Organisational due diligence – Riding the next wave of value creation

A guide to organisational excellence

Private equity has become extremely competitive. With the high level of current sophistication and harsh capital sourcing environment, new levers are needed to sustain returns and guarantee Limited Partners long-term top-quartile performance. After financial engineering and operational excellence, General Partners  are looking for new ways to create value, compensate for high entry prices, and differentiate in the eyes of Limited Partners.

Addressing the soft factors is the next value creation wave that winning investors need to catch. By focusing on organisational excellence, General Partners can accelerate operational excellence and push up returns. Conducting a thorough organisational assessment at early stage in the investment cycle enables sponsors to evaluate the targets’ ability to execute the value growth plan. Armed with this valuable information, buyers can adjust bids according to the target firm’s capabilities, start corrective actions early to de-risk the investment, and leverage organisational strengths.

Humatica’s interviews and survey results highlight investors’ growing awareness regarding the importance of organisational factors. 97% of survey respondents agree that organisational issues are likely to cause delays in realising Private Equity investment plans. Despite the impact organisational issues might have, little attention is given to their rigorous assessment. Only 30% of Private Equity funds surveyed conduct organisational due diligence.

Why does this discrepancy exist? Assessing organisational performance pre-deal is a complex aspect of achieving organisational excellence. The lack of a structured approach, clear accountability, and trusted advisors do not make it easier. It takes planning and forethought to enable a fund to build the required processes and competencies.

Yet, leading fund managers have recognised that organisational excellence is actually a pre-requisite to achieving operational excellence in the portfolio. The even greater challenge is how to address this new reality. Humatica is pleased to present a collection of learnings and improved practices for organisational due diligence from across the industry. Humatica also identified three areas in which General Partners should evolve current methods into a best practice process.

For demanding fund managers, who want to differentiate and lead the pack in returns, addressing the soft factors to achieve organisational excellence will deliver a competitive edge and enable them to catch the third wave in private equity.

The challenge to catch the third wave of value creation at its peak has already begun.