Unlocking Value in Private Equity
In today’s dynamic market, financial engineering alone falls short of the returns it had promised in the past. Financial engineering has become less effective as a stand-alone tactic and most investors would assert that they focus on operational improvements within their portfolio – the truth is that, in practice, a vast majority of investors do not have a cohesive operational engineering strategy. Done correctly, financial engineering is a key component of differentiated returns, but when paired with proven operational engineering, the two unlock even greater value.
McKinsey states that “in our experience, few PE firms are active performance partners, working closely with management to rapidly and sustainably create value.” Instead many investors view operational engineering as a reactive process, only intervening in a portfolio company if there has been a persistent, long-term problem. Reactive operational engineering is ineffective at unlocking value in portfolios. To be effective in operational engineering, it is imperative that proactive and proven operators be involved in every stage of the investment.
While it is clear that operational engineering is growing in importance, the integration of financial engineering with operational engineering will yield the strongest returns. The best management teams nurture and maximize all aspects of their companies – strategy, talent, product, revenue, and operations – unlocking hidden value. Nevertheless, not all operational engineering is created equal and experience matters. Morgan Hill Partners’ combined 400+ years of experience have demonstrated the effectiveness of strong operational engineering.
Unlocking hidden value is no different for private equity investors. A balanced approach with both financial and operational engineering is required. It’s not surprising that leaders in operational and financial engineering like Vista Equity Partners consistently outperform their peers on an annual basis. Ultimately, a pragmatic approach to developing a base of operational engineering talent is key to unlocking superior returns.
Whether a firm chooses to use an external operating group, like Morgan Hill Partners, or build their own internal team, there are three major components to any great operating team:
- Team – A diverse team of industry experts with the experience to make an instant impact
- Playbook – A defined and repeatable process that drives value at every turn
- Hands-on Execution – The ability to roll up their sleeves and carry out the plan with portfolio company management
Morgan Hill Partners was founded on the principles that a proven team with a repeatable playbook that executes alongside management can unlock hidden value. As operational engineering becomes a core component of most portfolios, we are proud to partner with financial sponsors to unlock value in their portfolios.
If you’re a financial sponsor with a growth-stage portfolio and looking for new ways to create value in your portfolio, we’d love to talk. Reach us at info@morganhillpartners.com or (212) 739-0173.
