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The aggregation of marginal gains

How do successful private equity firms stay true to their ‘winning formula’ while responding to the changing pressures of a competitive world? Equistone’s UK Country Head Steve O’Hare spoke to business journalist Ross Butler.

WHEN THINGS ARE going very well, it doesn’t always make sense to be disruptive. But in a changing and competitive world, too little change can slowly erode your advantage. So what to do?

The concept of marginal gains was popularised by the ultra-lean, razor-thin tyred world of competitive cycling – it’s the idea that improving every tiny thing by a small fraction creates a kind of ‘compound return’ that quickly accumulates.

When Steve O’Hare was elected to be Equistone UK country head three years ago, he knew he was taking the lead of a smart, successful team in a brutally competitive market, and they were doing everything by the book. But Steve believed there were hidden gains to be had.

“We weren’t getting the sum of our parts. It wasn’t broken, but I felt there was more horsepower we could get out of the engine, by working in a more cohesive way.” Steve concluded there was a gap between how the UK team presented to the market, and how they treated each other internally. “We weren’t behaving, among ourselves, in the same fair, equal and collaborative way that we do with our counterparties externally. At the same time, we had very capable individuals with the right attitude, who just needed an environment where they could grow and flourish.”

For Steve, the most powerful form of leverage is setting the right culture. “This is a people business, and it’s all about how you can best incentivise and motivate individuals, so they can grow, enjoy the job and make sure they are successful and part of a winning team.”

This is a people business, and it’s all about how you can best incentivise and motivate individuals, so they can grow, enjoy the job and make sure they are successful and part of a winning team.

His solution for establishing a more collaborative and trusting culture was three-fold: to adopt a policy of broad and regular consultation, both informally and through regular, firm-wide polling; to be open and transparent, and to empower individuals with responsibility.

One test of such values is whether they apply to people’s wallet, and in this, the UK team now has full transparency, with all incentivisation decisions fully explained, discussed and shared, allowing disagreements to be aired if not always resolved. “It is a vision of trust and collaboration, and if you live it every day, and deliver on it, then scepticism dissipates.”

Both anecdotally and more formally, it appears to be a happy ship. “The feedback from the surveys has been amazing, and even during the Covid period, the culture if anything is even stronger, which is testament to individuals supporting one another. People are happy because they know they will be consulted on every major decision.”

In Steve’s view, the ability to stay fit for your market environment is dependent on a healthy culture. “We have created an environment where people feel safe to challenge each other, to share problems and ideas.”

Deep dives

For instance, the team has become much more systematic about doing ‘deep dives’ on an individual portfolio company basis, trawling the market for lessons – both good and bad – discussing, distilling and implementing them systematically. This doesn’t sound very ‘Barbarians at the Gates’, but if you want to systematise lessons and harness experiences from across a complex, ever-changing field, a prerequisite is the cultural willingness to share. “I’ve been guilty of it in the past, where you’ve got in your head things that would help colleagues, and either because they’ve not asked or you’ve felt you should not tell, it hasn’t happened.”

The next question was how to turbocharge the experience of these very capable deal executives and get that knowledge in them as quickly as possible?  Steve’s answer was to ensure that, on any deal they look at, the least experienced member of the deal team speaks first.

“As a junior dealmaker, your pace of learning is constrained by the information and deals that are put in front of you. So, I thought how can we accelerate that for bright individuals that haven’t done many deals? The best way is to learn more about what their teammates are doing, what challenges are they getting at a non-executive level, how are they implementing, how training or personal development.”

This device gives a voice to every team member, and an opportunity for them to learn and enrich their thought process. It also forces partners to listen, which over time encourages them to become a coach and then mentor. “The more headroom that less experienced people are given, the quicker they develop,” says Steve. “This is much more efficient than the linear fashion where you only know about the deals you work on.”

“Constructive intervention”

Oliver Meakin

As part of formalising this knowledge-sharing, the UK team have recently hired a ‘senior portfolio advisor’, Oliver Meakin. The role is effectively one of an ‘operating partner’, which is new territory for Equistone.

