Operating partners of private equity (PE) firms can do so much to create value at a portfolio company, provided they’re free to focus on what they do best. Peter Hlavin, VP of Business Development at Chief Outsiders, explains how fractional Chief Marketing Officers (CMOs) can collaborate with operating partners to build growth engines and drive exponential revenue growth.
The heyday of the C-suite and PE-suite jack-of-all-trades is over (if there ever was one). The most substantial opportunities to improve portfolio companies require sector and discipline expertise now. Twenty years ago, cleaning up the balance sheet and addressing some supply chain snafus might have delivered a healthy IRR, but today’s high asset prices require more than boilerplate reforms.
Yet PE firms often still expect their operating partners and, in certain cases the PE partner, to tackle the full range of the issues facing a portfolio company, as a Swiss army knife to fix the whole enterprise. But marketing is a discipline that operational executives and GPs rarely have experience managing. Portfolio company CEOs might take ownership of marketing responsibilities, simply by virtue of not having the resources to tap a full-time specialist.
Peter Hlavin of Chief Outsiders argues this can slow the growth trajectory of the portfolio company. Instead, the PE group can deploy both an operating partner and a fractional CMO to help a CEO deliver on the investment thesis, with each resource doing what they do best. In this way, they can serve as a “growth squad” that can maximize the potential of a portfolio company, which generates the returns that keep LPs committing to the next fund.
PE groups have long appreciated the power of tapping operating execs to help run portfolio companies, sometimes by bringing them in-house, and sometimes relying on a loose confederation of executives they’ve worked with previously.
But some portfolio companies don’t just have operational improvement problems (i.e., waste and inefficiencies, misaligned supply chain, poor NPD pipeline, etc.). And an operating partner may feel some trepidation about marketing problems that stretches them beyond their core area of expertise. “They’ll think they need to hire a marketing executive, when they might not have the budget,” says Hlavin.
Today, they don’t need one. Chief Outsiders offers a fractional CMO, so they don’t have to commit to a full-time resource, while still gaining the expertise of a top-tier marketing veteran. “Our CMOs can develop a plan that gets the company to grow sufficiently so eventually, they can afford that full-time marketing executive. We consider it part of our mandate to help source that talent as well,” says Hlavin. And if a full-time marketing executive is eventually brought in-house, Chief Outsiders typically transitions to special projects and/or an advisory/coaching role.
Frequently, GPs will watch a portfolio company do all the right things within the four walls of its business (i.e., operational engineering improvement), and have that operating partner deliver on every promise, but still struggle to grow revenue. “Nine to 18 months into the investment, they realize it’s a marketing issue that resides outside the four walls of the business, and reach out to us,” says Hlavin.
Ideally, that fractional CMO is there right alongside the operating partner as soon as the deal is being developed. Chief Outsiders often plays a role in pre-acquisition due diligence, sometimes as a small component (i.e., project specific), such as a digital competitor market analysis, and sometimes by developing a Q of M[arketing]TM report where they’re able to identify the opportunities for improvement, the low hanging fruit, and potential impact of a revitalized marketing strategy to grow revenues.
“So often, companies look at the little “m” of marketing when compared to the big “S” of sales,” says Hlavin. The reality is that marketing-driven initiatives are now in play well before the first salesperson picks up the phone. “We can help sales avoid the dead-end leads and unearth the gems. This big “M” way of strategic thinking can drive revenue growth and, in turn, create significant portfolio company enterprise value.”
Collaborating with the PE firm and the operating partner from the launch of the deal, Chief Outsiders can help manage the relationship with the CEO. “A lot of PE groups promise to devote resources to their portfolio company, but sometimes the CEO doesn’t always appreciate the help. But we’re battle-tested, boots-on-the-ground industry operators who have worked on over 800 corporate engagements and with over 65 PE firms, and can help develop and deliver a message in industry/sector languages. And we can do that in a style that allows both the PE group and CEO to see the value of what we bring,” says Hlavin.
Marketing can be a sensitive subject to CEOs, as brand identity can be something akin to their own identity, especially if they founded the enterprise. “We’re aware of this, but our recommendations are data-driven, so we can show them the hard evidence of why this shift is warranted,” says Hlavin.
These aren’t easy conversations to have, but Chief Outsiders makes this kind of honest collaboration part of their own culture. They have internal Peer Review sessions where a fractional CMO meets with 10 to 15 fellow CMOs for about 90 minutes.
In the first 30 minutes, the fractional CMO will explain the situation and current strategy for a client company;
In the next 30 minutes, their fellow CMOs will ask questions about that strategy;
And in the final 30 minutes, those fellow CMOs will make suggestions to further build on, improve or revamp that strategy.
This means that Chief Outsiders’ contribution has been vetted and upgraded by a bench of operationally-driven marketing veterans. It also means that every fractional CMO has experience with honest feedback and compromise, which is necessary in improving the fortunes of a portfolio company in the short term.
And that argues for today’s PE groups to build long-standing relationships with operating execs and service providers like Chief Outsiders, so that these collaborations can be fueled by trust and prior experience.
In this way, PE firms can have their own growth squad that hits the ground running, with each member of the team focused on what they do best. And together, they can develop a reputation as a master of exceeding expectations.
Topics: Private EquityJul 12, 2019 10:27:28 AM