The Brave New PE World

The PE industry has evolved since the 1980’s. Back then, the industry used leverage to generate investor returns. In the 1990’s the PE Industry made money by buying companies and expanding them. The 2000’s ushered in a period of earnings growth fueled by strong beta market growth trends. And now, for better or for worse, the industry is being driven by returns PE firms are generating through management of and operational improvements in their portfolio companies.

However, one of the major problems for PE firms in this current evolutionary period is that the returns they are generating for themselves and for their limited partners are low. The returns are low not only in an historical context but low versus the expectations and promises they have been setting with their investors.

Poor PE industry returns (IRR) are having major and multiple ripple effects:

  • Some investor capital is seeking higher returns from alternative investments.
  • PE firms are being forced to hold onto portfolio companies longer, (until growth prospects improve and returns can meet investment objectives).
  • Fewer deals are occurring since firms cannot quickly flip investments. One analyst recently concluded that 60% of the total industry IRR is now generated by operational improvements at portfolio companies versus returns from capital appreciation. Another analyst estimated that PE firms now are making more profit from management fees then they are from their deal flow.

In today’s PE industry, many of the PE firms that are delivering the highest returns for their investors are those that have significant operating partner involvement within their portfolio companies. Yet at this stage, even the dynamics of “operating partner involvement” are changing.

In the first years of this evolutionary period, the primary operating partner involvement in portfolio companies was in manufacturing and operations efficiency. That involvement had a positive impact on many companies but has as Bain, Mcgladrey and others recently noted has “primarily run its course”. According to those experts the time has come to turn operating partner involvement in the direction of finding alpha company growth in still slow beta growth markets.

With that noted, it also has to be acknowledged that generating alpha growth in portfolio holding has never been a strength of PE firms. It requires many skills that they have previously not had within their organizations, a process map that includes management at the portfolio company, that is repeatable, can be scaled up to multiple holdings and can be tracked from afar for success.

These skills are what MRA provides for its PE clients. For more information on case studies and approach, click through on the blog posts below or call MRA at 973-452-2584

Related articles:

Finding Growth in Slow Growth Markets

Bain, Forbes and Others Predict Best PE Returns Will be Driven by Alpha Growth

E&Y – If Your Company Needs Growth, It Needs a Growth Plan

Generating Organic Growth in PE Portfolio Companies