Performance improvement

Operator-Led Private Equity Performance Improvement

For the part of the hold where the investment case has to show up in EBITDA and cash.

Arete Ventures provides performance improvement consulting to US private equity firms and the companies they own. We work with GPs, operating partners, boards and portfolio company leadership once the 100-day plan is behind them and the numbers are still short of the model. LPs and family offices with direct holdings also bring us in for an independent read on a company that is missing plan. Most of our work is in the US, with some in the UK.

Our managing partner, Gaurav Shah, spent sixteen years as an operating partner at a San Francisco private equity firm. He has sat in the operating seat when a company missed plan and answered to the investment committee for it. He is a chemical engineer with six US patents who has built and run industrial plants. On your portfolio company, that means a senior person who reads the production schedule and the receivables aging himself, and who knows which fixes a management team can carry while it still runs the business.

-$4M to +$11M

EBITDA at a carve-out manufacturer, turned around inside the hold

430 bps

Gross margin added by a pricing program, with 97% of customers retained

$27.1M

Cash released at a distributor, with no new equity from the sponsor

$9.1M

Procurement savings on $120M of addressed spend, within eight months

3 of 5

Portfolio companies that exited above plan while we were operating partner

Where programs stall

Why Performance Programs Stall After Close

We have owned the plan after the consultants left. Programs fail in the same places, and few of those failures show up in the first board deck.

The diagnostic ends in a list nobody can carry.

Twenty ranked initiatives reach the board while management is still running the business. We cut the list to two or three, each with one owner and a dated dollar target. The ranking accounts for the time left in the hold and how much change the team can absorb, so nothing infeasible reaches the board.

The plan was built in the conference room.

Benchmarks and management interviews describe the business as it reports itself. We check it on the floor, in the production schedule, the dispatch log, the receivables aging and the discount approvals. The gap between what is reported and what happens is usually where the money sits.

Savings are counted before they reach the P&L.

Programs report identified savings, then annualized savings, and the board loses track of what has actually landed. We count a saving once it appears in the monthly close, and we keep an EBITDA bridge that ties to the accounts. The timing matters at exit. A buyer's quality of earnings team treats savings that are not yet in trailing twelve-month results as pro forma, and usually discounts them.

The gains fade when the advisors leave.

A program run by outsiders stops when their invoices stop. We set up the weekly operating review and the board KPI pack early, so management owns the numbers well before we step back.

Inside the hold

What We Work On Inside the Hold

Five areas where EBITDA and cash move in a company you already own, in the order we usually find them.

Pricing and Discount Discipline

Pricing is often the fastest lever and the least used. At a 20% EBITDA margin, a 2% price increase that holds lifts EBITDA by about 10%. The loss usually comes through discounts approved one account at a time over years, until some of the largest customers pay the least and nobody can explain why.

+10%

EBITDA from a 2% price increase that holds, at a 20% EBITDA margin

We rebuild margin by customer and by SKU, find where discounts have drifted, and reset who can approve what. Price increases go to the underpriced accounts first, where the case is easiest to defend. We also check how the sales team is paid. When commission runs on revenue, every discount is free to the person granting it, and governance alone will not hold.

Cash Conversion

Profitable portfolio companies run short of cash more often than sponsors expect. Average DSO hides the problem. Most of the trapped cash usually sits with a small group of slow payers, so the aggregate number looks acceptable. We work that tail account by account, clear excess and obsolete inventory, and reopen supplier terms nobody has revisited in years.

Clearing obsolete stock means writing it down, and the write-down reaches reported EBITDA. Before that happens, we check the covenant definitions and agree the treatment with the lender, so a cash program does not trip a debt covenant.

Procurement and Direct Cost

In process and industrial businesses, raw materials and logistics are often the largest cost line and the least managed. Our managing partner reads a raw material specification and a supplier's process as an engineer. That lets us tell when a cheaper grade will run in the plant and when it will cost more in yield or downtime than it saves. In specialty chemicals, a change of supplier can also require customers to requalify the product, which takes months, so the savings plan carries that timeline from the start.

At one specialty chemicals company, sourcing work across $120M of spend saved $9.1M within eight months. The supplier base shrank by 32%, and EBITDA margin rose 280 basis points with no loss of service or capacity.

Plant and Delivery Performance

Missed delivery dates and swollen inventory usually trace back to production planning. We rebuild the planning process and consolidate facilities the volume no longer supports. On-time delivery and inventory turns are tracked every week. In technology and automation companies the same discipline applies to the service cost of each deployed system, and to how engineering time splits between new product and fixing what customers already run.

