PE firms must work harder for returns

Private equity houses will have to work harder to get value from their investments, according to a study conducted by KPMG and Manchester Business School. The survey of 24 private equity firms, which manage a total of GBP57 billion, showed portfolio management skills are increasing important in the current economic environment.

That investors need to focus on more than just deal-making skills to produce good returns is a symptom of the current economic climate and an increasingly competitive and mature private equity market. The report, “Insight into portfolio management”, showed that firms often take too little action too late when a portfolio company is in trouble.

Although investment executives and committees spend on average 30 per cent to 40 per cent of their time monitoring existing investments, improved communication is still seen as key to spotting and responding quickly to problems. Oliver Tant, head of the private equity group at KPMG, said: “Spotting issues sooner and responding proactively will enable PE houses to protect and create value more effectively.” The study finds mid-market firms have the most to gain by improving these skills.

Monitoring of companies is generally the responsibility of the investment executive who oversaw the initial deal and is usually carried out through board meeting attendance and management accounts. The report also highlights the importance of having more than one communication channel, with non-executive chairmen proving valuable for their independent perspective. Currently 60 per cent of monitoring time is focused on financial data, neglecting broader performance indicators.

The firms taking part in the study preferred a non-interventionist approach post-deal, until problems with a company were uncovered. Private equity houses believe poor management and over ambitious sales targets are the primary causes for difficulties. Accordingly, when action is taken it generally takes the form of changes to the management team, with CEOs and finance directors normally the first to go.

In this situation PE houses do not second their own staff to companies, as often they do not have people with the right skills to offer practical help. According to one respondent: “PE houses are chronically under-resourced. We always think we could have done more, but don’t have the people to do it.” With only a quarter of firms employing more than ten executives with direct experience of business management, KPMG predicts PE houses will need a less finance-based professional skill set to help portfolio companies out.