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strategy and business
 / Summer 2011 / Issue 63(originally published by Booz & Company)


The Next Winning Move in Private Equity

An infusion of organic growth capabilities can take several forms, and which one is best probably depends on the specifics of the private equity firm — including its size and the industries in which it operates. Only a handful of growth-enabling capabilities apply across portfolio companies. One is better pricing ability. Another is improved sales-force practices, since the direct sales forces of acquired companies often have faulty structures or incentives, or aren’t disciplined about getting rid of underperformers. “There’s almost always, in a company that has a direct sales force, a sales-force redesign — always some kind of broad commonality there,” says one private equity executive, declining to be identified because he doesn’t want to disparage the management teams with which he works.

Yet even with growth capabilities like these, many private equity firms don’t build them internally. “It’s unrealistic for a firm that is not enormous,” says Eddie Misrahi, chief executive of Apax Partners, a Paris-based private equity firm that focuses on mid-market companies in France. “The average PE firm is 10, 15, or 20 people, so it’s impossible.”

Bigger firms, such as TPG, have the option of handling these needs more directly. “When there is enough work to do that’s permanent, we hire it [in-house],” says TPG’s Boyce. “That’s the short answer.”

KKR’s experience with Dollar General, a chain of variety stores in which it invested in 2007, illustrates how a growth capability that resides within a private equity firm can sometimes bolster returns. From the beginning, only a small portion of the work that KKR’s operating group did with Dollar General — work related to forcing vendors into competitive bid situations — was cost-related. KKR’s other initiatives all had to do with increasing Dollar General’s revenue.

When KKR first acquired the chain, Dollar General’s management was basing its decisions about product assortments and which products to stock on the profit margins of individual SKUs — A.1. Steak Sauce, for instance. KKR believed it made more sense to look at dollars of margin per linear foot, a common measure in food retailing that takes into account not only how much profit a given product generates per dollar of sales, but how quickly the product sells. The application of the new metric was part of a broader analysis in which Dollar General — usually a place where customers go to pick up a few small items in between major shopping trips to Kroger or Walmart — sought to make sure it had the right products to maximize foot traffic. “We took the Nielsen data and said, ‘OK, what’s the $12 basket at a grocery store?’” says Dean Nelson, the head of KKR Capstone, the firm’s internal consulting group.

That question led Dollar General to start carrying milk and other basic products. It’s why the company — which had previously carried only Pepsi, as part of an exclusive supplier arrangement that allowed Dollar General to offer the beverage at rock-bottom prices — started offering Coke as well. “We lost a few margin points, but we put Coke on the shelf too,” Nelson says. “That’s driven a lot of extra baskets, a lot more visits.”

The category reevaluation, and other growth initiatives, such as the extension of Dollar General’s private-label brand, were driven by a KKR Capstone marketing specialist who spent the better part of two years working at the Goodlettsville, Tenn.–based company. Dollar General is now public and has an enterprise value of more than $12 billion, versus $7.3 billion at the time KKR helped take it private. “It has been a home run for us,” says Nelson. “And 80 percent of that was growth; it wasn’t getting better terms from P&G or Kraft.”

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  1. Ken Favaro, Tim Romberger, and David Meer, “Five Rules for Retailing in a Recession,” Harvard Business Review, April 2009: An industry-specific analysis of the concept of headroom and the importance of organic growth.
  2. Steven Kaplan, “Private Equity: Past, Present and Future,” (PDF) University of Chicago Booth School of Business Publication, April 2009: A detailed and data-filled presentation on PE’s performance over the years, which also offers perspective on the industry’s success factors.
  3. Paul Leinwand and Cesare Mainardi, The Essential Advantage: How to Win with a Capabilities-Driven Strategy (Harvard Business Review Press, 2011): How matching strategic direction with an organization’s unique capabilities can lead to well-modulated growth.
  4. Justin Pettit, “Think Like Private Equity to Enhance Public Company Value,” (PDF) Financial Executive, November 2007: Six tactics that top executives can use.
  5. Peter Vayanos, Ahmed Youssef, Chady Zein, and Raymond Soueid,“Private Equity Comes of Age: Emerging Opportunities in the Middle East,” (PDF) Booz & Company white paper, October 2010: Why the key drivers for private equity in this region will include identifying sustainable investment ideas and creating value within portfolio companies.
  6. Rhea Wessel, “Bonderman Sees a Return of Big Private Equity Deals,” New York Times, March 3, 2011: TPG’s founder on the opportunities created by easier credit and IPOs in emerging markets.
  7. For a podcast by author J. Neely, in which he explores the private equity industry in light of Carlyle Group's recent IPO announcement, visit:
  8. For more on this topic, see the s+b website at:
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