LPs investigating value-add claims

Fund managers are increasingly expected to explain precisely how they created operational value in portfolios, according to speakers and delegates at PEI’s 2012 Operating Partners Forum.

Limited partners have become increasingly interested in learning exactly how their managers are adding value to portfolio companies, and many are not satisfied with simply hearing hard performance numbers.

Panelists at Private Equity International’s 2012 Operating Partners Forum talked about the evolving importance of operating capabilities at firms, and the various models firms use.

They also spent time discussing LPs' mindset around these issues, and the growing importance of being able to demonstrate exactly how operating partners are adding value. LPs are more routinely digging down into performance numbers to figure out what how significant a role operators play at firms.

Earlier this year PE Manager asked Duff & Phelps managing director PJ Viscio how firms may be able to tell investors a more compelling story around their value-add work. Read the full interview HERE

“LPs are considerably more interested in how you’re adding value into your portfolio companies, and you do have to spend time explaining what are the things we’ve done to make this business better,” said John Castle, chairman and chief executive officer of Castle Harlan, one of the keynote speakers at the Forum on Thursday.

“LPs are not totally satisfied with the technique of saying you bought at X and sold at 3 times X; they say, ‘well, maybe you bought at the right time, or levered it up,’” Castle said. “They want to know what value you have added to the enterprise and you have to be ready to talk to them.”

One member of the audience, a GP, said his team keeps a “score card” and publishes case studies of the work it does on portfolio companies and reports the information annually to LPs.

The role has already become ingrained in the industry. As one delegate described, a few years ago, the challenge of hiring operators into a firm involved transitioning the employee from a management role in industry to a private equity firm. More recently, the delegate said operator candidates are all coming from private equity firms, eliminating the need to help operators ease into life at private equity.

As competition in the industry heats up, and as the global economy continues along its shaky trajectory, delegates said the role of operating partners will continue to grow in importance, even as pressure on things like management fees forces firms to strictly utilize resources and re-assess the significance of everyone’s role.