How Private Equity Uses Data to Improve Portfolio Operations
On this episode of our Expert Insight Series, Blue Margin’s CSO Jon Thompson hosts Marty Moore, Operating Advisor for Tenex Capital Management, an operationally focused private equity firm investing in mid-market companies. Marty joined Tenex with a decade of experience in digital marketing and analytics via pharma company Loeb Enterprises, the startup Blink Health, and AI service provider IP Soft.
Founded in 1999 in New York, Tenex has over $3 billion in assets under management across the commercial services, energy, healthcare, retail, and IT sectors. Tenex’s high ratio of operating partners to deal team partners highlights their passion for operational excellence. Marty spearheads the firm’s use of advanced data analytics to accelerate operational excellence in the portfolio.
Watch the full interview, listen to the podcast, or read the highlights below. The episode covers five themes: how data visibility allows leaders to manage by exception, how distributed decision-making gives employees ownership of the value creation plan, why investing in disruptive technologies is essential to stay competitive, how Tenex uses dashboards to monitor portfolio performance, and data’s impact on valuation and differentiation.
Managing by Exception and Overcoming Resistance with a Founder-Friendly Approach
Tenex Capital uses data analytics to support their process of intervening in the portfolio only when financial and operational KPIs are lagging. Traditionally, management by exception has been hindered by retrospective, point-in-time data. Business Intelligence dashboards overcome this disadvantage with automatically updated reporting, allowing Tenex and their management teams to make informed decisions in real time.
Overcoming Resistance to Change
“At no point do I try to avoid that resistance. I take it in stride and work through it with the person so I can try to win them over.”
Marty Moore, Tenex Capital
Rather than taking a dictatorial approach to change, Marty recommends asking management teams for their input and building a partnership around an agreed-upon goal. McKinsey and Company has identified this kind of partnership building as a primary best practice for private equity firms, finding that a shared mission focused on realizing a deal’s full potential is what makes PE firm and portfolio management team relationships sustainable over the holding period. Being listed on Inc.com‘s Founder-Friendly Investors list testifies to Tenex’s shared-mission philosophy.
The Power of Distributed Decision Making
“We want to make sure that an employee can see how their contribution is helping to achieve the higher-level goals for the entire company.”
Marty Moore, Tenex Capital
Business intelligence coalesces disconnected data into narrative-centric dashboards that bring visibility to the team and help drive accountability to the value creation plan. In a portfolio company environment, improving outcomes stems from three foundational steps: investment and management teams align on the value creation plan; objectives are broken down into team- and employee-level goals with KPI measurements; and shared visibility into KPIs creates a healthy accountability that empowers employees to take ownership of their work and use data to monitor and improve their contributions.
A Framework for Setting KPIs
An important but often neglected step is defining key metrics. In The Game of Work, bestselling author and consultant Charles Coonradt offers three parameters for effective metrics: measurements should be relevant to the process, they should be precise using real numbers, and they should make work an enjoyable game because they show participants whether they are winning and how to win.
Avoiding Obsolescence: Invest in Technology
“Too many portfolio companies have not invested in tech for too many years and find themselves playing catch-up.”
Marty Moore, Tenex Capital
In challenging economic environments, it is natural for leaders to adopt a contractionary, defensive stance, but reducing technology investment is not necessarily the most effective path forward. Bain and Company has consistently advocated for strategic investments during bear markets. Their research has found that investing in digital operations can deliver production efficiency gains of 15 to 20%, along with improved manufacturing flexibility and product quality, returns that far exceed the 2 to 4% gains typical of standard continuous improvement methods.
The growth-minded trend is to invest in technologies that advance digitization and connectivity, including data analytics, BI, the Internet of Things, and machine learning. KPMG CEO surveys have found that despite recession concerns, the majority of CEOs continue to prioritize digital transformation and identify advancing digitization and connectivity as their top operational priority for achieving growth objectives. Marty recommends business leaders avoid obsolescence by adopting technologies at the forefront of progress rather than retreating to a fallback position.
The Power of Dashboards for Monitoring Investments
Dashboards serve both portfolio companies and their private equity sponsors. On the PE side, Tenex leaders daily rely on dashboards for insight into portfolio company performance. Tenex maintains a room of wall monitors, each assigned to a specific portfolio company, which gives them a dynamic lens into the real-time performance of their portcos rather than a diminished rear-view perspective.
To ensure their dashboards have the intended impact, Tenex employs best practices that include spotlighting the most important KPIs on a single monitor that encompasses the entire value creation plan at a high level, measuring KPIs from every department to maintain consistent accountability across the org chart, building from proven templates to create efficiency and minimize errors, and implementing recurring data-driven performance reviews informed by real-time data so leaders can consistently recognize high performers and coach lower performers.
The Impact of Data on Valuation and Differentiation
Data impacts both valuation and differentiation. While a common use of dashboards is to drive behavioral change, Tenex also uses dashboards to track KPI trends from the time of purchase through to liquidity, such as watching customer service satisfaction levels rise or missed shipment numbers decline. In this way, Tenex can measure the overarching impact of data on critical value drivers throughout the portfolio and tell a compelling story of trending value gains to prospective buyers.
“We have the historical data to show dramatic improvements.”
Marty Moore, Tenex Capital
If you would like to connect with Marty, you can find him on LinkedIn or via the Tenex Capital Management team page. The firm primarily targets major equity positions of family-owned, sponsor-owned, and carveout companies with $3 to $40 million EBITDA.
Blue Margin helps private equity and mid-market companies quickly convert data into automated dashboards, the most efficient way to create company-wide accountability to the growth plan. We call it The Dashboard Effect, the title of our book and podcast. Contact our team to get started.
