In an increasingly challenging exit environment, the pressure to drive value creation is greater than ever before. With that, portfolio boards need to sharpen their value creation playbooks, by embracing innovation, new ways of thinking and being ever more resourceful. In this roundtable, GPs discuss how boards are creating value in this difficult market.

At the table:
Adam Akbar, Bronzegate 
Aled Homer, Bronzegate 
Adam Keasey, Endless
Duncan Ramsay, ECI
Thomas Holroyd, Kester Capital
Robert Devonshire, MML
Michael Mowlem, Connection Capital
Fiona Satchell, Three Hills Capital
Annette Clancy, Jeito Capital
Moderated by
Taku Dzimwasha, Editor, Real Deals

When it comes to driving value creation, what are the key levers that portfolio boards currently have at their disposal? Are there any emerging strategies or tools that have proven particularly effective?

Adam Akbar: Across private equity, there are several key themes and levers that stand out. One of the primary focuses we see is driving operational excellence, which seems to be relevant across sectors. Pricing is also of great importance, and it can be beneficial to incorporate pricing mechanisms into contracts that automatically adjust, rather than engaging in challenging negotiations when costs increase. Having a sophisticated and strategic approach to pricing is essential. Additionally, the usual factors like strategic sourcing and effective talent management are crucial. However, one aspect that is consistently observed as critical is implementing tools to help extract relevant data. The data component is something we frequently encounter, as organisations often struggle to obtain accurate and timely information.

Michael Mowlem: I totally agree that data is critical. Our fundamental principle is that when looking to acquire a business, we need to be able to add value and not simply be the highest bidder in an auction and hope for the best. It requires diligent effort from everyone involved to ensure success. With smaller businesses, the focus after acquisition quickly shifts towards developing strategy and often addressing basic data-related issues highlighted through due diligence. In some cases, businesses we acquired lacked basic financial information like balance sheets and cashflow, which needed to be addressed to professionalise the operations. Professionalising the business is a fundamental step before anything else. Ultimately, value creation should be at the core of everything we do. Otherwise, investing with an index-linked approach would not generate the desired returns that clients seek.

Thomas Holroyd: When it comes to value creation, we develop a comprehensive plan spanning six strategies, including M&A, internationalisation, management augmentation, and sales and marketing investment. As we operate in the growth phase of the investment curve, digital transformation holds great significance. Another crucial aspect is operational improvement, especially considering that we often engage with businesses that are receiving institutional investment for the first time. These businesses often lack the necessary foundational elements. Therefore, we prioritise implementing new finance systems, enhancing reporting capabilities, and establishing robust data-driven KPIs. We also ensure that board packs contain comprehensive information, as many founder-owned businesses have never had such practices in place. It's essential to shift their focus from merely monitoring how much cash they have in the bank to actively understanding and utilising KPIs.

Adam Keasey: Many founders and owner-managers tend to prioritise short-term cash generation over long-term cost-savings initiatives within their businesses, which may require upfront investment. Alongside our focus on M&A and transformation initiatives, we also prioritise identifying savings opportunities wherever possible. Sometimes, it can be as simple as addressing inefficiencies within existing processes, like fixing a leaky tap. When we analyse a business and notice that its topline performance is strong but it doesn't translate into cash generation, we thoroughly examine each process. It may be a tedious task but by scrutinising each process, we can identify actions that can lead to additional cash generation, which adds value for future buyers.

Fiona Satchell: For us, the key drivers for creating value in both top-line and bottom-line terms remain largely unchanged. However, we are increasingly seeing the importance of focusing on specific areas, namely digital data technology and ESG. These are the areas where we are dedicating our time for due diligence and investing in internal capabilities. My expertise lies in digital across these subjects, and we have a team that is also being developed along with the necessary tools, structures and frameworks within ESG.

Annette Clancy: Our focus lies entirely on healthcare investments, particularly in products that are still in the development phase and have not yet generated revenue. Talent and expertise are of paramount importance to us. When developing new medicines, the process is expensive and risky, and involves selecting the most promising opportunities based on factors such as significant medical needs, patient benefit, growth dynamics, commercial return and the overall macro environment. The board's crucial role is to assess the risk-reward balance and make informed decisions on which indications to pursue. This requires a strategic and intelligent allocation of capital, with the board and management aligning their vision. We prioritise a long-term approach, rather than a venture model that often focuses on the first indication and immediate results/exits.

