Constructing an efficient global operating model

Over the past few decades, the private equity industry has grown from a US and Western European endeavour to a global industry.

22 October 2013

By Giles Travers, Director of Private Equity

Both buy-out and venture capital firms have global office networks, cross-border investments are part of standard deal flow and operating partners assist their portfolio companies to expand internationally to capture market share. So how do GPs combine an efficient and effective operating platform, whilst ensuring they and their portfolio companies don’t miss out on global opportunities?

Operating internationally is already a complex compliance burden. The variance in local laws and regulations proves a headache for most GP finance functions. Added to this are new waves of extra-territorial regulation, such as FATCA or AIFMD. Particularly for European firms, the AIFMD carries with it the additional costs of authorisation, risk management and depositaries.

And yet, the LP expectation is that GPs can still navigate the post-crisis waters with such speed and agility as to win even the most competitive of auctions and pick up undervalued targets in unpredictable markets.

These pressures have made many private equity chief operating officers and finance directors rethink their existing operations. A number of firms have re-organised globally by scaling back or closing international offices. Others have simply made staff redundant. Quickly reducing fixed costs is one strategy, but there are other operating partner principles that can be deployed to produce streamlined, scalable operations should certain markets rebound. In this regard, PE firms are no different from the companies in which they invest.

Constructing an efficient global operating model is no mean feat. Many companies and firms have tried by bolstering central internal legal, finance and compliance teams and developing their own controlled processes and procedures in house. However this option has proved expensive given the need to constantly invest and train teams to meet new regulatory requirements. Alternative constructs include using outsourcing firms or by simply relying on local service providers in each country: both of these options can result in lack of control and visibility.

Instead, the emerging model of choice for GPs and portfolio companies has been to employ strategic legal and finance teams at regional levels and rely on service providers to deliver the last mile of compliance in country. This model enables implementation of central reporting requirements whilst ensuring local compliance risks are covered off and operations can be scaled (in either direction) with ease. This approach is being adopted, in one form or another, by the majority of the top alternative investment managers: focus on your core strengths whilst developing partnerships with other specialist companies, partners or providers with similar values.

If private equity is to continue to outperform comparable public companies, ensuring an efficient operating model is in place is essential to finding and building better, global companies. Successful models will be those that that not only improve intrinsic value but also enable flexibility, scale and reach into new and recovering markets.

For more information, contact Giles Travers, Director of Private Equity.

This article first appeared in the BVCA Journal:

http://www.bvca.co.uk/Portals/0/library/documents/BVCA%20Journal%20Autumn%202013.pdf

 
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