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Private Equity: Why many portfolio businesses fail to meet expectations

21st Aug 23 9:31 am

Having spent the past four years as an external Sales Consultant working closely with numerous private equity clients to help boost sales across their portfolios, I’ve come to what I believe are some rather surprising conclusions:

The first is that, although Private Equity companies (PEs) naturally want a strong return on  their investments, they are usually realistic enough to appreciate that a substantial number of their portfolio companies won’t achieve the pre-investment forecasts, regardless of the extent of commercial due diligence conducted during that stage.

In addition, some organisations might take much longer than others to achieve their targets, whilst some might never get there at all. The ‘significant few’, who can provide spectacular returns, often prop the under-performers, similar to sales teams where one or two top performers compensate for several underachievers. This dynamic might seem to enhance the overall security of the portfolio investment.  Yet, for many early-stage companies, there still remains a significant element of ‘punt’ when investing.

One surprising observation when interrogating a company’s pipeline and forecasts is that the targets are often overly ambitious. Initially I believed this was due to the demands of the PE stakeholders seeking their pound of flesh. However, when scrutinising the reasons more closely, I discovered that it was often the Founder or The Board setting these ambitious numbers, without factoring in adequate contingency.  This issue is magnified when the company is in ‘fast growth’ mode, as it assumes that:

  • They can easily hire substantially more competent salespeople in a timely manner
  • Very few salespeople will leave the business over the next year or two
  • The entire team will achieve or even exceed their sales targets

These goals are often difficult, if not downright impossible to achieve, which often leads to a huge mismanagement of expectations. Consequently, the PE firm might become unhappy with the performance of the company in which it has invested.  There is a potential Catch 22 at play here: to attract investment in the first place, the company might want to demonstrate fast-growth and increasing profitability.

As a Consultant, my role is to ‘look under the bonnet’ of the company’s operations to understand why it is not performing to the anticipated levels.  Whilst many factors play a role, apart from the unrealistic targets, the most common issues generally include the overall quality of sales personnel; insufficient training investment; sales leaders acting as super-sellers rather than being great coaches, which makes scaling these businesses challenging; and very poor pipeline management and forecasting.

All these issues are fixable. However, the solution is likely to take months, not weeks, and involves mentoring sales leaders to become better at managing performance; creating a more robust sales process; scrutinising forecasts to make them more realistic; training the sales team in industry best practices; and ensuring the team stays motivated and focused on their target numbers. When sales teams consistently fail to hit their numbers, this becomes extremely demotivating. To address this, it is crucial to start by setting stretching yet achievable targets, training everyone, and building a strong coaching culture. This ensures sustainable development and ultimately enables the business to scale.

About Bryn:

Bryn Thompson is the Director of New World Selling, a sales and leadership training and consultancy business working closely with the Private Equity community and companies in a variety of markets to improve performance and scale faster. Before this Bryn ran the Commercial Training Division at Pareto for over a decade helping the Company to grow organically from £8m to c£30m in this time. He and his team exceeded targets every year and grew sales by over 400%.

Latterly Bryn became Strategic Accounts Director working with PE’s and VC’s to maximise growth and profitability across their portfolios. Bryn won a National Award (British Excellence in Sales and Management Awards) in 2010, and went through Randstad’s Global High Performance Leadership Program in Amsterdam in 2013.

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