Are there any specific key levers that portfolio boards can utilise to create value?

Clancy: One effective approach I have observed is the use of subcommittees within the board. Instead of burdening the entire board with solving every problem, these subcommittees focus on specific areas of expertise. It is also an opportunity to gather the most experienced board members for each specific area. For instance, you can have a transaction subcommittee that thoroughly analyses deals before presenting them to the full board for approval. By conducting extensive preparation work with the management team and engaging with experienced external advisers, this brings a more comprehensive and well-informed perspective to the board discussion. Similar subcommittees can be formed for other areas like science, regulatory and ESG.

Satchell: We have implemented a similar approach with a subcommittee in one of our portfolio companies, and it has proven to be highly effective. We hold monthly working sessions that involve the investment team and the management team ahead of the board meetings. These sessions serve as an opportunity to make decisions in advance and provide a pre-presentation of key matters to the board. This approach has been particularly valuable when we need to make significant strategic pivots, as it helps to diffuse the discussions and gain consensus before the board meeting. Overall, this working session format has worked exceptionally well for us.

Duncan Ramsay: We have a dedicated team of about a dozen individuals covering six key value-add project streams: M&A, tech and data, people and culture, internationalisation, sales and marketing, and ESG. There is no playbook as each portfolio company has its own priorities, but it means there is hands-on support and expertise as needed. So, if I take M&A as an example, the ECI origination team will work alongside the lead from the portfolio company on anything from helping them to map and prioritise opportunities, to setting up meetings and helping to execute the deal.

Devonshire: In our typical structure, we have a top-co board that focuses on strategic direction and avoids operational involvement in day-to-day management. We focus on helping to drive key strategic initiatives and the direction of the company alongside. There is an operational board comprising senior executives across various functions such as technology, finance and human resources. At the outset, we work on aligning our vision with owner-managers and identifying key objectives for value creation over the next few years. Alongside the owner-managers, we then work together to assess the skillsets present at the operational board level to determine if we have the necessary capabilities to achieve those objectives. If there are gaps, we work alongside the business to actively seek to supplement the team. In my recent experience, the most significant lever for driving value has been having the right skillsets and experience in the business that can effectively drive areas such as tech enablement, data utilisation and other key initiatives on the ground.

Mowlem: Reflecting on my career in private equity, I recall a time when portfolio management consisted mainly of attending monthly board meetings. However, the landscape has evolved significantly since then. Nowadays, board meetings are not the sole venue for developing major initiatives, and the relationship between the private equity firm and management has transformed into more of a partnership. While it's important not to blur the boundaries of friendship, there is a greater alignment of interests, allowing for open and honest conversations, even when addressing underperforming areas. The dynamic has become more ongoing, with a sense of colleagues collaborating toward shared goals.

In the current environment, is finding the right talent becoming more difficult?

Devonshire: Indeed, talent acquisition and attracting the right people is a challenging task. It requires having a clear vision of the goals and objectives you are trying to achieve. Engaging headhunters can be beneficial in identifying individuals with the specific skillsets needed and aligning them with the business's objectives. It's crucial to communicate the plan effectively and ensure that potential candidates believe in the vision. When there is strong alignment and belief in the plan, it becomes an attractive opportunity for talented individuals to join and contribute to the success of the business.

Homer: It is interesting to observe the approach of large-cap US funds such as KKR, which have portfolio operations teams. These teams often consist of experienced consultants that previously worked for firms like BCG or McKinsey. They adopt a playbook mentality, setting up workstreams across various verticals within an asset, whether it be marketing, sales, operations, etc. The focus is on driving rapid and comprehensive value creation in each vertical. While this approach traditionally dominated the large-cap space, we are now witnessing a similar trend emerging in the mid-market. More mid-market funds are utilising external consultants and deploying a playbook strategy to extract and deliver value from their investments. This approach involves significant upfront costs but aims to effect transformative change and create value within the first 12 months, emphasising a swift and dynamic implementation process.

