Tom Matthews
Value creation in a business is key to the private equity model. It means improving the business over the lifetime of the investment, so that by the time it comes to sell (exit), the company is in a better shape and worth more.
The business plan
Often even before a private equity firm completes an investment, it will spend time with the company’s management team and work out the optimal strategy to drive the business forward and accelerate growth. This method of working collaboratively with management to set the strategic plan for the private equity investor’s investment period is called the business planning process.
At Pemba, we set the business plan with the founder and management team well before the investment is completed. Through a series of strategy workshops, we help founders and management teams set the strategic vision for their companies and put the business plans in place to achieve these goals. It is extremely important for us that the strategic vision and business plan for achievement of the end goals are founder and management led, since these are the individuals responsible for delivering the key growth initiatives.
At Pemba, we facilitate these strategy sessions and challenge ideas where appropriate. However, most importantly we support founders and management and bring them opportunities to accelerate the growth of their businesses. This could be via international expansion, partnerships and / or strategic bolt-on acquisition opportunities.
In keeping with our Sherpa name, we play the role of the experienced mountain guides, but it’s not our journey; it’s the founders’ and management teams’. Our job is to help them summit (achieve their objectives) successfully.
Active ownership
This “active ownership” approach stands in contrast to public companies, where there are often hundreds or thousands of different shareholders. In private equity, the investor will generally own a significant equity stake (often a majority) and is directly involved in developing the business plan in collaboration with management and helping drive accelerated growth initiatives.
Financial incentives
Having a short reporting line between the private equity investor and management team of the partner company, and the use of financial incentives (often equity incentivisation), ensures the interests of the two are aligned to the success of the company. Both the private equity investor and the management team are motivated by the same goal – to drive the growth of the business and increase shareholder value for both parties.
Private equity vs public markets
Recent research took the opinions of more than 120 senior managers of private equity-backed companies. 90% said that private equity backing had benefited their businesses, and 85% said they would recommend private equity ownership to other business leaders. About 60% of respondents had worked in similar positions for publicly owned companies, and a large majority said that private equity investors were more engaged, better at setting goals and achieving targets than their public market equivalents.
Proven results
Specialist private equity growth investors like Pemba are experts at creating value. One study by Boston Consulting Group found that c. 70% of private equity investments generated at least 20% growth in profits and nearly half saw growth of 50% or more.
Summary
Value creation is not just private equity jargon, but goes to the very heart of what it sets out to achieve. Through creating value in the companies in which it invests, private equity plays a vital role in building better, more sustainable businesses, creating jobs and delivering accelerated growth.
