Study: PE lacks operational savoir-faire

Nearly half of private equity-backed company directors believe that private equity firms aren't adding enough operational value, according to a survey from KPMG and Directorbank.

The survey, of more than 300 senior executive and non-executive directors, revealed there is room for firms to improve when it comes to managing portfolio companies: 41 percent of the respondents rated the quality of private equity input as average or poor.

As part of the research, KPMG and Directorbank held confidential interviews with an additional 23 directors. 70 percent of those interviewed said having “managerial, operational or sector experience” would improve private equity input and help give firms a “greater empathy with management”.

The survey also revealed a disconnect in alignment of interests with 78 percent of respondents saying the interests of private equity and management were well aligned pre-deal and at completion; but nearly one-third said it worsened over the course of the investment period. One reason respondents gave for this was that private equity backers and management often had different views over the company's strategy.

According to the study private equity firms typically worked with companies in creating a 100-day post-investment plan. And although the majority of firms contributed significantly to creation of the plan, only about a third were actively involved in the implementation, according to the survey.

However the research did conclude that private equity directors are generally highly regarded for their deal-making and financing skills. “Our respondents consistently rated the input they got from private equity firms very highly during the pre-deal and completion phases and on the exit,” said Marc Moyers, head of private equity Americas for KPMG. 

The report also indicated that many private equity firms are aware of their operational limitations and had conscious efforts to add to their skills by utilising operating partners and industry advisors.

But simply adding operational advisors to a deal is not the way to bridge that gap according to the survey. “Most private equity houses do not have operational guys in their team – they bring them in on a deal-by-deal basis,” the study said. 

“That is a weakness because these guys do not understand how the private equity team ticks,” said one of the respondents, a non-executive director of a telecommunications company. “If you had operational people on the deal team, you’d shortcut a lot of processes.”