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Why Private Equity Value Creation Plans Quietly Fail · Private Equity Data Guy

• 0:00
  Foreign.
• 0:10
  Here's the scariest sentence in all of private equity right now.
• 0:14
  Every KPI on the value creation plan is green Enterprise value is exactly where it started and the leadership team can't explain why.
• 0:22
  That's the horror story.
• 0:24
  No fraud, no crash in a disaster.
• 0:26
  Just a company that three years into the hold is worth exactly what you paid for it.
• 0:30
  And yet the dashboard said everything is fine and you have a room full of smart people who can't tell you what happened.
• 0:35
  Today, I'm going to explain to you why this keeps happening, why it's almost never a strategy problem, and why so many firms are stuck hauling companies they can't fix, they can't increase the value of, and they can't sell.
• 0:46
  This is why value creation is the whole game now.
• 0:49
  First, here's why this matters more than it ever has.
• 0:51
  For 20 years, private equity had three ways to make money.
• 0:56
  Buy it cheap and sell it expensive.
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  Load it with cheap debt or actually make the company better.
• 1:01
  The first two are running out of road rates, killed the free leverage trick and they just nudged up again last week.
• 1:07
  And when you buy it today's multiples, you can't always count on just selling it.
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  A bigger multiple later on.
• 1:13
  Exits are slower, holds are stretching longer, and investors are banging on the table to get their money back.
• 1:18
  Which leaves one lever the company actually has to become more valuable.
• 1:22
  Real growth, real margin, provable improvement.
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  Value creation has gone from nice to have at the back of the deck to the whole investment case and thesis.
• 1:32
  And here's the problem that nobody prices in the lever that runs on data.
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  All of them do.
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  Of course you would say that, Graham.
• 1:40
  Here's why every lever runs on data.
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  Have a think about what a value creation plan actually is.
• 1:47
  Pricing, cross sell, procurement, savings, add on acquisition, sales, productivity.
• 1:51
  Every single one of these is a claim about some number in the company getting better.
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  You want to fix pricing, you need to know your margin by product, by customer, by cohort.
• 2:01
  You want to do cross sell.
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  You need one clean view of who's buying what.
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  You want to integrate an add on.
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  This is the most complicated one.
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  And people don't realize you're merging two companies, entire data sets, before you do anything else.
• 2:15
  And if you want to prove any of it worked, you need a baseline that you can look back on trust.
• 2:20
  And you need numbers for before and after that a buyer is going to believe.
• 2:24
  And that will stand up to diligence when you come to sell the company.
• 2:28
  So the value creation plan gets written at the fund in a spreadsheet during diligence, using the seller's polished numbers as a starting position.
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  Then after acquisition, it lands in a real company that runs on 19 disconnected systems.
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  One heroic finance person and a one person human API that nobody else knows about or can replace.
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  The plan always assumes that the company can measure, but most portfolio companies, and especially in the mid market and lower mid market cannot.
• 2:58
  And that's the gap and that's everything that goes wrong.
• 3:02
  You've already seen this movie.
• 3:03
  Year one, you get the quick wins.
• 3:05
  We put the new pricing in, we take a little bit of cost out, everyone's a genius.
• 3:10
  Year two, the plan says build, we're going to cross sell, we're going to add new segments, we're going to add on tuck in acquisitions and everything starts taking longer than the plan said.
• 3:19
  Nobody can agree what an active customer is.
• 3:21
  Finance says one number, op says another and the board deck says a third.
• 3:25
  And I can guarantee you that board deck number is prettier on both of the previous two.
• 3:29
  So what does everybody try and do?
• 3:31
  They try and fix the dashboard and suddenly you've got green lights everywhere.
• 3:35
  Initiatives marked complete workshops have been held, consultants have been deployed, all the boxes have been ticked.
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  Yet the company's not any more valuable.
• 3:43
  Why is that?
• 3:44
  Well, the KPIs that people most commonly set up are measuring activity rather than value pricing.
• 3:52
  Project delivered.
• 3:53
  Great.
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  Well done.
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  Check mark.
• 3:55
  Let's have a celebration and order some pizza.
• 3:57
  But was the margin captured?
• 3:59
  Do we know what it was before and what it was afterwards?
• 4:02
  Not clear.
• 4:03
  CRM rolled out big check mark.
• 4:05
  We've got this amazing new technology, but did anyone fix and normalize the data before we rolled it out?
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  Is it enabled?
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  Cross sell?
• 4:12
  And people might say yes, but nobody can prove it.
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  And the dashboard has turned green because measuring the inputs and measuring efforts is easy and measuring value measuring outputs is much harder and requires solid data foundations that the company has never had.
• 4:28
  And the enterprise value, as we said before, just it's flat.
• 4:31
  Because buyers will not pay for green dashboards.
• 4:34
  They pay for numbers that they can trace and truly more valuable companies and everything that they can is just going to be discounted.
• 4:40
  Now the PE fund knows something's wrong.
• 4:43
  Here are the usual three fixes and here's why they normally fail.
• 4:47
  Number one, buy a new tool.
• 4:49
  We'll get a new BI platform.
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  This will look beautiful and with AI it's going to look even more beautiful and personalized.
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  But a dashboard on top of broken data is just a faster way to look at numbers that nobody trusts.
• 5:00
  You can't buy your way out of definitions that nobody has ever agreed on.
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  Fix two, let's hire someone.
• 5:06
  I've got this buddy who went to Harvard Business School, I've got this ex McKenzie guy that I know.
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  We hire them in, put them in mid level, no clear mandate, make them report into it and they spend a year mapping the entire mess.
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  Produce a deck about the mess and then they leave.
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  And the message, well, that stays behind and that's still there.
• 5:23
  Fix number three, let's cross our fingers and wait for the exit.
• 5:27
  Maybe the multiples will expand, maybe the industry will just pick up more value and we'll clean it up when the bankers show up.
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  Except by then everything's a fire drill.
• 5:35
  Oh no, no, because I've been in this diligence will find the gaps anyway, you haven't got time to fix them.
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  The fund is not going to give you a chance to fix them.
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  So every gap becomes a price reduction, a post close fix, and money that you don't get when you sell the company.
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  The thing all three of these fixes avoid is the actual problem the company never agreed to.
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  What its numbers actually mean, where they come from or who owns them.
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  That's not a tool, that's foundations.
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  And foundations built mid hold are the cheapest money in the whole deal.
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  Because every quarter they exist, they compound.
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  You get faster decisions, you get provable initiatives, and you get a diligence process that runs by quickly and smoothly instead of blowing up.
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  So if you're an operating partner or you're running a portfolio company, here's the test.
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  Doesn't cost anything, just takes one meeting.
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  Pick the 1 number the value creation plan depends the most on and ask the room.
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  Can anyone walk this back to source data and tell me where this number came from?
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  Who defined this number in the first place and what does it actually mean?
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  What's included?
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  What's not included?
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  How do we define it?
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  If we were to go outside this room and calculate it separately, would we all get the same answer?
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  And if the room goes quiet, you find the problem.
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  And it's not a strategy problem, it's not a talent problem.
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  It's the reason the dashboard is green and the value is flat.
• 6:55
  So at the bottom I've linked a free scorecard that I've got.
• 6:57
  It's a high level tool that can just give you a general idea of where you're at.
• 7:02
  Then we can have a chat.
• 7:03
  I'll show you exactly where the plan and the data disagree while you've still got a whole period left to fix that.
• 7:08
  If you like this video and and this is your world, hit the subscribe button below.
• 7:12
  Because the thesis you've got is only as good as the numbers and the data foundation underneath it.
• 7:16
  And the data is the.