Interview – 01. Jul 2019
DRIVING OPERATIONAL EXCELLENCE
IN PRIVATE EQUITY
James Marshall, Northedge Capital

Over the past years we have seen market valuations continuing to rise, in the mid-market as well as large-cap space. We therefore consider it essential that private equity firms have the required model in place to drive operational excellence in their investments.

Some PE firms choose to have operating partners, whilst others have highly developed networks of external consultants or advisors to help generate value creation. Ultimately, how a PE manager decides to transform a business it acquires depends on many different variables. James Marshall, Investment Director at NorthEdge Capital LLP said that they choose to work with Syngroup UK Ltd in the small-cap and mid-cap space because:

“Our approach is such that the deal team not only executes the deal but also works with the businesses in the portfolio to support growth and this often includes operational improvement activities. We have a strong track record in high growth manufacturing business and we find that we can differentiate ourselves on facilitating relevant and targeted operational expertise, which makes us particularly attractive to mid-cap businesses that want to increase throughput, drive efficiency savings or drive into new markets”.

“We work with specialists pre-deal for their deep sector know how and benchmarking pre-deal to assess the quality of opportunities and this then often evolves into supporting in the more detailed due diligence phase. Post-deal we have seen success where we have been able utilise their expertise to accelerate operational performance and Revenue/profit growth. Ultimately though, at NorthEdge we back management teams and it is the ability of these partners to work with our teams that creates value.” said Marshall.

VALUE CREATION LEVERS

Having an operational partner or consulting firm at hand can be used as an effective lever for value creation, especially, for example when you need to transform the business in a way that goes well beyond the PE manager’s core expertise. For example, managing the business relocation to purpose built new premises filled with the latest technology, designing and implementing a factory expansion that doubles the manufacturing footprint or developing an international business model using e-commerce and 3rd party distribution providers might require operating consultants to help on the project management, production, sales & marketing or logistics side of the business.

With respect to value creation plans, the general consensus in the industry was that having a 100-day plan in place is good practice. Marshall “We will combine financial, commercial and operational due diligence to help us assess risk, validate business plans or cost savings programmes. For the companies we invest in, we jointly develop a sensible roadmap with the management team and this can often be supplemented by collaboration with our operational experts who can then provide targeted support, if needed, to ensure that our businesses achieve their full potential.

“Each investment we make is different,” confirmed Marshall. “It doesn’t make sense to have too standardised an approach to both deal assessment and business growth strategy. Often, we invest in companies whereby we think that with our support the team can move the needle in terms of profit quickly but sometimes building a sustainable platform to deliver the 3-5 year plan can be more important.

This requires having a clear view of the business, from an operational perspective, and knowing what levers to pull on from a cost reduction and revenue creation perspective. By knowing this in advance, everyone should have clarity on the objectives and then it is a simply a case of execution.
Finding the right people with the right competences and skills is not easy and takes a lot of time.

“You need to find the right balance between working and collaborating with the management team and whilst trying to capitalise on the value opportunities that can be accelerated by working with partners that are experts in their niche; it’s a fine line that you need to tread. We do not micro-manage the business, instead we work with management to create value,” said Marshall.

Part of the way around this is to identify the right topics that the company’s management team are struggling with, where the deal team can add value, either by themselves or through the use of external operating consultants.

The management team needs to understand that the PE manager is there to help and to add value and that it is a good investment for them. In that sense, it is vital to create trust with management.

“There is sensitivity (not to push too hard) and you have to ensure that your energy goes into the right areas that help develop the company to achieve its business / growth plan,” said Marshall. “In our experience, if you are fully aligned with the management team then value is created far quicker.

A PRACTICAL CASE STUDY

For example, Syngroup acted as Operational Due Diligence Adviser to private equity firm NorthEdge Capital on its investment in Platinum Stairlifts, a manufacturer of stairlifts.

Based in West Yorkshire, Platinum offers a full suite of high quality, custom built stairlift products, which it sells via an international network of over 250 authorised dealers, distributing to more than 40 countries, including France, Germany, the Netherlands, and the US. Strong growth has been achieved in recent years, with revenue increasing by more than 20 per cent per annum since 2012.

In February 2018, NorthEdge backed the existing management team, led by founder Tim Frear, to support the business to invest in new product development, enhance its proposition for distributors and strengthen its presence across international markets.

James Marshall on the deal: “Platinum was an asset that attracted significant interest from private equity because of the quality of its product set, its growth potential and the fundamentals underpinning its market. It was typical of many of the businesses we support in that it had significant potential put continued to operate within throughput constraints and unlocking that would drive significant growth. Our long term relationship with the founder, supplemented with our operational expertise was a critical factor in attracting Platinum Stairlifts to NorthEdge.”