PE investors often fail to unlock a portfolio company's full potential by only interacting at the board level. Engaging deeper with operational leadership is crucial to understand the team's true quality and identify opportunities to transform the value proposition, which are often missed from the boardroom.
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Many late-stage investors focus heavily on data and metrics, forgetting that the quality of the leadership team remains as critical as in the seed stage. A new CEO, for example, can completely pivot a large company and reignite growth, a factor that quantitative analysis often misses.
During due diligence, the most revealing portfolio company reference checks involve asking CEOs leading questions. Frame inquiries to suggest the private equity sponsor is taking undue credit for successes. This tactic encourages frankness and uncovers the true dynamics of value creation and deal sourcing.
Capital has become commoditized with thousands of PE firms competing. The old model of buying low and selling high with minor tweaks no longer works. True value creation has shifted to hands-on operational improvements that drive long-term growth, a skill many investors lack.
Effective private equity boards function as strategic advisory councils rather than governance bodies. Board members are expected to be co-investors who actively help with strategy, networking, and operational challenges like procurement, making them a key part of the value creation engine.
In Phase 1 operational improvements, a Pareto analysis reveals that the majority of value comes from three key areas: aligning and incentivizing the management team, rationalizing the revenue portfolio to focus on profitable segments, and optimizing the operational footprint.
Instead of just telling portfolio company leaders what to do, effective PE operators 'show' them how with specific frameworks, tools, and process examples. This visual and systematic approach is more effective than verbal direction alone and accelerates the implementation of value-creating activities.
An investment committee's value extends beyond simple gatekeeping. It serves as a vital communication tool between company divisions, a focusing mechanism to prevent chasing distractions, and a mentoring opportunity where junior talent can learn from senior-level analysis and decision-making.
To maximize value creation, young private equity firm Teopo Capital made a strategic decision to hire a full-time operating partner dedicated to portfolio companies before building out a fundraising team. This signals a deep commitment to hands-on operational improvement as their core strategy.
The era of generating returns through leverage and multiple expansion is over. Future success in PE will come from driving revenue growth, entering at lower multiples, and adding operational expertise, particularly in the fragmented middle market where these opportunities are more prevalent.
Operating partners add maximum value when involved pre-acquisition. They should help shape the value creation plan and deal thesis from the start, rather than being brought in post-close simply to execute a plan others have created.