Management assessment and focus on operating model are some of the key bets a private equity (PE) firm makes while investing. However, with a market flush with PE funds chasing a few good assets, the author says some of the basic elements are not getting the desired attention.
Management Assessment: As mentioned, bet on CEO, CXO suite and bench strength is one of the most important aspects of sound PE investing. After all, it is the management that is being empowered to deliver results. It is however very common for PE firms to not have access to CXO suite or bench-strength during the diligence phase and, importantly, where available, not follow a thorough management assessment to gain an understanding of the ability of the management team to deliver in a scaled up model. A very important part of diligence is often overlooked at the expense of the true value potential of the deal.
Operational Due Diligence (ODD): It is common for PE deal teams to spend a lot of resources on Commercial (CDD) and Financial (FDD) due-diligence. However, key aspects of operations viz: channel bandwidth and scalability of supply chain; distributor/dealer churn and relationships; capacity available to support growth and its implication on capex needs and timelines; conversion efficiencies and internal scrap rates, etc., are often overlooked by some of the smartest financial minds.
Digital Disruption: Many business models are getting disrupted by digital enablers. The author has not observed digital as a business lever being debated either as a source of upside or a potential risk to the business during the diligence phase. Some aspects of Big Data supported by Analytics can be a source of competitive advantage for a consumer-facing company; Internet of Things can enable better forecasting and management of downtimes in a manufacturing set-up; artificial intelligence (AI) and digital records can be an enabler for a healthcare provider. These are just a few examples of how digital focussed ODD can help with an upside to the PE base case. Completing this assessment earlier in the process allows for a timely dialog with promoter/CEO and gain an alignment on investments required.
In summary, while the author is sensitive to the challenges in deal making and aware of various nuances that exist in competitive-process deals, especially in minority investments, a concerted effort on behalf of the best financial brains in the industry, aka the deal team, on the above operational aspects can go a long way in ensuring that the deal is off to a great start with most of the heavy lifting on the critical debates occurring prior to close.
Akhil Puri is partner and leader at Private Equity Value Creation, EY India.