Value Acceleration Lesson Learnt
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The document discusses private equity investment strategies and provides examples. It recommends having a clear investment thesis focused on growth, using debt leverage but matching risk and return, focusing on key metrics like cash flow rather than earnings, tying manager compensation to business unit performance, and being willing to prune unprofitable areas and sell businesses when the price is right. It provides examples of private equity firms implementing these strategies successfully at companies like Crown Castle International, Wesley-Jessen, and SecurityLink.
Value Acceleration Lesson Learnt
- 1. Researched by: Rogers, Paul, Holland, Tom, Haas, Dan, Harvard Business Review, 00178012, Jun2002, Vol. 80, Issue 6 Presented by: Vinh
- 2. Define an Investment Thesis Don’t measure too much Work the balance sheet Make a center the shareholder
- 3. Have a three-to five-year plan Stress two or three key success levers Focus on growth, not just cost reductions
- 4. Crown Castle International Corporation: Providing Wireless Infrastructure. Business model: purchase a cellular telephone transmission tower from one telecommunications company and then lease space on it to other service providers in the area Investment thesis: “ replicating the business model in other major markets- could significantly increase the value of the business ” Berkshire invested $65 M in 1994, Return in 2002: 10x
- 5. Wesley-Jessen, maker of colored lenses and toric lenses Neglected its key customer base - the optometrists Overhead grew to dangerous levels Over expanded into unprofitable segments: standard lenses By 1995, those missteps had reduced the company to an operating loss and a perilous cash position Bain Capital acquired Wesley-Jessen in 1995 Brought in a new management team to pursue investment thesis “ Return the company to its core business ” Stopped serving unprofitable customers Cut expenses on advertising, promotion, and other outside services Eliminated several levels of management in manufacturing Expanded its product range within the specialty segment Operating profit jumped to 15% of sales in 1997 IPO in 1997, 45x ROE in less than 2 years
- 6. Prune to essential metrics Focus on that most clearly reveal a company's progress in increasing its value Ex: Berkshire Partners merged 2 acquisitions that produced industrial machines, it focused on only two simple measures of merger success cash flow (to assess the immediate impact of the merger and the company's continuing ability to meet financial obligations) and synergy effects (to ensure the realization of projected revenue gains and cost reductions). Everything else was secondary
- 7. Focus on cash and value , not earnings cash remains a true barometer of financial performance earnings can be manipulated Use the right performance measures for each business avoid imposing one set of measures across their entire portfolios Link incentives to unit performance, not parent company tying the equity portion of their managers' compensation to the results of the managers' units the management teams own up to 10% of the total equity in their businesses
- 8. Use debt to gain leverage and focus, but match risk with return PE firms rely heavily on debt financing, about 60% of their assets are financed with debt Treat equity capital as scarce High Debt Ratio strengthens managers' focus, ensuring they view cash as a scarce resource and allocate capital accordingly Redeploy or eliminate unproductive capital - both fixed assets and working capital
- 9. SecurityLink : installs and monitors security systems GTCR Golder Rauner acquired SecurityLink from SBS GTCR's managers saw trapped value in the unit KSF is selling directly to customers & focusing only on regional markets where they could achieve market share leadership. They identified high selling costs &frequent cancellations, slipshod work, high rate of costly false alarms GTCR ‘s investment thesis “Pursue rapid growth in carefully targeted regional markets” Released capital by selling 1/3 of SecurityLink's offices-those lying outside the target markets refocused capital on building direct sales capabilities in the target regions Cut 1,000 sales and service jobs TRADE SALE, $135 M investment =>$586 M 13 months
- 10. Focus on optimizing each business Don't hesitate to sell when the price is right Act as unsentimental owners Get involved in the hiring and firing decisions in portfolio companies Appoint a senior person to be the contact between the corporate center and a business