The value creation plan stands out as a linchpin of successful investments in the private equity space, where billion-dollar deals are commonplace. These strategic documents serve as the road map for transforming acquired companies into more valuable assets. VCPs encapsulate a private equity firm’s vision, detailing how they plan to improve operations, drive growth, and ultimately generate returns for investors. Industry veteran Darren Huston, CEO and founder of BlackPines Capital, recently shed light on this crucial element of PE strategy, offering insights into how these plans shape the future of acquired companies.

 

At its core, a value creation plan is a comprehensive blueprint for enhancing a company’s worth. Huston describes it as “the fundamental piece that aligns the organization to create value.” This document isn’t merely a wishlist; it’s a detailed road map that outlines specific steps, timelines, and goals for transforming an acquisition into a more valuable asset.

 

Darren Huston notes that VCPs can vary in scope, potentially covering “four to 40 different areas depending on how it’s managed.” This flexibility allows PE firms to tailor their approach to each unique investment opportunity.

 

To give context, a typical initiative might be reorganizing a go-to-market approach reorganizing people management systems, or changing the way a company prices its products.  Each initiative within a VCP is then defined and resourced, typically with a template, including many of the elements below:

 

• North-star goals (1-3 year time horizon).
• A statement of scope (in-bounds, out-of-bounds).
• A designated sponsor and full-time lead.
• Allocated resources.
• Other organizational support and dependencies.
• Major project phases.
• Key performance indicators (input and output metrics).
• Plans for using external experts and resources to validate efforts.
• Review frequencies and level (CEO only, or Board)

 

To guarantee success, the VCP process itself should also have a full-time process owner who helps raise the bar on team execution and reporting.  VCPs should be tracked at the initiative and portfolio levels.  Huston also believes reporting on progress should be “80% data, 20% words” with detailed use of input and output metrics that, through visualization, tell the story of how things are going.

 

Darren Huston: Focus on Operating Value

 

One crucial aspect of VCPs is their emphasis on operating value, which is distinct from financial engineering techniques. Huston clarifies, “VCP is strictly operating value,” setting it apart from strategies like leveraging a company to create value through debt management. VCP removes the ambiguity of other strategies and establishes a relationship exclusively between execution and value.  Being on the VCP list generally means something needs to be transformed. And it is highly valuable once changed or fixed.  Buyers are often interested in this evaluation in order to assess profitability and lack of redundancy. This focus on operational improvements underscores the PE industry’s role in actively enhancing the businesses they acquire.

 

The creation of a VCP often coincides with a change in ownership, typically spanning a four-to-six-year horizon for PE investments, or up to 10 years for venture capital firms. Interestingly, these plans aren’t static and often provide opportunities in management. Darren Huston reveals that VCPs can undergo significant evolution: “Usually the VCP, what I’ve seen, can change 50% because they were notions that investors had, but, in execution, we can find that there may be more value in some areas and less value in others.”

 

This adaptability ensures that VCPs remain relevant throughout the investment lifecycle. For instance, Darren Huston mentions that “midway, two years in, you do an acquisition. Then it would be smart to say, OK, let’s create a VCP around the acquisition integration because it’s important and  very complex.”

VCPs in Action

 

Value creation plans play a pivotal role throughout the private equity deal process. In the early stages, PE firms present a high-level VCP to their investment committees when evaluating potential targets. As the deal progresses, the VCP becomes a tool for alignment between the PE firm and the target company.

 

The urgency to finalize the VCP by the deal’s closing is palpable. Huston emphasizes, “Usually, at about the time the deal closes and the gun goes off, that’s when the VCP has to be ready.” This allows for immediate execution once the acquisition is complete.

 

VCPs are closely linked to the concept of growth mapping. It is a strategic exercise that involves understanding the growth potential of a company’s core business and adjacent opportunities. Darren Huston explains, “It’s like you’re on this multidimensional chessboard and your business is in one square of that chessboard.” The VCP, informed by this growth mapping, outlines how to capitalize on these identified growth avenues.

 

VCP Strategy

 

To illustrate the relationship between VCPs and other management tools, Huston employs a musical metaphor. He describes the VCP as “the orchestral movement.” While related concepts like objectives and key results (OKRs) are “the music sheets that each part of the orchestra has.” This analogy underscores the comprehensive nature of VCPs. It is providing the overarching structure while other management tools, like OKRs, guide day-to-day execution. VCPs also serve as a testing ground for investment theses and a rallying point for aligning management teams with the PE firm’s vision. While many large firms employ similar strategies, Huston suggests that a focus on core PE activities, including VCP development and execution, could be a differentiating factor for smaller, more specialized firms.

 

As larger PE firms diversify into areas like private credit, Darren Huston raises concerns about the potential impact on core PE activities. He notes, “The declining focus can be an issue because particularly what it takes to do great [leveraged buyouts]. It is where you take majority ownership, is to me the absolute core of private equity.” This observation highlights the importance of maintaining a sharp focus on value-creation strategies, even as firms expand their service offerings.

The Future of VCPs

 

VCPs also serve a crucial role in communicating with investors. They help PE firms explain to their limited partners how they plan to create value in their acquisitions. They are providing a clear rationale for investment decisions and a framework for measuring progress. As the private equity industry continues to evolve, value-creation plans are likely to remain a cornerstone of successful investments. They have the ability to provide structure, align stakeholders, and adapt to changing circumstances. It positions them as invaluable tools in navigating future challenges and opportunities. For investors, management teams, and industry observers alike, understanding the role and mechanics of VCPs offers valuable insights into the inner workings of private equity strategy.