Portfolio Orchestration: Private Equity’s New Superpower To Improve Value Creation
Jay Goldman, cofounder and CEO of Sensei Labs, co-author of New York Times bestseller The Decoded Company, HBR Advisory Council member.
Copyright by Tom Werner
If 2022 was the year companies began embracing enterprise orchestration for sustained transformation, 2023 will be the year their investors and private equity owners become fast followers.
Rising interest rates, extended inflation and a potential recession have made it difficult for PEs to meet expectations (see PEI LP survey). Hugh MacArthur, a partner at consultancy Bain & Company, sums it up: “There’s no arguing that private equity faces a dual threat from rising rates and costs.”
Value Creation Is Transformation By A Different Name
The last decade has been the age of transformations, which I refer to as the era of enterprise orchestration. Transformation is now a critical skill and success factor for enterprises, including many owned by PE. Successful portfolio transformations are a prerequisite to fundraising and the fund’s ongoing existence.
Value creation plans (VCPs) have the same characteristics as transformations, with the added clarity of well-defined financial KPIs and a fixed duration. Accelerating VCPs and reducing risk is a massive competitive advantage for scarcer LP investments and against other funds. The same transformation strategies that help enterprises transform can be re-run as VCPs by PE funds. A recent report by Constellation Research demonstrated that transformations orchestrated on modern, purpose-built platforms had nearly triple the average success rate of traditional methods.
Solving PE’s Top Challenges
Enterprise orchestration isn’t a panacea for all the challenges faced by PE, but it can deliver rapid ROI against the most common ones we’ve encountered as we’ve helped portcos and funds around the world accelerate their VCPs.
Missing LP/GP/Portco Alignment
PwC’s 2022 Next in Private Equity Survey showed 54% of PEs use email attachments to collect data from portcos, and 36% just write their response in the email body. For a sophisticated data-driven industry, having 90% of your data delivered by the antiquated equivalent of carrier pigeons needs to be urgently addressed. Access to real-time data is the first, prerequisite step toward alignment on shared best practices and accelerated value-creation strategies.
LPs are also becoming more sophisticated in measuring PE success. As Joana Rocha Scaff, head of private equity at LP Neuberger Berman, notes in a PEI article (paywall): “More and more, we’re also increasingly looking not just at returns per se, but how that return was created – earnings growth, leverage reduction, multiple arbitrage, ESG KPIs, etc.”
Enterprise orchestration can standardize KPIs, build on a shared model across portcos and provide simplified, real-time reporting by integrating various data sources (e.g., multiple ERPs, CRMs, etc.) with structured data/KPI/benefits tracking that enforces adaptive governance models. Automating real-time dashboards for cohort-based analysis and LP reporting saves hundreds of hours of effort by PE firms/portcos while ensuring alignment and transparency and accelerating value creation. Predictive models can highlight gaps to be filled by future investments.
Lagging Digital Transformation
The Private Funds Leaders Survey 2022 looked across areas of focus for PE CFOs. Its view of tech enablement found portfolio management is most poised for tech disruption, followed by fund operations.
This speaks to the need to replace the antiquated carrier pigeons and modernize portfolio orchestration. Big funds like KKR and Blackstone have been hiring chief information and innovation officers and global heads of data science to build this capability. Funds outside of the top five should look to enterprise orchestration platforms to achieve similar outcomes at a much smaller investment and much faster ROI.
The same push toward digital exists in the portcos. Traditional VCP tactics based on management teams’ prior experience are no longer sufficient to drive necessary results within hold periods. The aforementioned PwC survey found 40% of portcos’ top priority is creating value through digital transformation by digitizing more areas of their companies. Enterprise orchestration drives transformation by deploying proven playbooks, coordinating across silos and ensuring activity alignment with KPIs and outcomes.
Talent Shortfalls
Winning the war for talent is critical to create value. Transformation leaders and teams are drawn to exciting opportunities for personal growth. Today’s hybrid work reality, especially for global companies spanning geographies and time zones, requires a modern remote work environment that breaks down silos. A next-generation enterprise orchestration model inherently provides the framework for successful transformation while supporting a work-from-anywhere workforce.
Delayed Value Creation
The Journal of Alternative Investments found average 2000 to 2008 hold periods were 4.7 years but have stretched to 5.8 years since, causing IRR to drop as holds run longer. That extra time can diminish portco performance against faster-moving competitors and make acquirers more aggressive in reducing valuations due to slower value creation.
Accelerated value creation is survival of the fastest brought to life. Enterprise orchestration significantly accelerates VCPs through adaptive playbooks that build on best practices learned across portfolio and fund cohorts, building a library by portco industry, geography and strategy. Access to the right financial, commercial and operational data by the right people at the right time drives higher performance and better decision making. An enterprise orchestration maturity model, as seen in the Constellation Research report and explained in my previous Forbes article, helps assess transformation capabilities in potential portcos and identifies areas of required focus to drive VCP results.
Welcome To The Portfolio Orchestration Era
The need to deploy the unprecedented $1.1 trillion dry powder held by U.S. PEs alone only becomes more pressing over time. PwC’s US Deals 2023 Outlook highlights the slowdown of 2022 and into 2023 as a perfect chance for innovation before returning to normal deal volumes. And as described in its Next in Private Equity Survey, “PE must adapt to thrive over the next five years. The traditional PE model relies on tried-and-true methods that can fall short at every step of dealmaking in today’s superheated, competitive environment. Firms…risk overpaying for deals and seeing companies underperform during the hold period.”
The macroeconomic stars have aligned to provide PE funds with a rare chance to transform themselves before dealmaking returns to normal levels. This can be achieved with the help of real-time dashboards, predictive analytics, collaboration automation, playbooks and adaptive governance to accelerate VCPs and future fundraising. Now is the time to turn this economic crisis into your perfect opportunity to leverage digital transformation to enter the portfolio orchestration era.
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