Buying to build

When driving operational improvements at portfolio companies, it pays to keep one eye on medium-term goals, writes Neil MacDougall, managing partner of Silverfleet Capital.

Building value in portfolio companies can be achieved in a number of ways. At Silverfleet Capital, we recently adopted the strap line “We buy to build” as we felt this best characterised how we work with the management teams we back and the companies that we invest in.

This approach naturally breaks down into three broad areas: accelerating organic growth; rolling-out successful retail or service propositions; and making bolt-on acquisitions.  

Companies in which we have invested have created value by doing some or all of these things.

Operational improvement is important as well, as many firms face margin erosion from rising costs and greater efficiency is needed to offset this pressure. In addition we often find there is scope to improve the efficiency with which working capital is used in a business. Genuine improvement in working capital management is however much more than just stretching creditors. Better coordination between sales and production can help to reduce inventory, for example.

Accurate and timely invoicing can make debtors easier to collect and the sales force and finance team need to decide together if it is really worth selling to customers who never seem to pay. All of these are actions that if they are to be effective need to continue in a self-sustaining way well beyond the timeframe of a 100-day plan.

However, increased efficiency alone is unlikely to lead to sustained profit growth, which is why we think “we buy to build” is much more important than simply making everything as lean as possible. Long term growth will in many cases have a current cost. Genuinely new and innovative products rarely work perfectly right from the start; new people need training before they can become fully effective; new units need to ramp up production and new outlets will also have a start-up period before they reach maturity.

Because of this it is important to have a mid-term plan to work towards as well as the budget for the year. There are all too many examples of firms that were so focussed on short term goals that they never saw the innovations coming that eventually put them out of business.

We also find that it is important for management and private equity shareholders to have an agreed time horizon for an investment. Of course that need not be set in stone but a business and management team that finds itself permanently in the shop window is not going to find it easy to concentrate on delivering real growth in competitive markets.

Will all the hard work and investment be worth it in the end? Well you won’t know until you get there, but in our experience the common feature of all our most successful investments was not multiple arbitrage nor debt reduction – it was consistent profit growth.