How private equity firms can help their portfolio companies win new business and grow revenues
Introduction
To be successful, a private equity firm needs to build a valuable portfolio. Almost all firms recognize that doing so requires picking the right portfolio companies, and they invest their resources accordingly – assembling proven investment teams, conducting deep diligence on potential investments, and making sure they structure each deal just right. But simply picking the right companies isn’t enough. The most successful private equity firms think strategically about how to grow the value of each investment. Increasing an investment’s value is easiest when a firm leverages a successful private equity portfolio operations team and fully realizes the power of its relationship web.
Growth of Private Equity Portfolio Operations
Since the 2008 financial crisis, operational improvements have become an increasingly important piece of how private equity firms build value in their portfolios. Fifteen years ago, as Drew Hansen at Forbes writes, “the focus was on picking winners and financial engineering – not adding value to investments.” Today, however, each of the top 25 private equity funds has an internal group focused on portfolio operations. Firms now understand that they need to add value, not just find it.
According to McKinsey, the proliferation of operating groups represents a “broad philosophical shift” in the way private equity firms are approaching their investments, from a “’buy smart and hold’ approach to ‘acquire, align on strategy, and improve operating performance.’” Firms are investing in “driving measurable performance improvement” at their portfolio companies and are relying on their portfolio operations groups to do so. As private equity firms build out their operations teams, they need to determine how those teams can have the most impact on a portfolio company’s bottom line.
Functions of a Private Equity Operating Role
Traditionally, a private equity professional with an operating role – whether a member of an internal operations team or an outside operating partner – is either a generalist or a functional specialist. Generalists provide portfolio company leadership with insights, perspective, and management coaching based on decades of business experience. Specialists assist the portfolio company in key functional areas. In a survey by Ernst & Young, private equity firms most frequently deploy operating specialists in finance (73% of firms), talent & human capital (55%) and procurement (45%).
Only 36% of firms in Ernst & Young’s study dedicated a specialist to business development – helping their portfolio companies grow by finding key clients and building critical strategic partnerships. Many leading private equity and venture capital firms, however, have programs focused in this area. For example:
- 3i Private Equity runs a Business Leaders Network with “a focus on connecting with Chairmen, CEOs, Advisors, and other senior Board level management for our existing portfolio assets and new investment opportunities.”
- Norwest Venture Partners offers Norwest Connect, an “executive briefing program that connects the firm’s portfolio companies to leading corporations in order to…cultivate strategic business leads.”
- Mayfield Fund uses “an extensive, global network of experts called the ‘Mayfield Edge’ to help portfolio companies ‘secure strategic partnerships and alliances.’
Firms with these programs recognize that they have a key asset they can deploy to accelerate revenue growth at their portfolio companies – their relationship capital. Relationship capital is the value of the relationships within and among organizations, and is critical to the success or growth of any venture.
Warm Introductions Deliver Immediate Value for Portfolio Companies
By sharing its network of relationships with its portfolio companies, a private equity firm can significantly accelerate growth with limited resource investment. David Teten, a venture capitalist who studies the impact of operational support teams on portfolio success, observes that “the cheapest and sometimes most value-added service that an investor can provide is access to his network.” Introducing a portfolio company to a potential client doesn’t require delving into the company’s books or doing a deep dive into their product. In some cases, all it requires is sending an email.
Supporting portfolio companies with relationship capital plays to the strengths of the private equity model. Senior operating partners, who are often retired CEOs or other C-level executives, have extensive networks. As Ernst & Young notes, “with their wide networks, they’re often able to open doors that might otherwise have been shut.” Furthermore, private equity is a relationship-driven business. A private equity firm has relationships with investment bankers, senior executives, and influential investors – any of whom might be a potential customer for their portfolio company.
Portfolio company executives recognize the value that these investor relationships can bring. When consulting firm A.T. Kearney surveyed CEOs of portfolio companies about what makes a successful private equity relationship, the CEOs repeatedly cited networking as an area where they particularly value private equity support. The survey concluded that “PE operations teams offer broader connections and a network of experts and consultants that can be rapidly deployed to support management.”
Of course, private equity firms can be strategic about which organizations in their portfolio would most benefit from relationship-driven business development. Relevant characteristics include:
- Sales Approach: Companies that sell B2B rather than direct-to-consumer will often benefit more from warm introductions to potential clients and strategic partners.
- Seniority of Target Customer: Companies selling products and services that require executive-level buy-in often have difficulty reaching their target customer without a strong in. Warm introductions are particularly helpful when selling to senior executives.
- Product Complexity: Companies whose products are more difficult to evaluate rely more on trust and reputation to secure big clients. A good word from a connected private equity partner can help build the trust that’s required to close the deal.
- Brand Recognition: Companies with high brand recognition are better able to secure an initial sales meeting when they go in cold. Those that are less well-known benefit most from the added credibility an introduction from a private equity firm provides.
RelSci for Private Equity Firms
The best tool for relationship-driven business development is Relationship Science (RelSci). Deploying RelSci enables private equity firms to aggregate their relationship capital into a single platform and share that wealth with their portfolio companies.
Private equity users can leverage Contact Sync to build a digital Rolodex, tagging their senior-level connections from among RelSci’s database of over 9 million people. Using Relationship Sharing, they can then make these connections accessible to executives at their portfolio companies. This means that whenever a portfolio company executive pulls up a prospect in RelSci, they’ll be able to see who at the private equity firm has relationships there and can make an introduction. RelSci offers customizable sharing settings, giving each client firm complete control over who has access to its relationship information.
Operating executives looking to maximize their contribution can take a higher-level view with Relationship Discovery, which enables users to visualize their relationship reach by industry, role, or geography. Operating executives can drill down into a portfolio company’s target customer profile and identify new business opportunities.
Learn More
Are you a private equity leader who cares about building value at your portfolio companies? To learn more about supporting your portfolio with relationship capital, or about other ways in which Relationship Science can help drive better returns for your firm, request a demo today.