v i e w p oi n t
Seven Value-Creation Imperatives from Private Equity Companies strive to create value for their stakeholders, a pursuit that occupies countless hours in boardrooms and executive suites around the world. Only a select number of companies, however, get it right.
Middle
East companies can improve their chances of finding the correct approach by applying the best practices of the top-tier private equity (PE) firms. These international players have lessons to teach because they regularly create economic value and build efficient, high-growth businesses. Leading PE firms in the Middle East, that have the correct value-creation approach for their portfolio companies and sustain it over time, have been generously rewarded. Owners, boards and executives of public and private companies can learn from PE firms’ seven critical imperatives that Booz & Company has identified. They can adapt them to their own business models to create additional and lasting value. Focus on value The first imperative for PE firms is a relentless focus on value. To attract continued investment from investors and rightfully earn their fees, PE firms maintain close attention to value-creation beyond
30 Qatar Today
june 2012
simple financial engineering and severe cost-cutting. Today, PE deals are increasingly featuring substantial operational improvements that result from the application of deep industry and functional expertise, going down to core operations. More importantly, PE firms regularly evaluate the value-creation potential of the businesses in their portfolio and quickly exit business lines that do not draw on these companies’ core strengths and differentiating capabilities. Middle East companies can apply a similarly impartial lens to their portfolio, that will allow them to prune their activities after assessing financial performance and then the degree to which a portfolio company employs mutually reinforcing capabilities that cross business unit lines and that distinguish the enterprise as a whole. Remember that cash is king PE firms typically finance 60-80% of an acquisition with debt. This high-leverage model instill a sense of urgency among firms to liberate and generate cash as expeditiously as possible. To improve cash flow, PE firms tightly manage receivables and payables, reduce inventories, and scrutinise discretionary expenses. To
preserve cash, they delay or cancel lowervalue discretionary projects or expenses, investing only in initiatives and resources that contribute significant value. Middle Eastern companies can take a page from PE playbooks and develop similar performance-improvement plans. Although specifics will vary by enterprise, any such plan will focus on increasing profits and improving capital efficiency. Executives should start with a blank slate and then objectively and systematically rebuild a company’s cost structure, justifying every expense and resource. Time is money The third imperative identified as critical among PE firms is operating as though time is money. With an urgency to generate cash quickly to pay down debt, PE firms run on this “time is money” mantra. PE managers can ensure that the leadership of companies in their portfolio understands the necessary changes through 100-day plans. To be sure, portfolio company executives are extraordinarily empowered, and have close working relationships with actively involved boards and are not driven to appease external stakeholders. Still,