Oliver has held C-suite roles at high profile mid-market businesses, with a consultancy background, and he works with Equistone’s management teams “to put additional structure and guidance around improvement plans,” says Steve. Oliver joined in March and is already active on two Fund VI deals and the firm’s latest investment, all of which are “heavily pregnant with operational improvement opportunities.”

The UK country head is at pains to emphasise this is not at the expense of the deal team, who remain with the business. “Oli is an augmentation to the deal team, not a substitute. I firmly believe one of the benefits of the Equistone model, where we move from being deal-doers to non-execs, is you learn in real-life 3D-colour what actually happens in businesses, rather than from IMs and due diligence reports. This insight, in turn, makes you a better investor. I don’t want that river of learning to be disrupted.”

Some might wonder if this new operational role signals a lurch towards a more muscular, interventionist Equistone, which could change the relationship between management teams. Steve rejects this two-dimensional reading of complex relationships.

“We want to understand the managers we back, their motivations and drive; we want to like them on a personal-level, and we hope that we are empathetic to real-life situations. But they are also well-incentivised individuals, there to drive the growth of the business and we must not and do not let the first part of that influence our judgement as to whether they are delivering the second.”

He says Equistone does replace managers, “and that is always a shame, because a certain judgement had been made at the outset, but on those occasions, we have a responsibility, for the good of all the employees and stakeholders.” It’s just that they don’t jump to that conclusion.

We want to understand the managers we back, their motivations and drive; we want to like them on a personal-level, and we hope that we are empathetic to real-life situations.

“Ruthless” monitoring

Equistone’s brand of interventionism is one of challenging the business plan and really getting under the key levers of change and growth. “We want to understand the key objectives and then monitor them ruthlessly at the board, and then overlaying this with our own experience, or by bringing in specialist consultants. We are general practitioners, not surgeons. We’ve seen a lot of companies change and grow, but we will bring in the most skilled practitioner to execute.”

The team is also systematic in their monitoring and questioning of value creation: every portfolio company is tested each quarter, where the deal team presents the deep dives, previously mentioned, to Steve (and now to Oliver too) covering everything from strategic initiatives, M&A opportunities, key drivers and indicators, views on management; “all the lessons from this are shared with the entire team and acted upon.”

At the time of writing, Oliver has only been in place as portfolio manager a few months, but the evidence so far is that “it is absolutely helpful and not fundamentally changing our relationship with management teams or the way we function.”

Taha Hasan

In addition, there is precedent for some degree of specialisation within the UK team. In 2016, they appointed a dedicated Head of Origination, Taha Hasan. Steve says Taha’s efforts give them an inside track and have resulted in some Fund VI commitments that would never otherwise have seen the light. On the day we spoke, Taha was on a video-conference call with the Equistone team in Paris (and is scheduled to speak with Munich) to talk them through some of his processes. This international knowledge-sharing is a strategic edge. 


A happy team is a good foundation, but to what extent will this translate into good deals, and strong returns?

For one thing, the UK team’s investment rate has materially improved in the past three-to-four years (even with a market-wide lull during Covid.)

Steve is based in Manchester and travels every week to London where the majority of his team is based. When he took the helm, he was adamant that he would not be a bottleneck on opportunities, but would give his team headroom to perform. “When I took the Country Head role, I did not go around the market with a big drum, because I didn’t want to become a single point-of-failure.” His approach is to empower the team, and it seems to be working. He believes the investment rate is a testament to how the London team has benefited from “some of the freedom and dynamics we have put in place to pursue transactions and to be deal captains.”

He is similarly bullish about performance, with early indications that value from Fund V investments has increased at a faster rate. “As a result of the shared learning, increased attention and maturation of individuals involved, we have seen these older deals materially move forward in their value and strategy.” He specifically references the digitisation of a number of companies, which is “day versus night”, compared to where they were, and the quality of revenue streams. “That will manifest itself in some very good exits this year, for businesses that were valued pretty low a few years ago.”

In terms of newer deals, there are already several that appear very strong and just one that’s having a tougher time, entirely due to Covid. It is expected to “disproportionately bounce back. 

A full version of this article appeared in PLATFORM 05, Summer 2021