Managing value: back to basics

With little value being generated through multiple arbitrage or de-leveraging, one key aspect of any investment portfolio is the improvement of operational performance. The idea is not new in itself; indeed, the concept forms the ‘basic' principles of the private equity investment model. It is what GPs spent 2009 doing in an effort to safeguard and maintain the value of their portfolios.

As the global economy hit a slump, portfolio companies saw dramatic declines in trade, forcing their sponsors to adapt, which at times meant changing the management structure of their investments.

Speaking to unquote" Private Equity Europe, Chris Kirkness of executive recruitment specialist Korn/Ferry Whitehead Mann highlighted that: "In the early phase of the downturn, a raft of companies began to trip covenants as earnings fell well below optimistic forecasts, and we very quickly became busy changing CFOs. That is not to say that it was always necessarily their fault, but they were on the spot for the monthly numbers and in the eye of the storm. In truth, many were not on top of the pace of decline and they lost the confidence of either the private equity firm or senior lenders, or both."

Even those investors whose hands were not forced by covenant breaches – usually mid-market players accustomed to more conservative gearing multiples – saw the need to approach the question of management differently.

Brian Scouler, director of Dunedin Capital Partners, explains: "When selecting a management team things have changed, you can't simply rely on the management team that's in place. It has become a necessity to recruit managers to suit the specific needs of the company, and these may be managers, particularly chairmen, that we've worked with before."

Thankfully, the portfolio management measures implemented throughout 2009 are starting to bear fruit. LPs have indicated that fourth quarter distribution was "encouraging" due to increasing liquidity while NAVs at year-end have also been up.

Meanwhile, the industry is looking much healthier for investment opportunities. According to unquote" data, the private equity environment has continued to improve over the past six months. Debt is more readily available, especially for good quality deals sponsored by respected managers and there is generally more confidence that earnings have bottomed out. The volume of exits has also increased and realised money multiples are generally falling in line with historic norms.

So, the operational travails endured in 2009 are beginning to pay dividends and, a third of the way into 2010, though trends may remain difficult to establish, the outlook for private equity is improving slowly but steadily.

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