February 15, 2016
Interviewed by: David Snow
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Growth Strategies in Portfolio Operations

Jim Corey of Blue Ridge Partners discusses trends in how private equity firms are growing their portfolio companies, such as assessing growth strategies earlier on in the asset’s ownership, convergence in operations rolesand using data to monitor growth. 

Jim Corey of Blue Ridge Partners discusses trends in how private equity firms are growing their portfolio companies, such as assessing growth strategies earlier on in the asset’s ownership, convergence in operations rolesand using data to monitor growth. 

Avoiding Error in Portfolio Operations
With Jim Corey of Blue Ridge Partners

David Snow, Privcap: Today, we’re joined by Jim Corey of Blue Ridge Partners. Jim, welcome to Privcap. Thanks for being here.

Jim Corey, Blue Ridge Partners: Thank you. Good to be here.

Snow: You work with private equity firms in helping them to grow their portfolio companies. Your firm has been around since 2002, so I’m very interested to hear your perspective on what has changed by way of private equity firms interfacing with their portfolio companies. What are some of the biggest trends right now in private equity in how private equity firms help their portfolio companies grow?

Corey: There are several major trends that we see. One is the engagement around issues related to top-line revenue growth earlier in the lifecycle of the ownership of the asset. A couple of years ago, it would be commonplace for us to get a call in Year 3 or 4 to ask for help with accelerating growth because there’s been some disappointment—the numbers just didn’t materialize. That’s now changed dramatically. There’s a much greater emphasis on getting engaged with the management team shortly after closure to develop that growth plan and to begin execution. Asset prices are obviously a lot higher than they have been in the past, so accelerating growth is often an important part of the investment thesis.

Snow: Right, there’s very little room for error.

Corey: [There’s] very little room for error, so they need to get going quickly because you can’t wait until Year 3 or 4 and then discover that there is an issue because the range of options are much more limited. That’s one big trend we see. Another one is on the back end of that—it’s near the time of exit. Maybe 12 months before exit, putting together a definition of the investable growth runway for the next owner is extremely impactful because it increases the exit multiple.

Snow: There’s been a very impressive rise of operating partners in private equity firms. And many private equity firms now have operating partners—they’re either full-time employees or they’re on the board, or they play a very important role. How has that evolved? Do you think that, going forward, there will be more operating partners in private equity? Or is there going to be more outsourcing?

Corey: I think it will be a combination of things. Number one, we see a tremendous convergence of models. There were a lot of private equity firms with no operating partners and they now have some. There were a lot of private equity firm sponsors with huge groups—150-plus operating teams. Those are now generally smaller. So, there’s a convergence in terms of size, but there’s also a convergence that we see happening in terms of roles they play. It’s less commonplace now for those operating partners and their teams to actually conduct engagements. They tend to be more of the advisors to the management team and the interface into the consulting market.

Also, as I was mentioning earlier, we see them involved in a much greater breadth of the lifecycle of the ownership of the business. They are now becoming more involved, even in late diligence, certainly in 100-day planning throughout the lifecycle and then in exit planning.

Snow: Why would a very large private equity firm reduce the number of operating partners they have on the team? What disappointments are they running into with such a large team?

Corey: I think many of them discovered that it was impossible for them to keep current sharp skills in all the different disciplines. If you think about the different set of talents they would have to have, and just thinking about it in terms of a revenue-growth context, can they maintain the pricing skills they need that are best in class? Go to market models—all the different functional skills that one needs—it’s tough to build those internally, because pretty soon you realize those skills have atrophied a little bit. They might have had them at one point, but the external consulting world now has much better skills and tools than you had internally. So, why not start using those outside skills? I think that’s part of what has caused that reduction in size.

Snow: Considering that private equity firms invest in a whole array of different industries, what are some commonalities across these different industry groups for driving revenue growth?

Corey: One example is the importance of analyzing basic performance and having the right kind of metrics to understand how you’re doing relative against your expectations and relative to benchmarks, and having that kind of data available to analyze the effectiveness of the current sales organization.

Snow: Have you seen a range of ways that these firms communicate with the portfolio companies?

Corey: Most sponsors have great scorecards around financial aspects of the business, much less evolved in terms of monitoring revenue growth. And, particularly if you think about what drives revenue growth, there are a set of preceding activities that you have to have in a B2B environment. You have to have proposals or bids or quotes, and then you have to be selected into the final round. Most companies are not very good at measuring the activities that precede revenue growth, so the really good sponsors have developed dashboards and metrics around those activities that lead to revenue growth, or the leading indicators, if you will.

Snow: What would be some smart questions for an LP to ask a GP that’s trying to differentiate itself from the many other GPs out there?

Corey: One, I would ask about this ecosystem, how they manage the ecosystem of skills they have available to them, and try to measure whether their balanced effectively between internal resources and external resources.

I would also ask about full-lifecycle engagement around the topic of revenue growth. Lots of studies have shown that revenue growth drives about 60% of all value creation over a five-year holding period. So, it’s critically important that it get done right, given where asset prices are at.

I would ask about the dashboard and ask if they have created a standard dashboard of metrics that they would measure.

Snow: As you know, many (or almost all) GPs say they have a robust plan for value creation. These can be, in fact, very robust systems or they can be sort of window dressing that tells LPs what they want to hear. What’s an example of window dressing that you would be skeptical of if it were described to you?

Corey: I think a lot of sponsors describe individual situations they made a difference in and, of course, that’s important and that’s the storytelling that demonstrates that they add value. But a much more impactful way to think about that is developing more sustainable processes that work across the whole portfolio.

Do they have the ecosystem design? Do they have the metrics in place? It’s a methodology. That is what’s powerful and the window dressing might distract from that. It might just be about the individual stories and not about the sustainable abilities that ought to be built inside that operating team.

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