February 12, 2014
Interviewed by: David Snow
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Process-Driven Value Add

The secret sauce for adding operating value is ketchup. So say three operating partners from Partners Group, Riverside and Argosy, who argue that many improvements to portfolio companies should be process-driven and checklist executed.

The secret sauce for adding operating value is ketchup. So say three operating partners from Partners Group, Riverside and Argosy, who argue that many improvements to portfolio companies should be process-driven and checklist executed.

Process-Driven Value Add

Special Report: All About PE Operating Partners

David Snow, Privcap:

Today, we are joined by Fredrik Henzler of Partners Group, Don Charlton of Argosy Private Capital, and Ron Samson of The Riverside Company.

Let’s talk about an important goal of many operating partners in private-equity firms: building processes around value creation. Ron, notwithstanding that every deal is different, are there ways to systematically check boxes and create value in one portfolio company after another?

Ron Samson, The Riverside Company:

I definitely think so, absolutely. Every investment is different but you live off processes. There are always processes you can put in place to make your investments better over time. You will have a strategic planning process; you will have some sort of monthly operating-review process or talent-review process with these companies. These processes are all critical. It does not mean the content that comes out of those processes will be the same for every company. They are not—they will be completely different for a manufacturing company versus a service company versus software. They are going to be completely different, but I believe in getting these processes set up within your firms so that you have some consistency throughout your firm and you can measure things consistently. So, yes, it is a big deal for me, personally.

Snow: Fredrik, you spent years as an operating consultant to private-equity firms before joining Partners Group. Has the process-oriented approach to value creation always been in private equity or has there been a learning process as folks like you have become more embedded in the process?

Fredrik Henzler, Partners Group:

I do not think that (A) it has become much more embedded and (B) it has anything to do with me personally. But, this is the way value is created in a company, be it a small, medium or large-sized company. It is not art; it is science, setting a clear goal, defining how to get there and then executing on it. But that is a project—it is the same at GE as in the mom-and-pop company and the private-equity company. The focus on operational value creation has increased tremendously from something being done very seldom to sporadically or ad-hoc. Now, it is being done systematically, and if you do it systematically, you will want to have processes to make it repeatable, efficient and effective. So, it has increased tremendously over the last six to eight years.

Snow: Without necessarily talking about your own firms, do you ever find in private equity, especially people with a deal background, some skepticism to the idea that one can be systematic and even repetitive in approaching value creation because they think every company has its own unique story and you have to start there?

Don Charlton, Argosy Private Equity:

We approach it from a checklist standpoint—we make sure there is a compendium of what value-creation levers we can pull. For most deals we are doing, we can only pull two or three levers because that is what the team is capable of managing. We do not go in with a list of 15 items and say, “We need to do these in the first six months.” We pick two or three things we think are low-hanging fruit, that this team is capable of producing. We tend to focus, as Ron mentioned, on making sure we have a compendium of all this knowledge. It is important, especially if your firm has been around (my firm has been around for 22 years), to have a repository of lessons learned. We have a CRM system that holds all our deal knowledge and we have created a process checklist of the areas where you can add value in a company. We use those with a team to decide which ones we are going to pull.

Snow: Again, without necessarily naming names of individual portfolio companies, can any of you share examples of a process-oriented approach that yielded results and how that process unfolded? 

Henzler: One area we like to look at is procurement and supply chain. There are three or four things you need to get right in procurement to ensure you get to an 80% to 90% level of excellence or efficiency. These are things like having a commodity strategy or a segment strategy per commodity, per procurement group. Getting as much of the spend as possible under contract and getting as many of these contracts as possible as sourced via auction process or RFQ. That is one thing we try to do across the portfolio companies that have significant external spend.

Charlton: The one area in business that is not managed, is undermanaged, would be pricing. Often, firms will focus on things they can absolutely control with no issues, which is they can always cut costs. When you deal with pricing, it is a lot more difficult, so we bring in outside firms as it relates to pricing as more of a programmatic approach—segmenting out all your SKU’s. It is difficult for many owners to broach changing pricing, but if you can, it has a much higher multiplier than just reducing costs.

Snow: Even if the products are different and the industry is different, there would be a process-oriented approach to say, “Now is the time to look at pricing,” and you would bring in the experts needed, depending on what the products were.

Henzler: Sure. Exactly right.

Snow: Ron, can you share any stories of a systematic approach that yielded yields?

Samson: Sure, I will go back to what Fredrik mentioned in terms of having a strategy and a plan and then executing on that plan. We had one company that I was chairman of. We had laid out a strategy, willing to add some new products to this company, so we laid that out. One tactic to figure out what kind of products we wanted to add was to survey our customer base. We did that and they came back with several ideas of the top idea we decided not to do—it was too much of a commodity product for us and would encourage us to add too many SKU’s. The second idea on top from the customer base was that implementing a completely new product category—completely different from what the company had done in the past, but something our customer base wanted us to supply. It is on its way to becoming a multimillion-dollar product line. As Fredrik said, this is not rocket science, but it takes discipline and execution to get it done. That is what this management team did and they are reaping the benefits.

Henzler: Sometimes it also takes somebody who is not in the box to ask the questions, to kick-start the process. We are all buying smaller, medium-sized companies, the management teams are tightly knit, and some have been together for years, if not decades. It is tough to step outside the box and ask the questions from a new direction.

Charlton: Typically, they have been doing fine, making money.

Henzler: Yes, or else we would not be looking at the—  

Charlton: As to why you are trying to fix what isn’t broken, and it’s usually an issue of scalability and how we can double revenues, that will take stepping outside the box.

Snow: Let’s talk about private equities’ historic view of itself, which is, in many cases, a GP will tell the outside world that there is a secret sauce they used to create value. Fredrik, you have a funny saying that is a retort to that—can you put it in context?

Henzler: Yes. It is: “Our secret sauce is Ketchup.” It is not: “I am very open to putting out all the manuals, all the approaches we have on the table,” because none of that is secret, special, or exclusive to us. It is setting goals, defining the milestones to get there, and then executing on it. It is not rocket science, even though we try to treat it as science, getting the milestones out.

Samson: Yes, execution is the hard part. It is easy to lay out a plan and see where you want to go. But getting there and having the people, the resources, the monitoring and the metrics to make it happen—that is where the rubber meets the road and how you create value.

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