling to entrepreneurial-type owners. For more professional owners of businesses, managers of businesses, where perhaps they've come from a round of private equity ownership previously, there certainly is a level of excitements exists there. What you find is that when you talk about we've got a clean sheet of paper, that's exciting to them. They've been in a situation where they've been preparing business for exit. Perhaps, there's some investments that have been held off on because it hasn't been appropriate for the time leading up to an exit process that we can get started on at that point.
So, I think if you're able to capitalize on that excitement, it serves you well.
Purcell: I was going to add on that point of excitement. I mean it's interesting sometimes you find an entrepreneur who's owned his or her business for a long time and ran the business in one particular way. In many respects, that first period, it's a nice opportunity to establish that there's a new regime. There's a new mindset around capital allocation. There's a new mindset around risk tolerance. And in some respects, you can actually unleash an entrepreneur or management team to sort of do more and take more calculated risk than perhaps they did under the former owner.
So, in a way, using that first 90 or 100 days to really pivot and sort of all get on the same page about risk return decision making, etc., it could really sort of get the business off with some nice momentum.
Ospalik: That's a great point. I think one of the things that's refreshing for our managers to hear is that we may say for the next couple years, we're not as focused on profitability maximization. We're going to make some investments. And we're all going to be in agreement, in terms of what those investments are and what we expect to achieve from those investments. But let's make a list. And let's figure out where we can get the greatest bang for the buck. And I think that's a refreshing attitude for a lot of people to hear.
Snow: Ed mentioned taking it seriously. And so I'm interested in maybe the view that LP's take towards the 100-day plan. How can you tell or how would an LP, let's say, be able to tell the difference between a GP who says they have a 100-day plan and they take it seriously versus one that actually puts the time, resources and expense into making it successful and serious? What suggestions would you have?
Purcell: Well, I think, David, there's physical evidence of the plan. I mean the physical evidence are things as simple as the 10 or 15-page pack that, literally, you're reviewing with your management team once a week or once every two weeks. There's other physical evidence, just the quality of the information the company gives to you as the owner. The monthly reporting pack, the monthly operating review pack, the board pack every quarter.
Ospalik: I think from our standpoint, one of the things that I'd say there certainly should be a physical plan document. And you should see how you executed against that. And that should be a fairly black and white test. But also, in some instances, what I would be interested, in an LP's shoes, what resources were brought to bear on the company? And that's another area that I think you see more and more, particularly, in the middle market and lower-middle market of GP's adding resources. Whether those are operating partner-type resources that are brought on to the board level, or actually, in house dedicated teams.
So, for example, my group, the portfolio operations group, we have the team that just spends their time specifically on portfolio companies. We have a team based in Asia that works specifically with working with our portfolio-owned companies on their global initiatives on sourcing and market entry internationally. So, I think you want to look at both, what was the plan document and how'd you do against it? As well as what resources that were incremental did you bring to bear on that situation and in that company? And then, how did they perform?
Snow: Final question for this segment. Without necessarily commenting on your individual firms or maybe by name on any firms that you work with, are you aware of there having been challenges as private equity as an industry has evolved in getting the kind of more deal transaction-oriented professionals to fully embrace the post-acquisition 100-day plan? Or is it fairly easy to integrate that into the-, we're going to do the deal and then, we're going to build the company?
Ospalik: I'll jump in. I think from our standpoint, it has certainly evolved and it will continue to evolve. At this point, we're at a stage where I feel really good about how the investment professionals are embracing the 100-day plan. It is a consistent approach that we bring to our investments. We'll have a session within a week-to-two weeks post closing where we'll sit down with management that's well orchestrated. And we go through what does it mean to be a Baird portfolio company, essentially. And from the standpoint of the deal professionals, that is something that I found that they welcome it. It takes questions away from their management team. It allows the management team to understand and develop that cadence, in terms of how we're going to go move this forward. And to the extent that we've done this now more and more with different portfolio companies, it ends up coming off really well. It establishes that rapport in a really positive way because you're sitting down and going through this and you're answering questions that your management team will inevitably have. And you may or may not know what those questions are going to be. But the better you come off in that meeting, the better cadence you establish, the better you look in the eyes of the partners that you're going forward with. And I think it's a really positive way to kick things off. And our deal teams do that and they embrace it.
Kleinguetl: Well, I would agree with all those comments because private equity has had a great sense of discipline around this process for a number of years. And I think you contrast that to, say, 15, 20 years ago when you had the rollups and the poof IPO's. And teams would be off to the next deal and not worrying about how the deal's executed. And then, wonder why the whole thing collapsed at the end.
The opposite is a case now, private equity tends to be very disciplined and getting value out of the deals. Depending on the investment horizon, they want to focus on three-to-five years, making sure that there's no lumpy results but kind of an upward trajectory to plan for the next liquidity event. So, big contrast to what things were 15, 20 years ago vis-à-vis some of the poof and rollup-type company where everybody was doing deals and kind of in a frenzied way vis-à-vis what we see today in a very disciplined fashion.
Expert Q&A with Ed Kleinguetl, Managing Director of Grant Thornton
What is the magic of the 100-Day Plan? Why is it such a valuable tool?
Kleinguetl: Well, the reality is why the Hundred Day Plan is important is because at the day of closing, according to general market study, there's only so much energy towards change. And so on day one, the day of closing, you have maximum velocity, and you've got about a hundred days to implement a number of those changes, particularly, in terms of trajectory. After that, people settle back to business as usual, kind of hunker down. And if the right trajectory isn't set during that period of time, then the value will ultimately not be realized. It doesn't take two years to figure this out. The hundred--if the first hundred days aren't correct, it will not be as liable a deal as it should be. That being said, a hundred days actually tends to be more than a hundred days. It is days before closing, to lead up to build velocity going into maximum momentum through the hundred days.
Tell me about what is unique about how Grant Thornton works with Private Equity firms on their 100-Day Plan?
Kleinguetl: Well, there are actually two things that make Grant Thornton unique. First of all, the value creation component, the integration component is part of the transaction advisory services within Grant Thornton, where other firms, that's part of business consulting, and it's not typically brought into bear as part of the transaction process. So it's kind of separate and distinct. Second, within Grant Thornton, there are a number of deep subject matter advisers that can be brought to bear in terms of systems, financial controls, a focus on the human capital components of the business. A focus on customer strategies, so bringing in those key subject matter advisers in the key areas that a client wants to grow, that makes Grant Thornton quite unique.