Anecdotally, institutional investors frequently comment on the volatility of investment returns in lower mid-market private equity portfolios. One or two out of maybe 10 to 12 investments generate exceptional returns, while one or two companies will flounder and fail and do not return their invested capital. The remainder produce adequate but not exceptional results to just about justify an average top quartile performance. If only fund managers could produce consistently strong performance.
This challenge is something that WestBridge is seeking to meet, and the firm has been making strong progress with its second fund, WestBridge II, which is independently benchmarked as a top 5% performing fund for its vintage and category.
The WestBridge team has created an environment where exceptional performance across the entire portfolio is embedded throughout all aspects of the firm’s operations, including strategy; investment identification and execution; systems and processes; and engagement with portfolio management.
The systematic rigour we apply to improve portfolio companies is equally applied to our own business and its operations as WestBridge has grown over time.
The first thing that a firm needs to establish is a high performance culture. This is easy to say but a much more difficult thing to achieve. The private equity industry has many successful investors working in it that have a range of cultural biases. Similarly to our approach with investee companies, at WestBridge, we look for a technical standard as a hygiene factor when recruiting team members but, most importantly, cultural fit and an appropriate level of diversity. One of the core competencies WestBridge looks for is partnership. Our approach partners with management teams of our investee companies, and similarly, we have created a team that seeks to partner with each other and is mutually supportive.
Put another way, the focus is on making the pie bigger - not on individuals securing the maximum slice of the pie at the expense of their colleagues. In an industry where participants are trained to negotiate to optimise the outcome for the funds they represent, sustainably creating this culture is difficult and easy to damage once in place. Only an open, honest and respectful approach throughout the organisation can maintain this. This approach leads to transactions only being WestBridge transactions and not attributed to one individual. Team members with the most appropriate skills for a challenge are deployed when required – the mantra is we want the best WestBridge player “on the pitch” in each situation.
Top returns are not only created by culture. There has to be a clear focus on how value will be created. Many private equity firms seek to develop sector specialisms to create an ‘angle’ on a deal. WestBridge has re-engineered its investment and value creation process to identify, secure and develop only those businesses where we can genuinely add value by deploying the WestBridge Value Creation Model, which systematically seeks to drive outperformance in portfolio companies. Again, this is a simple thing to say, but is impossible to achieve without rigour, focus, a lot of hard work, shoe leather and the right culture.
The WestBridge partner group has many years of successfully investing in the UK lower mid-market. As the firm has developed, we have codified the attributes of successful growing businesses into a set of criteria that, in the main, are present in growing niche companies.
These criteria cover many aspects of a business, but they are designed to identify those companies that will respond most vigorously to the application of the WestBridge Value Creation Model. By combining these filtering criteria with a comprehensive market coverage origination model, WestBridge identifies four to six very strong businesses each year that can be rapidly developed. Opportunities are won by the team advocating a true partnership approach with management and not a master-servant relationship. After all, the management teams we partner with are about to embark on one of the most important journeys of their working lives that may well secure their family’s financial future. What they really want is an experienced partner on this journey, working in an environment that can deliver outperformance. But, again, without the right culture in the firm, it is impossible to “walk the walk”.
Repeatability is key. Having identified best practices, they must be ruthlessly applied. Underperforming companies in private equity portfolios are frequently attributed to strategy drift initiated by one or two of the senior team members. Again, a high performance, mutually supportive culture has an essential role to play.
Ensuring we optimise a company’s growth over the investment period is essential to delivering top performance. WestBridge identifies and secures those businesses where we can add the most value by deploying our Value Creation Model. The essence of the Value Creation Model is to seek to systematically develop all aspects of a portfolio company at the right time so that it takes maximum advantage of the market opportunity available. This process is all-encompassing and covers improved systems, management development, ESG credentials and buy and build acquisitions, amongst others. Culture again plays a key role. It is essential to have a trusted partnership with management. Our team members need to be part of working groups in portfolio companies, addressing improvements and not just attending board meetings, taking notes and essentially marking management’s homework.
Essentially a high performance ‘can do’ culture is created in portfolio companies. Raising management’s horizons is key. CEOs of exceptionally strong performing businesses frequently reflect on the fact that they are doing things now seemed impossible 12 to 24 months ago. Actively managing this progress is also key. The old adage of what gets measured gets managed is highly relevant.
Finally, exiting a business at the optimum point is also essential. Ensuring that exit horizons are fully considered and reviewed systematically translates into investment returns being optimised. In addition, having the right culture in your firm seamlessly facilitates exit optimisation.
At WestBridge, we believe you only generate repeatable top quartile performance and avoid portfolio volatility if you: create a mutually supportive high-performance culture in the team and within the portfolio companies; rigorously only invest in only those businesses where you can add value; and systematically develop those businesses in true partnership with management. This approach is easy to outline but very difficult to achieve consistently because if properly applied, you only invest in companies where you can demonstrate you can deliver strong returns.