Why Private Equity Needs Performance Improvement


It wasn’t too long ago, Private Equity firms could purchase a company, do ”financial” engineering, and sell the asset for a nice profit in a relatively short time frame. It provided a nice quick return on their investment.

Well, times have changed. Although many firms would like to sell, they are finding that adequate liquidity does not exist. This presents a conundrum for investors. The traditional method won’t work in these economically uncertain times. Maybe it’s time for a new approach.

Here’s the issue: The P/E firm has an asset, one that it may have had for a while. With the economy, the traditional model won’t work – the asset won’t be sold any time soon. Given that and the need to get some value from the asset, a focus on operational performance improvement should be taken.

Just like many other industries whose traditional operating practices have slowed, it’s time for Private Equity to look to a dedicated and structured Performance Improvement approach, and some firms, like Alvarez and Marsal, have recently started their own internal PI groups to address this need. But, what is Performance Improvement? While there are many definitions out there, I’ll define PI as an approach that evaluates and measures a process, identifies improvement opportunities, provides an improvement plan, and executes the plan to achieve the new process. The process can be evaluated at a strategic or tactical level. The scope will depend on the problems to be solved, and the time available to improve. The key to a successful PI initiative is having top management support and active involvement in the improvement activities by the people actually performing the process.

So why not just hire some consultants to assist with this? Well, a firm can start with consultants, and make quick impacts, but it will not have the flexibility or consistent approach that is needed to address the long term. By having a dedicated internal Performance Improvement group, a firm can has these benefits:

• Dedicated and Flexible resources that can easily be moved to different assets in the portfolio

• A consistent approach to PI that can be communicated throughout the firm

• A culture of continuous improvement can be cultivated

• Additional resources with operations backgrounds that can be utilized to assist in what may be considered ‘non-PI’ activities

• The ability to contract out PI resources to firms that have not made the investment in a dedicated PI group, but need the skill set

With this type of approach, it’s more important that members of the PI group have a broad understanding of business and systems thinking, and be experienced in facilitation along with the tools of Lean, Six Sigma, and Theory of Constraints (TOC) than be experts in the process being improved. This is valuable because by using a Kaizen (or Rapid Improvement Event) model, the process experts are already in the room (the ones who do it every day), leaving the facilitator to be able to apply the appropriate improvement tools and techniques, and be able to ‘ask the dumb questions’ which typically lead to breakthrough ideas and actions.

Those firms that embrace this methodology will find themselves well positioned as economic conditions improve to make substantial gains.

If you want to discuss further how to get going, drop me a line.

Glenn Whitfield


One Response to Why Private Equity Needs Performance Improvement

  1. Andrew Meyer says:


    I’d love to talk to you further about this. It’s an area that’s near and dear to my heart, but quite difficult to address.

    For starters, the Private Equity and company sales discussions usually take place at the board level, which is where firms like Alvarez and Marsal and other strategy firms really like to operate.

    The PI programs you’re talking about have strategic and tactical elements and often require boot on the ground knowledge, which present pricing and speed to demonstrate results problems. This presents agency, timing, direction and focus problems for strategy firms like A&M.

    Additionally, as companies get larger, there are often strategic and corporate alignment issues between middle and executive management which are difficult to discover, rarely discussed and quite damaging if not addressed.

    This is an area of great interest to me that I’d love to discuss with you.


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