International Institute for Private Equity and Investment Banking

PEVCRC - Private Equity Value Creation Research Center

Our center focuses on the study of Private Equity corporate value creation, core operation performance improvements and benefits of high value financial engineering. We believe that PE backed companies can always outperform traditionally owned and managed enterprises, and it is the goal of our center to provide a best practices set of tools and solutions to the PE industry to sharpen and to hone their ability to deliver best results.

Good Private Equity principals always focus on straightforward and simple ways for value creation, but these simple and straightforward rules often cannot be adopted by management prior to PE taking over. Often management that is not backed by PE can’t achieve the same results that Private Equity can for various reasons. Even though financial engineering, which is a significant value creator plays a big role and Private Equity experts are often much better at FE than management is, most companies’ core operation performance improves under PE, even when management is not changed when the new owners take over.

In companies where the management does not follow “top talent best practices” rules, good PE operators focus on bringing on board the best talent, while often ignoring and disrupting office and company politics and culture, while disregarding built alliances and allegiances thus doing what is best for the company, for the investors, and for the bottom line and not what is most comfortable, convenient and safe for the management and the board. On the other hand, in companies that do focus on attracting and on properly incentivizing top talent, PE usually leaves things alone, although from our experience there is always room for improvement, and in such cases just letting good management know that they are fully in charge and that their “top talent focus” practices are encouraged by the new owners will often lead to significant additional improvements. Top talent focus and everything that comes with it is considered the biggest value creation tool and rightfully so.

Realizing Best PE Returns through Investment Combinations

As more funds are currently available for PE firms than ever before, and as most firms are searching for similar deals and focus on similar strategies, it is becoming more and more difficult to succeed by focusing on only one strategy. While in the past a single investment strategy might have provided solid returns for the investors and for the PE firms, in the new landscape it is the firms that are able to adapt and to utilize a multiple strategy approach that will reap the rewards of the new environment. Utilizing the strategies available to private equity investors and combining them with Value Investing, investing in Undervalued High Performers, focusing on Distressed Asset Acquisitions, creating opportunities through new business model company and team acquisitions and other means is what will make a difference between stellar performers and firms that will see their returns hurt by the new competitors and the ever changing landscape.

Other Value Creation Tools and Measures

A properly developed reward system for meeting and exceeding financial and performance targets goes hand in hand with a well designed platform for top talent focus but there is much more to it, and it really stands on its own as a powerful tool for significant performance improvement. Most well designed systems are usually considered too extravagant or too over the top by owners, the media and the public alike, and yet it can be shown that rewarding management and employees in an above fair manner, results in significant and extraordinary performance results. He who gives first, gives twice. Companies often have weak incentive models and they are equally bad on not rewarding management well on the upside and on the downside. PE naturally understands good incentive systems and how to strike a balance between rewards and top performance, and how to provide incentives both to the top players and to bottom performers while still being able to create a competitive environment. PE allows management to stop worrying as much about public or owners opinions and thus a better game develops. The system must be built to get rid of underperformers as quickly as possible and to allow the top performers at all levels to stay and to be provided with better rewards and incentives than they can get anywhere else while allowing them to move up the ladder quickly while delivering more and more for the company. Performance testing must be in place, rigorously enforced, and constantly improved and needs to be objective and measured at all levels. Math should be simple. A person delivering twice as much should be paid twice as much and should be allowed to move up twice as fast. Anything else is giving in to politics, culture and social opinion. This is the only fair model to live by to deliver top performance results. There is also something to be said about models where all efforts are rewarded whether large or small. Many of PE funds focus on the 3M model, rewarding both failures and successes. All failures are rewarded. A failure is simply considered a small success and is rewarded on a smaller level than a success. It is the inactive members of the organization that do not deliver either failures or successes that need to be removed.

Private Equity Brings with it a wealth of knowledge and experience and a clear vision and focus that management often cannot achieve on its own. It is the goal of our center to develop tools and performance models that can help the industry as a whole develop further and to deliver even better results in the future.

News on Private Equity Value Creation & Opportunities

Inefficiency Within The Private Equity Mid Market

Posted: 9th November 2011 10:28

By Céline Fillistorf

Private Equity is associated with a number of things - illiquidity, excess remuneration, high returns and high risk, exclusivity, entrepreneurship, Facebook, and the list goes on depending whom one asks. The asset class has been around long enough to be firmly established as a leader in the investment arena, producing higher long-term performance than any other asset class. As such, it is no surprise that current market conditions characterised by increased volatility, struggle to reach return targets, falling valuations and lowest interest rates seen for decades are creating a strong demand for private equity investments and opportunities despite the illiquid nature of such investments. On the other hand, supply of investment opportunities is on the rise, given tremendous technological breakthroughs leading to the redefinitions of value chains in many industries, hence creating opportunities for new entrants and for consolidation alike.