Are operations teams being widely used in the mid-market?

Holroyd: The emergence of value-add teams and operating partner teams in large-cap firms and their subsequent adoption in the mid-market is indeed an interesting development. However, when it comes to smaller and mid-market businesses, the relevance of these teams may vary. In many cases, the businesses we invest in are not yet at a stage where they are ready for such extensive support. The specific needs and readiness of each business should be carefully assessed to determine the appropriateness and effectiveness of deploying value-add and operating partner teams.

Mowlem: The concept you mentioned is something I have also observed, although it is not yet widespread. Striking the right balance between exerting some control while still allowing for entrepreneurial autonomy is crucial. It represents a different model that requires careful consideration. There are valuable lessons to be learned from it, but it's essential to understand and apply them within the appropriate context.

Clancy: We implement a model that engages the expertise of the fully experienced team at Jeito with our portfolio companies, starting with the due diligence process and maintaining it throughout the life of the investment. This allows for a fully collaborative dialogue between us and the portfolio company's management team. Of course, we can also suggest areas where external expertise might be beneficial, such as engaging with banks, and then facilitate those connections in an experienced manner.

Ramsay: It is being more widely used but whether you are working with an operational team or not, it’s all about aligning objectives and working collaboratively to address areas of improvement. We join the deal team right at the start of the process to make sure that alignment is in place from the beginning. Increasingly you are seeing management teams express a desire for additional support in certain areas, so our aim is to adapt our approach and provide the right help based on the specific needs and preferences of each management team.

Satchell: Being a minority investor like us necessitates a different approach, one that emphasises collaboration rather than a push model. Instead of dictating actions, the focus is on sparring with the management team, engaging in constructive discussions, and accelerating their thinking in an optimal direction. As a founder and entrepreneur, it's essential to establish alignment and extend their capabilities by leveraging our knowledge, benchmarks and portfolio expertise. Acting as a sounding board and trusted partner, we provide support and guidance. In some instances, our involvement may be more subtle, serving as a soft overhead, while in others, there may be a natural pull to actively engage and work alongside the management team. The collaborative nature of our role is intricately tied to being a minority investor, requiring a nuanced approach that respects and aligns with the founders' vision and entrepreneurial spirit.

Homer: I have also noticed a trend where change and transformation professionals are shifting from PLCs to private equity due to the perceived higher success rate of transformations and projects in the private equity space. One key factor contributing to this success is the presence of a unified and aligned strategy at the top, whether it's a blended portfolio leadership team or driven solely by operating partners and investors at the fund level. This unified vision allows for decisive action and implementation through consistent sponsorship. In contrast, PLCs often have a more diffuse structure with varying levels of commitment and willingness to embrace change among stakeholders.

Keasey: Effective communication is crucial for a successful value-creation plan. Simplifying the message and ensuring that it resonates across all levels of the organisation, even among employees in the lowest roles, is essential. When individuals understand why a particular change is being implemented because it has been effectively communicated to them, it can have a transformative impact. By fostering clear and transparent communication, organisations can align their workforce and empower employees to actively support and contribute to the desired changes, ultimately driving the success of the value creation initiatives.

How does your adoption of a hybrid model with operating partners join the investment lead in overseeing portfolio companies?

Satchell: Our approach involves taking two seats on the board of every portfolio company we invest in. Traditionally, these seats would be occupied solely by investment team members. However, we are increasingly adopting a hybrid model where an operating partner joins the investment lead in overseeing and managing the asset together. This approach brings a more diverse perspective to the table, with our operating partners bringing their genuine expertise and specialisations from their prior experiences before entering the private equity industry. This diverse perspective and specialised knowledge contribute to our ability to bring a different dimension to the management and oversight of the portfolio companies we invest in.

Ramsay: We have a dedicated ECI team member on the board, and then while we generally keep the board size relatively small, we occasionally add individuals with specific specialisations, with technology being a common area. Technology, especially in the digital realm, often requires a unique understanding and language. Having a board member with a technology background, such as an ex-CTO, provides valuable insights and helps navigate complex projects and potential risks associated with significant investments in this area.

