The Hindu Business Line : ‘PE firms can leverage operational capabilities’

Private Equity (PE) firms’ superior performance is linked to their networking skills with industry insiders in the sector in which they are actively involved, besides their domain expertise and fast operational improvement, a report from the Boston Consulting Group (BCG) said.

Indian PE firms’ operational capabilities were not fully leveraged so far, the report said. “With likely softening of equity markets, in the coming years, PE funds will have to build capabilities to deliver value through operational improvements, these capabilities will be the basis of differentiation for PE companies,” said Mr Harsh Vardhan, Partner & Director, BCG, said to reporters while unveiling the report

The Advantage of Persistence: How the Best PE Firms “Beat the Fade”.

Industry insiders

Among the three distinctive organisational capabilities that mattered the most, in the superior performance of the PE firms, was extensive networking with industry insiders in the sectors where the private equity firms operate, the report said.

Domain expertise or industry-specific knowledge was second important capability and finally the capacity to quickly implement improvements that turnaround their portfolio rather than the traditional structural factors such as size, scale and diversification.

“India, with strong underlying fundamentals will continue to attract more capital from PE companies,” Mr Harsh Vardhan added.

Commenting on the opportunity in India, Mr Saurabh Tripathi, Partner & Director, BCG, said: “Richness and diversity of Indian market allows for specialisation of Private Equity funds — be it expertise in domain, operational improvement or private network.”

“Operational improvement lever is not fully explored in India so far,” Mr Tripathi said adding, “the country has much higher presence of PE than other emerging markets.”

Operational improvement

Despite the current turmoil in the global credit markets, private equity will continue to be an important source of capital, but the sector’s focus will shift from creating value through leverage to creating it through operational improvement and growth, making the sector less dependent on credit, the report said.

So tighter credit and the higher cost of debt will affect the sector less than it has been suggested, BCG said.

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‘PE firms can leverage operational capabilities’