Innovation in Private Equity

by | Aug 15, 2011 | Evaluation Ideas, Google, Kickstarter, Subtraction | 0 comments

Private equity firms can boost the value of their investment portfolio by applying a systematic innovation method along the entire investment value chain – before, during, and even after the investment.

Private equity firms are collections of investors and funds that put money into privately-held companies. Private equity investments provide working capital to a target company to nurture expansion, new product development, or restructuring of the company’s operations, management, or ownership. Private equity firms are betting on their ability to take control of the target, clean it up, make it more competitive, and then sell it for a higher price.  It is like “flipping” a home in the real estate market.

Here is how a private equity firm could apply systematic innovation in their portfolios:

Before Investing:

Take the target company’s main product or service and apply S.I.T. to it during the evaluation process.  There are three things that could happen, all of which are positive outcomes.

1.  The innovation effort is a success.  You conceptualize exciting new innovations for the target firm that could increase its value.  By identifying these new sources of value before the deal, you widen your negotiating envelope.

2.  The innovation effort fails – no new opportunities are identified within the target company.  Given that, the full valuation of the deal should be based on the current products only.  This helps you avoid being overly optimistic about the target’s prospects for growth.  Any increases in value will come from cost cutting and efficiency gains.

3.  The innovation effort is a success, but you decide to walk away from the deal for other reasons.  You still have innovative concepts that you can extract value from.  You could sell the intellectual property to the target firm, or to one of its competitors, or to another private equity investor considering that target.

During the Investment:

By installing innovation processes in the target firm, private equity firms can influence success of the company and its stake in the company,   This would include: idea generation processes, voice of the customer processes, idea evaluation processes, prototyping, testing, validation, and launching.

After the Investment (the equity firm has sold its position):

How would a private equity firm use innovation after exiting?  On itself, of course. Taking the lessons learned from the last investment, and carrying those lessons into a systematic innovation process will yield new insights and opportunities.  Applying S.I.T. on deal flow, target selection processes, due diligence, and other key processes would bring value to the firm where it might be appreciated the most – right at home.