Homer: Some large-cap firms maintain an internal operating partner group consisting of highly skilled individuals. However, these operating partners often possess a generalist skillset. To further augment their capabilities and gain insights from experienced professionals who have successfully navigated similar challenges in the past, these firms are now establishing relationships with CEOs, CFOs and other industry executives, and engaging them on an advisory or interim basis, creating a portfolio support ecosystem. These external experts bring valuable perspectives and can provide guidance to identify and avoid potential pitfalls before committing to strategic decisions and investments. By leveraging the expertise of seasoned executives, large-cap firms aim to enhance their decision-making processes and increase the likelihood of successful outcomes.

In the context of value creation, what are the expectations and roles of CFOs within portfolio companies? How can CFOs actively contribute to value creation initiatives beyond traditional financial oversight?

Keasey: Assessing the bandwidth and capabilities of CFOs is a critical aspect of effective management. In the past, we have given CFOs additional duties, such as involvement in IT projects. However, we have come to realise that this approach is often not successful. As a result, we are now bringing in specialists, either on an interim basis or as non-executives, who possess the necessary expertise in specific areas. These specialists have a clear understanding of what success looks like and can drive projects appropriately, relieving the CFO of the burden. This change in composition involves not only the traditional C-suite roles but also the addition of specialists who work alongside and support the CFO in key projects. The CFO's relief is palpable when we bring in experts like CTOs or IT specialists, as it ensures that the project receives the focused attention and expertise it requires.

Mowlem: I would be concerned with overloading the wrong people with projects that may not align with their expertise. It is crucial to consider this because it is a common occurrence where the necessary assessment of needs and capabilities is overlooked. While CFOs often have a unique perspective on the whole business when it comes to leading projects, it becomes important to evaluate whether they are the right individuals for the specific project.

Akbar: In today's landscape, the CFO role is required to be highly operational and demonstrate the emotional intelligence to effectively manage multiple stakeholder relationships. The CFO needs to be a change agent and have a firm grasp of data and analytics. Some CFOs struggle with creating the right datasets, setting appropriate KPIs and efficiently utilising digital tools for automation. Investors expect timely and accurate information and analysis, and a CFO's ability to deliver on this is crucial. Additionally, being a CFO entails being a commercial leader first and a finance professional second. It is vital to contribute beyond finance and the numbers in boardrooms. The requirement is for a CFO to demonstrate a holistic understanding of the business to instil confidence and generate value. The role of CFOs has significantly evolved in recent years, particularly within private equity. The pressure on CFOs has intensified, given the close involvement of investors and their increasing demands on portfolio companies. In fact, a recent Bronzegate survey revealed that 75% of the PE CFOs surveyed would potentially be open to a job change within the next 12 months, indicating the challenges they face. However, it's worth noting that 82% of CFOs surveyed enjoy a good working relationship with their investors, highlighting a paradoxical situation. The burden on CFOs can affect their job satisfaction and relationship with investors, particularly if their personal equity incentives weaken and valuations change.

Homer: One of the things we emphasise is that CFO searches should not be approached similarly to other board positions. CFOs possess a highly transferable skillset that can be effective across a variety of industry sectors, so instead we emphasise focusing on business models, as the similarity of cost and revenue drivers between businesses with similar models will often be the same. This approach allows us to think more laterally and explore candidates from different industries who exhibit the right skills and behaviours, rather than limit ourselves to candidates from one sector. Instead of solely focusing on ticking every box, we prioritise finding candidates who possess the core qualities needed for success in each specific CFO role.

Devonshire: The role of the CFO in value creation is critical given the importance in reporting, tracking, data management and monitoring KPIs. Beyond financial performance, the CFO can play a key role in tracking areas such as organic growth, cross-selling initiatives, automation efforts, value-accretive M&A and overall business transformation. They are responsible for holding individuals accountable and delivering on key strategic targets. This can be particularly challenging in fast-growing and transforming businesses that engage in acquisitions and international expansion. The CFO must continually enhance their skills and keep up with the rapid pace of these dynamic organisations. While it can be a challenging task, the value they bring in helping to drive the success of the business is undeniable.