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"Lessons from Private Equity Any Company Can Use" by Orit Gadiesh & Hugh Macarthur, 2008

Sustainability is driven by performance excellence. Thus, lessons from Private Equity firms may be useful on how to maximise value, cut inefficiencies, and transform companies with a 3-5 year horizon

"Lessons from Private Equity Any Company Can Use" by Orit Gadiesh & Hugh Macarthur, 2008

Although it never mentions sustainability, as the book was written in 2008, on the verge of the financial crisis, years before the ESG frenzy and race towards Net-Zero, I recommend the C-suite and top management read this sort book. Please let me explain why.

The more we dig into sustainability, the more we understand that along the required innovation, the (concept) essence of the sustainability journey is about output optimisation and maximisation from your company’s assets. In simple words, it means combating the operations inefficiencies.

The purpose of private equity firms is to maximise the value of the company within their investment horizon, typically 3 to 5 years. Putting aside financial and tax engineering, this is mostly achieved through cutting inefficiencies and increasing assets (manufacturing, personnel, client base, brand, etc…) output, thus lowering operational costs. It boosts profitability and, as a result, the company’s resale value.

The authors, Bain Chairman Orit Gadiesh and Partner Hugh MacArthur, have used the concise and actionable format of a memo to convey the six disciplines that PE firms use in reaching their goals:

1. Define the company’s full potential. Invest in 3-5 key initiatives that bring you to the destination within 3-5 years.

2. Develop the blueprint. Blueprint is a roadmap for getting to the full potential destination, encompassing the initiatives that will generate the most value for your company within that time frame.

3. Accelerate performance. Measure only what matters, for instance cash, key market intelligence, and critical operating data. (In the case of ESG criteria, this is still an evolving discipline as there is no consensus yet on measurements. See my article on which scorecards to use and when).

4. Harness the talent. Hire hungry and energetic managers, create the right incentive packages to retain and motivate your best talent - get them to think and act like owners. It also requires assembling a decisive and efficient board, a practice aligned with the needs of good Governance in ESG.

5. Make equity sweat. Manage working capital aggressively and achieve disciplined capital expenditures. It means forcing managers to redeploy underperforming capital in productive directions (in essence, monitoring and improving ROCE and ROA).

6. Foster a results-oriented mindset. The goal is to move to the discipline as reoccurring and a part of the company's culture.

This is the PE formula for unleashing a company's true potential. In essence it suggests to increase efficiency by maximising your assets, a key lesson as we need to extract more output whilst using less energy and lowering carbon emissions.

My Recommendation: ESG is a battle for efficiency. This book is very concrete in defining the path towards higher efficiency and operational excellence.

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