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Can you put a price on innovation?   

By Riccardo Ottolenghi, PA strategy expert

A recent report from Preqin, found 95 per cent of private equity (PE) investors believe their portfolios are at or ahead of expectations – up from 81 per cent in 2011. The worry is this confidence is buoyed because of underlying economic strength, rather than strong management.

But if markets change unexpectedly, long-term sustainable growth can become much harder to achieve. New players are disrupting markets so the more traditional businesses are finding themselves fighting for existence. For private equity houses who play in the traditional business space, it’s critical to seek out management teams with the ambition to become disruptors themselves. An innovative management approach is key to delivering results – and profits.

It can be difficult to quantify the value and potential of innovation, so the number of PE firms that value it as a key capability in their investments is low. But a focus on innovation, stretching across the organisation’s people and processes, can deliver bold top-line growth. TPG invested in Vertafore because it was seen to be at the forefront of technological innovation in the US insurance industry. And TPG was handsomely rewarded with a $1.3bn profit on sale.

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So what should private equity investors be looking for in an innovative management team that will successfully weather choppy markets? Our research has uncovered the things that the best innovators get right. Here are three strong indicators.

  • Thinking broadly. Look for companies that do things differently, for example, companies that crowd-source ideas from across the organisation or customer base to find new and innovative concepts. Also, keep an eye out for management teams who build innovation into departmental budgets – even just a 10-15 per cent allocation per department demonstrates management’s commitment and creates the opportunities for innovative development across the company. We worked with a leading high street health and wellness company. Unusually for the high street, they generate 71 per cent of their revenues through innovative products and services, like their healthy pick’n’mix instore stations. People within the organisation come up with developments like these. That reflects the culture championed by management.
  • Being bold. Look for companies where the management team’s goal is to ‘disrupt ourselves’ or dramatically increase revenue. Maybe an idea starts as offering a product or service through subscriptions – it shouldn’t end there. Maybe the new product becomes a platform for the entire marketplace. Look for teams that seek to evolve an idea. We recently worked with an outdoor advertiser to develop a digital plan that won’t just improve their digital proposition but will completely revolutionise its business model, disrupt its industry and double its revenues within three years.
  • Acting fast. Look for organisations that are energetic – identifying, evaluating, establishing, and running projects in an agile way. Find companies focused on delivering a portfolio of small quick-wins. These prove and embed innovation fast and induce a snowball effect. It took us just two weeks to define the outdoor advertiser’s digital strategy and develop a roadmap for improvement. At the heart of this was a suite of minimum viable propositions we released month by month to promote rapid innovation and demonstrate progress.

It may be hard to put a figure on the value of an organisation’s attitude to innovation. But if there’s a management team that prioritises innovation across the entire organisation and understands its value to drive top line growth that’s a good sign. The only way PE houses can be sure their investments will perform ahead of their industry average in the medium- to long-term is by embracing innovation.

Find out more about our work in Financial Services.

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