Managing Private Equity Expectations

In a market that is encountering significant headwinds, on both the demand and supply side, managing the expectation and assessment criteria of your investors has become critical to a successful relationship. We caught up with three of our honorary members; Jon Andrew, former Value Enhancement Director at Inflexion and LDC; Graeme Hall, Founder of specialist sales consultancy, Sales Blueprint and Graham Donoghue, CEO at Sykes Cottages.

What is the expectation gap?

When a private equity fund invests in a business, they will expect to generate returns. Although they will have gained a lot of knowledge in the diligence and assessment of the asset, they are not as close to the company as your leadership team. Their expectation for growth will be set early on and can be challenging to meet in the face of economic uncertainty, reduced demand for your product/services and rising inflation.

Often, leadership teams will struggle to not only meet these ambitious goals but will also not find an effective way to communicate the difficulties they are combatting. This can often lead to misalignment and the potential for churn at a senior level halfway through the investment cycle.

“It’s like asking a team of walkers to ascend a challenging mountain, something they have never done before, without a map or equipment or insight… Then when they’re half-way up this mountain, and it has taken longer than expected, they’re often dismissed and someone else is parachuted in.”

Jon Andrew

The importance of sales planning

Most mid-market private equity funds expect double digit annual sales growth. Generally, this can be achieved via acquisition of new accounts or increasing wallet size of existing clients. However, many teams do not have a clear view on how they will achieve this level of growth. Graeme Hall explains that teams need to consider three things when creating a robust sales pipeline; the Ideal Opportunity Type, Numbers & Ratios and Resource.

  1. The ‘ideal opportunity type’ is where management must decide on what an ideal opportunity looks like, as it sets the direction for the sales team, and enhances the longer term shareholder value.
  2. Numbers & Ratios is focusing on the direction of travel. As Graeme explains, “many businesses compare their numbers to what they were this time last quarter but, in a Private Equity-backed businesses which is on a growth trajectory, you actually need to know what the figures need to be this time next quarter.”
  3. Resource is thinking about how you can optimise the sales process so you can get a better output for a given set of inputs. “Simply recruiting more heads will get you more business, but it won’t necessarily improve your EBITDA” explains Graeme.

Performance and Purpose Change

Private equity investors will transform your business professionally. Many entrepreneurs and CEOs struggle to understand why the way they have always operated will not be sufficient moving forward.  

Graham Donoghue explained that management need to undergo a process with private equity to change the business.

  1. Start with the purpose. Ask yourself why you and your colleagues do what you do. Build out straightforward answers to questions like who are we, what do we do, who do we do it for, why does it matter, why do we do it like this?
  2. Use this newfound purpose to engage the broader business. How are you going to go about achieving these goals? Work on winning the heart and minds of your workforce and uniting them on a shared mission. Bring your executive team into the strategy-setting process and make them feel included.
  3. You then need to set a framework for tracking progress. There are a few ways to do this – including business model canvases, OKRs and KPIs – but don’t get hung up on the models and their names. Start thinking about what the business needs and match your measurement to that.

“Give a sense of moral purpose to every member of the organisation about the job that they do and how it transcends beyond a bonus or money on share options they might make.”

Graham Donoghue

How to recalibrate your value creation plan

Due to current macroeconomic uncertainty, there may be several private equity-backed businesses that are re-assessing the viability of their value creation plan. If you feel like you need to perhaps reset, the best place to start is with the investment thesis.

  • Ask yourself whether it still makes sense and do the board still understand it.
  • Consider what the shape of the business needs to look like at exit and what is the time frame to get there.
  • Don’t be afraid to push back on the number of ongoing initiatives – it’s far better to complete one or two well as opposed to five averagely.
  • Engage the board in the planning process for any component you’re unsure of.

“Once you know what the shape of the business needs to look like at exit you can work backwards, tackling the org structure and management team. Do you have the right people on the bus and in the right seats for the new value creation plan and exit horizon?”

Jon Andrew

Extracting value from your private equity partners

Communication is critical when aligning on expectation and how to bring that to life. Identify a way to speak effectively and regularly with your investors alongside a bilateral mechanism to feed back into your board. Be on the front-foot in ensuring this discussive loop is functioning as it should be.

Another factor that leadership teams often fail to recognise is the importance of understanding how your private equity fund works internally. Make yourself and your team aware of the timings of portfolio reviews and reporting and prepare for difficult questions and challenges within your business. A well-placed conversation prior to an official declaration can mean you avoid tough situations where investors expected something your team are unable to currently deliver.

“Understand what your private equity fund has to offer: value enhancement teams, M&A, corporate finance links, recruitment, governance etc. Lean on them for insights and networks. I believe CEOs should be banging on the door for engagement and help. Your investor should have an operational playbook for creating value.”

Jon Andrew


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