Poorly run companies will eventually meet their destiny, and only then will PE investors abandon financial engineering strategies of the past, and turn to operational improvement, according to a special report released this week by The Deal and Pepper Hamilton. The report entitled, *Strengthening Companies: Operational Improvement Trends”, is based on a survey of 120 private equity executives. The survey demonstrated the importance of operational improvement and the thought that private equity firms put into the process.
When asked to think back to pre-crisis and not how strongly they agreed with the statement that operational improvement is more important now than pre-crisis, a strong majority said they believe it is more important now than it was before the financial crisis. As the graphic here shows, nearly 80% of the respondents either somewhat or strongly agreed with that sentiment.
Some respondents argued that operational improvement has always been important. The fallacy was that it wasn’t as critical pre-recession, so investors relied on financial engineering in lieu of operational improvement to generate returns.
- 48.4% of those surveyed said they begin focusing on operational improvements before signing a letter of intent while only 11.6% said they begin after reaching a definitive agreement and 11.6% said they do so after closing.
- Asked how they plan for operational improvements after closing, 47.5% said they use a 100-day program, while just 16.8% said they use a three- to five-year plan.
- Nearly 80% of respondents said they believe operational improvements are more important now than it was before the financial crisis.
- Respondents agreed that former CEOs and senior executives are most effective at identifying problematic operational issues at every stage: during due diligence, after a definitive agreement and after one year. (Image source: The Deal)