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Consequently, identifying and addressing operational inefficiencies at portfolio companies is crucial for the success and growth of these businesses. By identifying and addressing these inefficiencies, portfolio companies can improve their efficiency and effectiveness, leading to increased profitability and competitiveness. It is important for parent companies to regularly assess the operational performance of their portfolio companies and work with them to identify and address any inefficiencies that may be hindering their success. By doing so, parent companies can not only improve the performance of their portfolio companies, but also enhance the overall value of their investment. 

Identify Areas of Operational Inefficiencies  

When identifying key areas where operational inefficiencies are hindering performance, it is important to use a variety of methods such as key performance indicators (KPIs), benchmarking against industry standards, root cause analysis, and employee feedback and suggestions. These methods can help to identify areas such as bottlenecks in production, outdated equipment and processes, and lack of standardization. 

Once the inefficiencies have been identified, they should be prioritized based on the potential cost savings or revenue enhancement that could result from addressing them. For example, an inefficiency that is causing a significant loss of revenue due to production downtime should be given a higher priority than an inefficiency that only results in small cost savings. A list of all identified inefficiencies should be made, and their potential impact can also be assessed. 

When considering the feasibility and difficulty of implementing a solution for each inefficiency, it is important to consider factors such as the cost of the solution, the level of difficulty of implementation, and the potential benefits. Based on these factors, opportunities for operational improvement can be prioritized. For example, a solution that is relatively inexpensive and easy to implement may be given a higher priority than a solution that is more expensive and difficult to implement, even if the potential benefits of the latter are greater. It’s also important to consider the time frame for the solution’s implementation, as some solutions may bring short-term benefits, others may require long-term vision and investment. Prioritizing the inefficiencies and identifying the best solution would then bring the most value to the given time frame and budget. 

Collaborate and Create a Plan 

Working closely with the management team to develop and implement solutions that effectively address the identified issues is also crucial. The management team is best placed to understand the day-to-day operations of the company and can provide valuable insights into the processes and systems that need to be changed. 

Once a plan has been developed, it is important to implement changes to processes and systems, training, or organizational restructuring as needed. This may involve updating equipment or software, standardizing procedures, and providing training to employees to ensure that they are equipped to operate the new processes and systems effectively. It is also important to pilot the solutions and test them before rolling them out to the whole company. This allows for fine-tuning and adjustments to be made before the solutions are implemented company wide. 

Measure and Track 

Once solutions have been implemented to address operational inefficiencies, it is important to establish performance metrics to track progress and measure the success of the solutions. These metrics should be directly related to the identified inefficiencies, and they can help to provide a clear picture of the company’s performance before and after the implementation of the solutions. 

To track the performance of the company, data should be collected regularly on the identified metrics. This data can be used to determine the impact of the solutions on operational efficiency and compare the performance of the company before and after the implementation of the solutions. Data should be collected over a sufficient period of time to ensure that any improvements or changes are statistically significant and accurate. 

The collected data should be analyzed to gain insights into the impact of solutions on operational efficiency. This can help identify areas where additional improvement may be needed and help determine which solutions were effective and which were not. By analyzing data regularly, it is possible to identify if performance is improving over time and adjust the solution as needed. 

If additional improvement is needed solutions should be developed and implemented. By identifying areas where more improvement is needed and acting, portfolio companies can continue to drive operational efficiency and improve overall performance. 

Communicate Clearly 

Clear communication channels between the parent company and the portfolio company are essential to effectively addressing operational inefficiencies. This includes regularly updating all stakeholders on the identified operational inefficiencies and steps being taken to address them. This helps ensure that everyone is aware of the issues and is clear on the progress being made. It also helps to build support and buy-in for the efforts to address the inefficiencies. 

Clear communication up and down the chain of command can make a substantial difference when it comes to employee adherence to the policies or SOPs. Every effort should be made to clearly communicate what the problem is, how the solution will address that problem, and how this affects the company and the individual employees. Additionally, encouraging feedback and input from all relevant parties is essential to ensure buy-in and support for the efforts to address the inefficiencies. This can include feedback from employees, customers, partners, and other stakeholders. By incorporating feedback and input, the efforts to address the inefficiencies can be adapted to better meet the needs of the company and its stakeholders. 

Finally, it is important to communicate the progress and outcome of the efforts to address the inefficiencies to all stakeholders. This can include regular updates on the efforts’ status and any considerable progress or outcomes. Communicating progress and outcome helps ensure stakeholders are informed and can help build support and buy-in for the efforts to address the inefficiencies. 

