PE investment firms have outperformed public equity markets over the past three decades, so we know they must be doing something right. I've been lucky to have worked with a few great private equity firms throughout my career.
This experience has helped me be a better business leader and investor myself. PE firms have taught me how to evaluate a business and its future potential as well as understand new ways to add value to current organizations.
Private equity firms are unique in that they typically deal with assets not available on the publicly traded market. They buy in order to sell. This type of asset management operates under a different set of rules. Their goal is to increase the valuation of their investment, then sell and move on to other opportunities. Unlike public firms that can easily find themselves distracted by the day-to-day management of a business, private equity is laser focused on growth over a finite time period.
In other words, private equity firms are relentlessly and unapologetically focused on growth. Few companies gain this level of experience when it comes to transforming and growing companies, but that’s what PE firms do every day… And we can learn from the best of them.
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So what are top performing PE firms doing to create a competitive advantage over their public counterparts? Here are 5 things great PE firms do that we can learn from:
1. They create a winning formula and stick to it. Harvard Business Review called it “the private equity blueprint.�? These teams create a core investment strategy - their blueprint or map for success - and stick to their guns. They are not swayed by popular trends or quick tips, and they remain conservative in their approach. There are a variety of financial models that different PE firms may utilize, but the key is that each firm will decide which is best for their company model and remain loyal to that method. These PE firms will typically only invest in companies that align to their mission statement and their core strategy.
2. They become experts and nurture key internal talent. There are many different facets of successful PE firms, but all share a common element of success - they become experts in the markets they focus on. When reviewing a potential investment, they will develop a deep understanding of the target company's market, its target customer, and the key drivers of the product's success. These firms hire their own professionals with exceptional talent in their target industry to assist in growing their portfolio companies.
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3. They conduct rigorous, disciplined due diligence. Proper due diligence is critical to creating an accurate evaluation of a potential investment. Another HBR article outlined three key areas of research during the due diligence process: financial engineering, governance engineering, and operational engineering.
Successful acquisitions by PE firms will also include “customer due diligence.�? This involves researching the company’s competitive advantage from their customers' point of view. In other words, instead of taking the company’s word for it, they mitigating risk by going right to actual customers. This may include:
- Ratifying the company’s value proposition and mission with customers.
- Confirming the fit with the PE firm's broader investment mission.
- Researching how aligned the company's executive and sales team is with their customers’ actual needs and perceptions.
4. They are constantly looking for ways to create value. Great PE firms provide expertise and leadership to their portfolio companies. They view the investment as a partnership and act as such. Unlike business owners and employees, PE firms often have a less biased perspective of the opportunities before the company. Instead of assuming they know, they look for data to confirm and direct decisions. In particular, PE firms are in a position to provide additional perspective on customer needs to ensure the company’s growth strategy is aligned. PE firms can use customer insights to advise on opportunities for innovation, product development, engaging current customers, and obtaining new customers.
5. They think like owners and act quickly. This means that they home in on what data they need to make a decision and gather just enough of it to act confidently. They don’t slow down momentum and find themselves in data paralysis. They know that “time is money�? and that strategy is a process, not an event. Therefore, working through management, they are continually adapting their growth strategy based on market changes to quickly capture growth opportunities.
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By applying these practices and working in partnership with their portfolio companies, top performing private equity firms continue to dominate the investment market and return record-breaking returns to their clients.