We can be encouraged by “penetration-to-growth” ratios in various industries, such as digital media, technology, and consumer goods. With faster internet connections, growing penetration of smart phones and PCs, and increased online connectivity. There is a huge unexplored opportunity for consumer companies to reach out to consumers and create growth. While large firms will use this to try and retain large market shares and margins, the biggest opportunities are amongst smaller, innovative, mostly private companies which are suddenly finding themselves capable to compete with large firms, and those companies enabling this change and providing solutions that are changing the value chains of many industries. Never in history were companies able to move so fast from an idea to a large multinational company with hundreds of millions or billions of revenues and profits as they are today.

As a consequence, investors and those seeking capital have more and more specific ideas where they want to invest or whom they would like to have as an investor. Here it gets difficult to rely only on your private network and that is where platforms like DealMarket help finding, but also benchmarking existing interesting deals and market participants.

So where is the money coming from and where is it going to? The most sought after investors are family offices, angel investors (private individuals), venture and private equity funds, pension and insurance funds, asset management firms and banks. This list has changed quite a bit over the past few decades, with emergence of family offices (according to various sources there are over 3’000 globally), increased number of venture funds (in particular early stage ones) and last but not least increased role of pension and insurance funds which focus primarily on investments into funds rather than direct opportunities. At the same time, each one of these market participants is faced with hundreds of proposals being submitted per year – such as entrepreneurs for their latest start-ups, growth capital opportunities, buyouts, new funds seeking capital, and increasingly secondary interests in direct deals as well as funds.

Taking all this into consideration, and given the highly illiquid nature of the private equity investments where investors or limited partners can not simply assume selling is always possible whilst often they need to obtain liquidity, we are convinced that private equity model will undergo tremendous change over the next couple of years, in particular when it comes to its liquidity and marketplaces enabling it. Resolving the inefficiencies of the private equity industry will need regulatory blessing, but we are seeing some encouraging signs, latest of which is the recently passed Senate bill related to crowd source financing in the US.

One of the major inefficiencies today is simply that many institutions newly seek to invest in Private Equity but don’t know how to best source deals. Benchmarking deals is hard. Firms like DealMarket however gives the opportunity to search for contacts based on their deal experience, meaning if you want to invest in solar energy in Morocco but don’t know the market you can find someone who did something similar in the past (analogue to LinkedIn where your search people filtering them by CVs).

Another inefficiency is the lack of a software to cope with the increasing deal flow. Even banks still work with excel and explorer folders. Typically a company screens 300-500 deals a year and yet still relies on its analysts individual filtering system. Similar to companies working without a CRM system before, you now can loose all data if an analyst leaves your company. DealMarket offers a deal flow management tool that is easy to use and since based on cloud computing can be accessed from anywhere helping companies to focus more on content rather then administrative processes. Our aim is to standardize the way investment firms and investors source, store, manage and share deal flow.

Service Providers like data rooms, accountants, lawyers, consultants etc. discover the Private Equity market and try to penetrate it. In doing so they join global industry specific networks like Geneva Group International, attend Private Equity conferences or events and also advertise their services on global Private Equity platforms such as DealMarket.

Private equity is the industry that has embraced the technology the least, while it forsters it the most with the vast amounts of money it is investing in the companies in the field. That said, it is inevitable that over the next 5 years we will see automation of many processes in the private equity industry - in particular creation of platforms for trading and auctioning the secondary as well as primary opportunities and deals (limited partners and direct deals) - the field in which DealMarket will play a leading role globally.

There are most certainly many new solutions coming through to stream-line the industry but we must appreciate dramatic changes do not happen over night. Private equity firms however are now noticing what needs to be done and are analysing and, at times, implementing more efficient processes. Those who have shown resistance are noticing other adopters of technology receiving notable dividends and such experiences will inevitably lead to a shift in perspective. DealMarket remains committed to fostering innovation, and bringing efficiency to the private equity marketplace which should benefit all parties and market participants.

Céline Fillistorf is the CEO and co-founder of DealMarket.

Céline originally is from the French part of Switzerland and grew up in Zurich. She graduated from The University of St. Gallen in 1999 with a degree in Business Administration. She started her career by working for 5 years in management consulting at The Boston Consulting Group and A.T. Kearney. Following 2 years in sales development at UBS she set up her own consulting business Fillistorf Consulting in 2007 working with clients in the financial sector. Céline is married has two boys and lives with her family in Zurich, Switzerland.

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