How to consult for Private Equity portfolio companies
The rise of the independent consulting market has coincided with a private equity investment peak bringing opportunities aplenty for freelance strategy consultants. Over the last couple of years, we have seen a dramatic increase in demand from our private equity clients for independent consultants who can drive growth and change within their portfolio businesses.
The global private equity industry’s assets under management have grown by 80% since the financial crisis. EY’s 2018 Global PE Watch gives the value of investments (including the unrealised value from current investments) as roughly $2.7t.
However, following the financial crisis and credit crunch, private equity firms have been faced with changed exit imperatives and have needed to evolve their strategies. Rather than a quick exit through financial engineering, the dominant focus now lies with operational value creation and safeguarding assets for their investors through economic downturns. Operations or Value Enhancement teams now form a crucial part of private equity funds' business models with the purpose of optimising value creation through business improvement. As such, private equity firms have hired talent from top consultancies to bring strategic and operational skill sets in-house.
But why would PE firms use an independent consultant?
Often, strict governance procedures are followed to define the relationship between a private equity firm and its portfolio companies until bad performance forces an intervention from the Operations team. But if the private equity firm can support improved business performance from the outset, this increases the likelihood of a successful relationship and exit. In light of this, many private equity firms are now using independent consultants to formulate value creation plans and provide strategic support in their execution.
A recent study by AT Kearney on the relationship between portfolio companies' CEOs and private equity firms demonstrated the importance of clear communication and the ability to drive business decisions through influence rather than direct control. The addition of an independent consultant to sit inside the portfolio company can help build the trust needed – a strategic mind working behind the scenes to support the senior management and develop clear lines of communication and reporting to the private equity firm.
So how do you optimise your success consulting for PE portfolios?
1) Consider your stakeholders
Your client is likely to be the Investment or Operations Manager from the private equity firm. But without buy-in from the management of the portfolio company you will struggle to attain your objectives. Think of yourself as a conduit between the business and the private equity firm – to be effective in this role you will need to collaborate with senior stakeholders across the portfolio company. This could be the founders of an entrepreneurial start-up, the existing senior management of a later stage business or a new senior management team brought in post-investment. Your relationship with these critical stakeholders will define the success of the project.
2) Leverage the breadth of your experience
The specific expertise needed from the consultant will depend on the project, but two key areas of activity we have seen are in growth strategy and digital transformation. Both require strategic, commercial thinking combined with the ability to see the wider impact on the business and, often, a view of how to scale the operations. Pure "blue sky" thinkers will struggle to develop strategies with a realistic roadmap for execution.
3) Become part of the business
Integrate yourself – you’re not just an external advisor. Our most successful interims whom we’ve placed into portfolio companies have established themselves as part of the team. You'll be analysing the cold, hard data to back up your recommendations for senior management and the private equity firm, but gathering that data and gaining a proper in-depth understanding of the business will only be possible when the staff stop seeing you as an outsider.
4) Enjoy the pace
Decision making will be fast. Unlike large corporations, private equity portfolio companies tend to be leaner and decision making can be swift. Long, drawn-out processes where a strategy deck sits on a shelf do not apply here. You can enjoy seeing the impact of your work and being involved in the operational change that follows.
So if you’re an independent consultant looking for projects with private equity portfolio companies, the opportunities in the market are stronger than ever and a successful project could mean the start of a great client relationship and further freelance work.
Freshminds has been supporting strategy and management consultants across Europe since the early millennium – we have the expertise, insights and connections that you need to ensure that your career as an independent consultant is a success.
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