LPs demand focus on portfolio company operations

The majority of LPs (57 percent) reported that fund managers are not placing enough effort in the operational improvement of their investments, according to a survey by Deloitte,  which surveyed 53 private equity houses with $729 billion in assets under management.

Additionally, nearly three-quarters of limited partners (71 percent) believe managers are not giving enough attention to improving a portfolio company once a deal has closed.

“Investors are seeking far more from their GPs than pure financial engineering, a trend which has been exacerbated by the credit crunch,” said Jason Caulfield, an operational due diligence partner at Deloitte, in a statement.

Private equity houses have responded to demands by adding in-house operational expertise to help support management teams, Caulfield added. Indeed, over the past five years 30 percent of respondents have established an operational team.

Operational teams typically consist of industry specialists and management consultants that work alongside portfolio company management professionals.

However, in-house teams could be too heavy a burden on a fund's balance sheet, especially so for sector agnostic or small to mid-market firms, according to a 2009 study by business school INSEAD.

There is also the risk of deal partners clashing with the efforts of an operations team, the study noted. It may be the “deal team does not want to admit they have encountered problems that the operating partners might be able to solve” or that the operations team perceives deal professionals as acting too interventionalist.

Private equity houses will have to balance the advantages an in-house operations team brings in value creation and in satisfying LP demands with the aforementioned risks, the study warned.