Reading 1.6 Flashcards
How do VALUE CREATION PLANS differ?
Deal Type, ownership, growth strategy and geographic focus
What is a key driver of investor returns (more than strategy selection)
Value creation plans and how strategies are combined
Value creation plans are ESPECIALLY more important that strategy selection for investor returns in what type of deals?
Growth, Buyout and Secondary Deals
Successful execution of Value Creation Plans is dependent on
Resource constraint, Economies of Specialization, Diminishing Returns
VCP
Value creation plan
Top 5 VCP strategies in order of popularity (% of sample)
- Operational improvements (84%)
- Top-line growth
(in 74% of sample VCPs) - Governance engineering
(in 48% of sample VCPs) - Financial engineering
(in 35% of sample VCPs) - Cash management
(in 14% of sample VCPs)
A VCP often incorporates multiple strategies (____% in the sample). PE firms tend to choose from a concentrated set of favorite combinations. In this dataset, the average VCP spans ___ strategies.
1) 82%
2) 2.5
The ____ most popular strategy combinations account for ___% of the sample VCPs.
____ of the top ____ involve operational improvements and / or top-line growth.
1) 10
2) 80
3) 8
4) 10
The three most popular combinations involve both operational improvements and top-line growth; with no other strategy (___%), combined with governance engineering (___%) or with governance and financial engineering (___ %).
1) 18
2) 15
3) 11
What does the rise in popularity of the top 5 most popular VCP represent?
That PE Firms have become more hands on
Use of growth strategies in deals doubled (from 1992-1996 to 2012-2017), popularity of ______ tripled, popularity of_____ nearly quadrupled, and even popularity of _____ (the least popular strategy) more than doubled.
The already widespread operational improvement strategies also experienced further increase (____%) in popularity.
1) governance engineering
2) financial engineering
3) cash management
4) 5
5 types of deals and their description
- Early-stage deals (19% of sample deals) - Involve traditional venture capital deals, involving startups, pre-revenue companies, and pre-profit companies.
- Growth deals (59% of sample) - Typically involve external financing (but not outright acquisition) of companies with growing sales and profits.
- Buyouts (13% of sample - Typically involve acquisition (or at least majority control) of mature companies with fairly stable cash flows (eg., division of a large firm or a publicly listed company).
- Secondaries (6% of sample - Involve one PE firm acquiring the portfolio company of another
PE firm, and are more common in growth equity or buyouts than in early-stage companies. - Turnarounds (2% of sample) - Focus on underperforming or struggling companies.
In which deals are PE FIRMS more Hands on (implement VCPs more frequently)
- Involve buyouts (more so than early-stage deals).
- Are majority owners.
- Pursue inorganic growth (vs. organic growth).
- Invest in multiple countries (i.e., manage regional rather than country-focused funds
VCP strategies differ across deal types: while ____ are popular across all deal types, the frequency of implementation of top-line growth, governance engineering, and financial engineering varies significantly.
1) operational improvements
_____ and ______ become more popular as deal maturity increases, with ___/____ engineering strategies pursued in ___%/___% of buyout, ___%/___% of growth, and ___% /____% of early-stage deals, respectively.
1) Top-line growth
2) governance engineering
3) top line and gov
4) 88, 62
5) 77, 47
6) 56, 39
____ and ____ exhibit considerably stronger focus on financial engineering than the other strategies.
Secondaries, while generally similar to ____, pursue financial engineering less frequently.
This suggests that _____ and ____ are less important (have diminishing marginal returns) since buyout targets are sold to new PE investors.
1) Buyouts & turnarounds
2) buyouts
3) optimizing capital structure
4) incentive systems
Turnaround deals’ dominant strategy (___%) is _____, with the least focus on ____ (53%) and _____ (41%). This frequency of implementation of _____ is similar to that in early-stage deals (39%).
1) 59
2) financial engineering
3) top-line growth
4) governance engineering
5) governance engineering
_____ does not vary significantly in popularity across deal types.
Cash management
PE firms pursue growth, governance engineering, and financial engineering in ___% /___%, ___% /___% and __% /__% of their minority-/ majority-owned deals, respectively.
1) 72 , 78
2) 45, 56
3) 31, 43
The frequency of ____ and ____ does not vary significantly with ownership level.
1) operational improvement
2) cash management targeting
Examples of
1) organic growth
2) inorganic growth
1) increasing sales of existing/new products
2) acquiring other companies
Slightly more than ___ of sample deals are managed by single country funds and rest managed by “regional” funds that invest in multiple countries.
Half
____ funds pursue top-line growth and governance engineering strategies significantly more than ____ funds, often because they ________ of managers and board members.
1) regional
2) single country
3) consolidate companies across countries and and utilize wider networks
Operational improvement Strategy action items (7)
1) Buy/ upgrade assets (most used in initial VCPs)
2) Sell assets
3) Divest/spin off companies
4) Improve IT systems
5) Reduce costs (most used in revised VCPs)
6) Improve distribution or logistics
7) Improve organizational structure
