Managing to perfection

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Backing good management teams in making improvements at portfolio companies is a core element of private equity investment. But to what extent do changes to management practices make a difference to company performance, and can these changes be replicated in bolt-on acquisitions?

Improvements in management practices can be significant value creation levers for private equity investors.

At ECI we don’t really talk about management practices per se. We would put these things under the heading of people and talent, which are critical. It’s about making sure there is an engaged workforce and a high-performance culture.

Latest research focuses on the impact of consultant intervention on management practices. But the most important thing is to recruit the right people in the first instance.

In my experience, there is no point bringing in consultants if you don’t have people in the business who are going to embrace what they say and, ultimately, implement what they suggest. Having been a consultant myself many moons ago, there is nothing worse than going into a business, doing a load of work, and feeling that it is just going to get left on a shelf. 

At ECI, we are unlikely to get specialists involved unless they have a counterparty in the business that is going to pick up the baton. We can help the business along the way, but we are never a substitute for companies doing it themselves. 

Leadership must come from the top. The chief executive of the portfolio company is the most important element when it comes to making changes stick. Change then cascades through the organisation. It starts with a clear, shared vision and purpose. A set of values then filters through, to create a culture in terms of how people work. Get those things right and you see the impact in HR metrics such as staff turnover and employee engagement, and ultimately in business metrics such as productivity and profit growth. It’s all interlinked.

Group of colleagues talking

Enhancing the management practices in a portfolio company acquisition should not necessarily guide the implementation of buy and build strategy.

The companies we back are people-based businesses. The people, the culture and the way they operate are a major part of the reason that we choose to invest.
It certainly isn’t a given that the company being acquired will have inferior management practices. There are situations where that is the case, but there are others where, quite frankly, we can learn a lot from the culture of the businesses we buy.

In some situations you might want to impose management practices, for example if you are buying a manufacturing plant as part of a buy-and-build, you might want to put in plant managers that can implement best practice from the acquiring company. But with a service-based business, it is really important to retain the management practices that have made that business successful. 

I think creating sustainable operational change is more subtle than putting in your own management and rolling out a playbook. If we are pursuing an acquisition strategy, what we try to do is buy a company and integrate the best bits of its management practice and culture so that the sum of the parts is greater than the whole.

Sean was speaking to Private Equity Findings as part of a roundtable discussion. The full discussion can be found here.

Front cover of Private Equity Findings magazine.

About the author

Sean Whelan

"I joined ECI in 1998 having spent my early career in consulting with Gemini and Bain and Company, following a degree in Economics from Cambridge University. I am currently Chair of the Investment Committee and sit on the ECI Board, with responsibility for the Commercial Team."

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