The PE Dilemma
Private Equity is an overall interesting business model. However, the overall success rate is not very encouraging: 70% of investments don´t deliver the anticipated commercial success. Close to 20% of the investments change money, and only 10% of the investments (over)-deliver the anticipated financial results. Is it the next big theorem backed by science, the so far not found fifth principle of thermodynamics?
My working hypothesis was and is – it is not. When I spoke to M&A managers of various organizations, there have been several findings of relevance: there is a huge disconnect between expectation, management style and culture. In a different study , Alix Partners found that only 13% of study respondents from PE reported to conduct a formal evaluation of culture. More than 50% of respondents from portfolio companies reported a gap between strategy and culture.
In the same study, 71% of PE investors and 81% of portfolio company managers emphasized the criticality of a company´s culture to implement a strategy, to follow it and deliver expected results. In other words – the unpleasant ratio of non to successful investments is home-brewed. Investments often exceed triple digit millions or go even beyond. To position the organization from day one in the best possible way is doable for little money.
My team and I have worked for several PE portfolio companies both as consultants and managers of portfolio companies. We supported developments in PMI projects, turnarounds, restructurings, or have been involved in projects from strategy development to cost improvement. We have seen organizations where high ambition messed up, and we have seen the underdogs outperforming. Some of the secrets are described in the 5P Principle. Feel invited to talk with us for more insights.