Ring Fence: Private Equity Operational Improvement

Many might argue against my claim, but I firmly believe that Private Equity and Leveraged Buyouts add value to the world economy. More and more, acquisitions by Private Equity firms are focused on creating long-term value, rather than financial engineering. That is very healthy.

Of course not all Private Equity firms can be described as long term thinkers but those that do think more longer term and are vested in the operational improvements of their portfolio companies do add value to the world.

Kohlberg, Kravis, Roberts & Co. (KKR) ¹ is by far the leader in the Private Equity buyout world. It is not surprising that a key ingredient in their approach to creating value in the companies they acquire is the implementation of Lean Thinking in the enterprise.

100 Day Plan

For KKR, a key aspect of their value creation approach to acquired companies is what they call their 100 Day Plan, which is a Ring-Fence, or Timebox, or One-Piece approach to improving a company (as opposed to a batch approach). In their words ²:

One of the key components of KKR’s value creation process is the 100-Day Plan. Developed by the KKR industry professionals, KKR Capstone professionals and the management team of a new portfolio company, a 100-Day Plan details the steps necessary for the team to achieve specific strategic, financial and operational goals.

How will margins be improved? How will supply chains be shortened? What departments need more resources? Who will be accountable for what?

Line by line and business unit by business unit, the 100-Day Plan charts a path to value creation by ensuring that everyone involved in the running of a portfolio company agrees upon a plan for improvement, is committed to executing it and is held accountable to it from day one. Because they find the experience of forging and adhering to the first 100-Day Plan so valuable, KKR and portfolio company management teams often develop and implement second and third 100-Day Plans.

100-Day Plans tend to focus on identifying critical, forward-looking operating metrics, such as customer satisfaction measures, on-time delivery and sales pipelines. At times, this enables KKR portfolio management team to identify challenges facing a business before those challenges are revealed in the financial data, thus allowing teams to make difficult operational decisions as early as possible in KKR’s ownership.

In the succeeding posts on Private Equity and the implementation of Lean Thinking to improve portfolio companies, I’ll share several examples of how Lean can quickly improve companies, add value, and remain true to the Respect for People pillar.

Kohlberg Kravis Roberts & Co. (commonly referred to as KKR) is a New York City based private equity firm that sponsors and manages investment funds, focusing primarily on leveraged buyouts of mature businesses. Since inception, the firm has completed over $400 billion of private equity transactions and was one of the pioneers of the leveraged buyout industry. In March 2010, KKR filed to list its shares on the New York Stock Exchange. The firm was founded in 1976 by Jerome Kohlberg, Jr., and cousins Henry Kravis and George R. Roberts, all of whom had previously worked together at Bear Stearns, where they completed some of the earliest leveraged buyout transactions. Since its founding, KKR has completed a number of landmark transactions including the 1989 leveraged buyout of RJR Nabisco, which was the largest buyout in history to that point, as well as the 2007 buyout of TXU, which is currently the largest buyout completed to date. KKR has completed investments in over 160 companies since 1977, completing at least one investment in every year except 1982 and 1990. KKR is headquartered in New York City with thirteen additional offices in the US, Europe and Asia. In October 2009, KKR listed shares in the company, through KKR & Co. an affiliate that holds 30% of the firm’s ownership equity, with the remainder held by the firm’s partners. ↩
Super Return 2006 Presentation ↩