Vincenzo Morelli, partner emeritus at TPG Capital and the chairman elect of the European Private Equity Association, delivered a keynote address at PEI’s Operating Partners’ Forum in London on Wednesday in which he set out the “rules” for executives focused on operational value creation.
“Accept no compromises on management quality, but realise that it takes 12-18 months to find out if a chief executive and his current team are any good. There should be no room for sentimentality,” he argued.
He said the majority of an operational executive's effort, and the management’s, should be on top-line growth. “Growing margins and revenues is how to really add value,” he said.
Firms should also create and nurture their own ecosystem of knowledge, bringing new ideas and technologies to their portfolio companies, he said.
“You must make sure that operations-focused team members work in perfect step with those on the deal side. Operators and financial guys need to work in partnership from due diligence all the way through to exit. Put egos aside and recognised that while deals are the crux of private equity, your LPs must be able to see that you have added value,” he said.
Finally, he argued operational partners are not there to make decisions for a chief executive, but rather to challenge them. “The decisions must be theirs otherwise you have got the wrong chief executive. Operational partners don’t run the company – they need to put those ambitions to one side.”