Unlocking Top-Line Growth - According to Dean B Nelson
Unlocking top-line growthThe key to improving a portfolio company’s operations is via top-line growth, says KKR Capstone’s Dean Nelson
According to Dean B Nelson, “It‟s pretty straightforward to work with a companyand get its costs down in the first six months. But if we want this investment thatwe‟re going to hold four, five, six, seven years, to really create a lot of value forour investors, we need to drive top-line growth.”It seems as though every private equity firm is operationally focused these days.But separating true operational improvement from window dressing can bedifficult, particularly as a growing number of fund managers continue to hypetheir ability to cut costs and transform portfolio companies. KKR holds a distinctadvantage in this regard, as it can point to more than a decade-long operationstrack record with KKR Capstone, its 60-strong in-house global operations team.“Our goal is to build the right strategy and work side by side with the team toimplement it so that the new processes or tools work long after we‟re gone. Wesucceed when the strategy works and we are able to walk away from it, havingcreated value for our investors,” says Dean Nelson, founder and head of KKRCapstone. “Alignment of interest is not a small point. People at the companyknow that we have the same interests at hand.”He continues: “Frankly our model‟s a little different. We don‟t write slide decks,we don‟t try to prove to the „nth‟ degree how big an opportunity it is – our goal isto work with the management team to get the opportunity up and running.”
The key to defining operational improvement, and overall value for the business,is top-line growth, Nelson says. Operational strategies geared toward thedevelopment of stronger revenue streams leave portfolio companies bettersituated in the long-term.Most firms focus their operational improvement strategies on cutting costs, astrategy that – though important – usually only provides a one-time bump on thebalance sheets. Eliminating costs alone does not position a portfolio companyfor long- term growth, he says.“It‟s pretty straightforward to work with a company and get its costs down in thefirst six months. But if we want this investment that we‟re going to hold four, five,six, seven years, to really create a lot of value for our investors, we need to drivetop-line growth to get the multiple up and keep a good steep improvement inEBITDA,” Nelson says. “And I think that‟s unusual for the industry, certainly howpeople view the industry.”KKR‟s approach to top-line growth begins during the due diligence process,when KKR Capstone executives join the deal and management teams toanalyze and determine where a potential portfolio company stands to benefitfrom the firm‟s operational expertise.
Those areas – or “levers” as Nelson likes to call them – generally include acombination of five or six cost-cutting and top-line strategies, he says (the bulk ofthe firm‟s efforts are spent on the top-line strategies). Those levers can includehelping a portfolio company negotiate better terms with its supply vendors,improving its pricing functions, creating a new framework for sales staff ortargeting areas in which it could expand, but KKR Capstone‟s initial involvementgenerally centres around helping company management find where it has “leftmoney on the table”. “A lot of these private companies, they‟re very profitable,and they don‟t worry about the cash coming out of the business,” Nelson says.“We never try to put our vendors in a place that‟s beyond their comfort zone orbeyond what‟s appropriate, but we do see a lot of companies that probablyaren‟t pushing working capital as well as a lot of the best practices companiesout there would.”Another area where private companies stand to benefit is improving their pricingstrategies on specific goods or services. KKR Capstone has found that manycompanies don‟t have a pricing function that takes into account theircompetitors, which can lead to situations in which they lose customers to lowerprice competitors. It‟s also found some companies leave „money on the table‟by undercharging.
Freeing up that working capital, and taking into account new sources ofrevenue, can open the door to expansion, including to emerging markets wheremacroeconomic growth patterns continue to be more optimistic than those inthe US and Europe. Projecting those visions of growth to existing managementteams can assuage the anxieties of family owned businesses that may beskeptical of partnering with a private equity firm.“When working with a family-run business, a founder, or an entrepreneur, it‟s likesell- ing a child, it‟s something you‟ve built,” says Nelson, recalling a recentexample where the company was excited by “our vision for growth, and inparticular the growth in the number of stores. They wanted to know how wewould do that, how we would make sure they had additional resources,” hesays.Crucial was acknowledging that expansion and growth couldn‟t come throughcost cutting alone, he says. Identifying and executing strategies that a companycan use to lower its costs while growing revenues benefit both the company andthe private equity firm‟s returns in the long run. That‟s not window dressing.Original press release from KKR.