Conclusion 

Operational inefficiencies can significantly impact the success and growth of portfolio companies. Identifying and addressing these inefficiencies is crucial for improving efficiency, increasing profitability, and enhancing competitiveness. When exploring strategies for identifying and addressing operational inefficiencies, it can be helpful to seek the assistance of specialized consultants who can provide valuable insights and guidance. By proactively managing and continuously improving operations, it is possible to drive long-term success and value for portfolio companies. Thanks to our team of specialized operational consultants, Seraph can work alongside a manufacturing operation and act as support structure to add value from day one. Our advisors are former management at many suppliers and OEMs and are experts in production and operational efficiency. Contact us today to schedule a discovery call, or see our case studies for more information. 

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The Fallacy of Low-Returns 

It is true that many social enterprises are built with idealistic or even unreasonable goals in mind. Frequently, many social entrepreneurs lack sufficient business acumen to make their projects successful, believing that passion will fill a tangible skills gap. However, those entrepreneurs with a solid business foundation that decide to take on some of the world’s biggest problems may find themselves with a surprising amount of success. 

Some of the biggest problems, like banking access, access to clean drinking water, clean energy, and more, can be solved with for-profit models. Additionally, the introduction of a PE firm to provide guidance may add legitimacy and stability to pursue further rounds of funding. PE firms that decide to acquire these social enterprises with solid business foundations may find themselves, like the founder, with a world of opportunity ahead.  

Many Impact investment funds are seeing significant alphas, sometimes up to 20% annual growth rate, and can be found relatively close to home in the US and Latin American countries. Every year, billions of dollars flow to enterprises with a philanthropic view on their operations, and to great benefit. Impact investment isn’t just for successful PR campaigns; there is appreciable profit that can be made from these types of ventures as well. 

Additionally, the length of impact investments is frequently on par with other investments that PE firms undertake. The amount of time needed to purchase a company, grow it, train new management, and develop an exit strategy may vary. The exact moment of the exit strategy may depend on the overall market conditions and other factors outside of the influence of a PE firm. However, most impact investment projects wrap up or receive more advanced funding within five years. 

Conventional Funds Adopting Impact Investment 

Conventional funds and private equity firms are starting to notice the social and financial impacts generated by impact investing. Socially-oriented companies that attract impact investment are in need of the deep talent that general partners can bring to the table. Impact investment can be somewhat riskier than traditional private equity investments, however, the proper amount of due diligence and the right business decisions can mitigate these risks.  As the businesses mature and impact investors remain invested in the day-to-day of the business, other investment opportunities like VC funding become more viable. Many businesses have already progressed from impact investing to VC funding rounds in the eight-digit-figure range.  

The Difference Between Impact Investing and ESG 

Impact investing and ESG (environmental, social, and governance) are two totally different ideas. While the two do share some similarities, they are not the same. The former has caused some polemic in recent years, but impact investing lacks any sort of political ideology and merely seeks to evaluate if someone is doing good business for a good purpose.  

At its most basic level of analysis, impact investment is an investment strategy employed by private equity firms and other investment institutions with the expectation of a positive return. As opposed to ESG, impact investing is based on sound financial analyses and robust evaluations of the business in question. These financial decisions are then applied to certain businesses to funnel capital to the businesses best suited for growth within a PE firm’s strategy. 

ESG, on the other hand, is more of an operational and HR stance that many companies have decided to adopt. It takes a broad look at an individual company’s practices in relation to environmental friendliness, stance on DEI (diversity, equity, and inclusion), and its governance structure. Many companies that receive impact investment from private equity firms have DEI and ESG aspects.  

It’s worth noting that many recent ESG ETFs by large investment bankers have suffered sub-par returns, with many even losing money. Companies that receive impact investment do not share the same weaknesses common to many ESG investment opportunities. Those companies that receive impact investment often have a “business-first” mindset that drives social progress, but they are always business-first. This, among many other factors, makes impact investment a better option for PE firms rather than ESG investment initiatives. 

Conclusion 

Impact investment has touched the lives of hundreds of millions of people in the Western Hemisphere alone. Every day, investment-worthy businesses appear and come online that are sure to impact the lives of millions more. Seraph can play a unique role in PE business acquisitions. Once acquired by a PE firm, many companies undergo significant transformations in operations. Those companies working in manufacturing, aerospace & defense, medical devices and more may be able to benefit from Seraph’s ability to implement efficient processes. Thanks to our team of specialized operational consultants, Seraph can work alongside a newly acquired company and act as a support structure from day one. Our advisors are former management at many suppliers and OEMs and are experts in production and supply chain efficiency. Contact us today to schedule a discovery call, or see our case studies for more information.  

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