PE Portfolio Management

I work on a team that manages a portfolio of six to eight companies. We are control-only equity investors, and we believe that a lean team cannot manage much more than that number effectively. Our team is comprised of four investment professionals, a CFO and support staff related to this function, an analyst and two administrators. In each transaction, two or three of us will assume board seats. How involved we are with each company depends on where we are in our hold period, and whether or not the business is performing.

With respect to our hold period, if we only recently closed on an opportunity, we are likely in daily contact with the management team. In the due diligence period leading up to the transaction, in addition to the work required to close, we are evaluating the business and developing an action plan for the first year. Most of the businesses we get involved with are not perfect. We look for founder-owned businesses that have scaled to a level now requiring more infrastructure to continue along their trajectory. In many instances this requires we take on a human resources function post-close to help recruit talent and build around the knowledge base in place. I want to emphasize that we do not like to replace management teams, and instead prefer to build around them. This period is also focused on developing systems and reporting that will facilitate overseeing the business and making important decisions efficiently and with better data moving forward.

In this first year we develop a reporting structure that will survive the hold period. It is generally comprised of the following:

  1. A weekly dashboard.
  2. Monthly financials.
  3. Quarterly board meetings.

I like to think the effort is reciprocal. Every investment is a partnership, and we work very closely with our management teams. When we are looking at an opportunity that we believe is likely to close, we will often provide the primary equity holders with a deck containing every operator and lender we have worked with dating back to 1989, and encourage them to contact anyone in the deck. Our business is all about people and reputation, and its important to have long-term healthy partnerships.

If at any point the business starts to underperform, and in any hold period this is likely to happen to each investment at least once, our involvement escalates to match the risk we face. On one end of the spectrum, this might require using our network to help the management team identify and recruit professionals that can help navigate uncertain terrain. In such cases it is likely something we have seen before, and consequently we may have prior experience working with a group to resolve the issue. More serious concerns may require an all-out, roll-up-your-sleeves effort in which the company becomes your 24/7 priority.

Otherwise, there is a period in between the acquisition and sale that requires less of the team’s attention. This fluctuating requirement is what permits managing a portfolio. Attempting to acquire six businesses simultaneously with a team of our size would be nearly impossible.

Finally, working towards an exit will again consume all of your time. In our portfolio, because we do not have defined time horizons, the decision to exit is generally reached one of two ways:

  1. The management team informs the board that they are interested in exploring an exit.
  2. We receive an unsolicited, but very attractive offer.

Once you exit, you must immediately start looking for the next opportunity - a process known as “sourcing.” A challenge that many small firms face is maintaining a high-level of sourcing activity as the priorities detailed above start to pile up. But it is absolutely critical. Sloppy sourcing will yield less attractive investment opportunities, and the effort required to manage a portfolio of bad investments, assuming it is not abandoned, is even greater than what is described here.

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