Private Equity Portfolio Management
Gavin Ryan
25 years: Private equity & banking
Gavin explains how a private equity investor manages his portfolio company by outlining the approach of a successful fund manager and the six part value addition framework.
Gavin explains how a private equity investor manages his portfolio company by outlining the approach of a successful fund manager and the six part value addition framework.
Private Equity Portfolio Management
10 mins 20 secs
Key learning objectives:
Understand the six part value addition framework
Outline the time spent and approach of the fund manager
Overview:
How a private equity investor manages his portfolio company, is the area of private equity which is the most difficult to understand. The private equity investor gets involved semi operationally or a quarter operationally. This is a very nuanced involvement which is easy to misunderstand.
What is the six part value addition framework?
- First, private equity ownership is concentrated. The private equity investor will hold a relatively large block of shares.
- Secondly, private equity ownership is close. The private equity investor will be looking to keep a close eye on the company, for example by asking for regular reports or making frequent visits.
- Third, private equity ownership is rational. The private equity investor is a rational economic actor with a clear objective.
- Fourth, the objective of the private equity owner is to increase the value of the company over the medium term period.
- Fifth, the private equity investor wants management to have interests aligned with his objective of increasing value.
- Sixth, the private equity fund manager is on the clock. His fund will be liquidated in a few years and he needs to get things done now.
What is the optimal approach of the fund manager for best performing investments?
A study found that in the best performing investments, the private equity team partner spent fifty percent of his time on the company during the first one hundred days; and maintained regular contact every week after that. The involvement of the private equity investor is quite articulated over different areas. It can take place at a high level, like a board meeting; or at an operational level, like sending an analyst to help out on a project. At the same time the private equity team does not want to demotivate management by interfering too much. So the involvement must be very nuanced.Gavin Ryan
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