A recent report from Preqin, found 95 per cent of private equity (PE) investors believe their portfolios are at or ahead of expectations – up from 81 per cent in 2011. The worry is this confidence is buoyed because of underlying economic strength, rather than strong management.
But if markets change unexpectedly, long-term sustainable growth can become much harder to achieve. New players are disrupting markets so the more traditional businesses are finding themselves fighting for existence. For private equity houses who play in the traditional business space, it’s critical to seek out management teams with the ambition to become disruptors themselves. An innovative management approach is key to delivering results – and profits.
It can be difficult to quantify the value and potential of innovation, so the number of PE firms that value it as a key capability in their investments is low. But a focus on innovation, stretching across the organisation’s people and processes, can deliver bold top-line growth. TPG invested in Vertafore because it was seen to be at the forefront of technological innovation in the US insurance industry. And TPG was handsomely rewarded with a $1.3bn profit on sale.
Innovation Matters: What are the 'innovation leaders' doing right?
So what should private equity investors be looking for in an innovative management team that will successfully weather choppy markets? Our research has uncovered the things that the best innovators get right. Here are three strong indicators.
It may be hard to put a figure on the value of an organisation’s attitude to innovation. But if there’s a management team that prioritises innovation across the entire organisation and understands its value to drive top line growth that’s a good sign. The only way PE houses can be sure their investments will perform ahead of their industry average in the medium- to long-term is by embracing innovation.