I had a user ask me how difficult it would be to transition from a cost-cutting role (what I would call ops) to Private Equity. Its a great question. Since after their two year sting in high flying consulting Mr. McKinsey and Mr. Bain now want to do private equity, we explore Ops to Private equity from a skills standpoint in this article.
Cost Cutting and Turnaround in Private Equity
The user’s (I’ll call Johnny) experience has been in product cost reduction which entails connecting disparate data from across sourcing, manufacturing, and design to identify opportunities to reduce product cost, pulling the key team members together and managing the projects while the they execute on actions. Johnny has a mechanical engineering background but moved into this cost reduction role because I love having the responsibility of improving profitability.
I mentioned to Johnny that my firm at least works with turnaround professionals, guns-for-hire.
Johnny was not familiar with the term “turnaround”. Which makes sense, since it is a very finance specific term.
“I’m not exactly sure what turnaround is but I imagine it involves some aspect of cost reduction? Not sure how closely you worked with this person you all hired for turnaround. Does your team have any current need for someone with my skill set?”
Johnny’s question is frequently asked by folks working “in industry” or as consultants in corporate or industrial settings looking to sidedoor into the private equity world.
The Short answer: cost-cutting and turnaround skill sets are valuable to a Fund either as an employee or third party.
Think about the basic premise of the business (at least in the buyouts space). You buy a business with leverage, and get a return on the cash flows that exceed your acquisition debt costs. If you manage to make improvements to the business, you might have a capital gain.
And improvements are usually based on improvements to EBITDA or Cash Flow. So you have revenue levers, and cost levers. A PE firm will find you attractive if you can increase value to their assets in either direction.
However the question is complex. Working for a private equity owned company is not the same thing as working for the private equity company.
At my firm we hired a turnaround specialist: we had a construction services company that started underperforming and this guy came in to cut some heads and turn the fire on middle management. He’s done a good job. He was interim CEO at various MM and LMM companies where he was hired for similar tasks. However he technically does not work for the fund.
That said, he’s on track to become an “operating partner”, individuals who are in fact employed and incentivized at the fund level
Johnny was happy to hear about it: “Sounds like an interesting role! I am trying to break into PE with my skill set but not entirely sure if there is a role at a fund that already exists or if I need to pitch my skill set as a new position a fund could benefit from. Ideally I’d like to be an employee vs third party.”
Johnny has two options, he can either join a firm as an employee specializing in ops, turnaround or cost cutting. Or he ca join third parties that go in and boost operations.
There third party consulting firms such as Alvarez and Marsal, MBB, the Big 4 or other down market professional services firms that offer very similar services to Johnny’s current skillset and role. It is certainly an option, however consulting compensation and “skin in the game” is far less than working directly for the fund.
Efficient Paths for an Ops Professional to get into Private Equity
If you want to go the fund route, the answer lies in networking, outreach and zeroing in on yiur interest and preferred path. Playing the numbers game is crucial in my experience. For two reasons.
- Eyeballs: this is simple. The more you reach out the more you will approach the law of large numbers and your response rates will resemble the true average of what it should be. You will have the opportunity in this instance to pitch your value add directly. And even if there are no direct openings in operations, cost cutting or turnaround, there may be certain processes in the works or simply unlisted jobs that HR and recruitment teams have in the works.
- Reps: this is the value of failure. Every rejection you get gives you the opportunity to meditate on why you in fact failed to get an offer. This helps you get better.
Lord knows how miserably bad I failed my first modelling tests before landing the offer.
Breaking into Private Equity tips from a Pro in the the Trade
- Go straight for the Lower Middle Market (LMM) first. Lots of funds in growth mode start thinking more about professionalizing the operations functions. These guys sometimes can only “do the deals that can be done”. Which often results in hairy investments. These hairy investments may include cost cutting as well as cost restructuring, interim leadership or other operational quirks that come from playing in the lower middle market.
- Find some distressed debt or equity specialized firms. There are firms that make there money specifically on turnarounds and distressed debt.
- keep doing outreach, networking and applying.
In general, turnaround and operations jobs will have more of an ad hoc route than the structured buy-side recruitment process. Also maybe think a but broader than just cost cutting because there are other needs involved at portcos such as hiring, systems, strategic sourcing etc…
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