Turnarounds Inside the Hold

When a portfolio company is far behind plan, the order of decisions matters more than the number of them. Cash and the lender come first. Next comes a weekly operating rhythm with the leadership team, so problems surface in days. In a carve-out, the date the seller's transition services end also sets the pace, because every system the parent ran has to be replaced before then. Systems changes such as an ERP migration go last: planned early, executed once the business is stable. Where a company needs it, we step into an interim operating role, as we have on one engagement.

Problems found before signing, and the 100-day plan, sit with our Buy-Side M&A Advisory. Decisions across the whole portfolio, integration and exit readiness sit with Private Equity & Venture Capital Advisory. Owner-led companies without a sponsor work with us through growth and operations consulting for midsize businesses.

Proof

Selected Engagements

Three results, with the numbers and how they were measured. Company names are withheld.

01 · Turnaround inside the hold

The carve-out was losing $4M a year. Two years later it was an exit candidate.

Manufacturer · acquired in a carve-out · sponsor-owned

What we found. Revenue was falling and EBITDA stood at minus $4M. Nobody in the leadership team owned a clear set of numbers, and production planning still ran on the parent's old methods. The facility footprint was sized for volume the business no longer had, and the commercial strategy had not been rethought since the separation.

What we did. We set up a weekly operating review and rebuilt accountability inside the leadership team, so every number had one owner. We redesigned the commercial strategy and consolidated facilities. Production planning moved off the parent's methods onto a process the business could run on its own.

What it meant for the investment. Revenue returned to growth within six months. Cost came down by $14M, and EBITDA moved from minus $4M to plus $11M. The company returned to lender compliance and became a credible exit candidate within two years.

The hard part. A carve-out arrives without the systems its parent ran for it. For the first months the weekly numbers came from spreadsheets, and every decision was made on data we knew was incomplete. Waiting for clean data would have cost the lender's patience.

EBITDA, $M

At carve-out: -$4M

After the turnaround: +$11M

74% to 96%

On-time delivery

3.2x to 6.1x

Inventory turns

$14M

Cost reduction

02 · Pricing

Raw material costs were rising, and the sales team was answering with discounts.

Industrial products manufacturer · sponsor-owned

What we found. Raw material inflation was compressing margins, and the sales team had responded with aggressive discounts across the customer base. Margin by customer and by SKU showed a long tail of underpriced accounts, many of them priced on deals agreed years earlier.

What we did. We analyzed customer profitability, SKU-level margins, competitive position and the history of discount leakage. Then we introduced pricing governance by customer segment, with tighter discount authority, and put targeted price increases through on the underpriced accounts.

What it meant for the investment. The program paid back in under 90 days. The company beat its lender covenant targets and was sold two years later at a materially higher earnings multiple, on the strength of its improved margins.

The hard part. The resistance came from inside. Sales leaders expected to lose accounts and pushed back on narrower discount authority. The argument ended only when the first quarter showed 97% of customers had stayed.

5.2%

Average realized price increase

97%

Customer retention

430 bps

Gross margin expansion

$8.7M

EBITDA increase

03 · Working capital

The business was profitable and still could not fund its own growth.

Distribution business · about $300M revenue · sponsor-owned · nine-month program

What we found. EBITDA was acceptable, and cash was the constraint. Inventory built up during supply-chain disruptions had never been worked down. Collection standards had slipped, and supplier terms had not been reopened in years. The sponsor was preparing an equity injection to fund growth the business should have paid for itself.

What we did. Over nine months, management shortened customer collection times and cleared excess and obsolete inventory. Supplier payment terms were renegotiated in parallel.

What it meant for the investment. The business released $27.1M of cash. The planned equity injection was cancelled, and the cash funded growth from inside the company.

The hard part. Clearing obsolete stock meant writing it down. Reported earnings took the hit in the same quarters the cash came in, and the board had to accept a weaker EBITDA print to get a stronger balance sheet.

$27.1M

Cash released, with no new equity

72 to 58

Days sales outstanding

$59.2M to $47.7M

Inventory

45 to 53

Days payable outstanding

Receivables: $300M × 14 ÷ 365 = $11.5M. Inventory: $59.2M to $47.7M = $11.5M. Payables: about $185M of annual purchases × 8 ÷ 365 = $4.1M. Company names and sponsor identities are withheld. Past results do not predict future outcomes.

Engagement

How an Engagement Works

Every engagement is fixed-fee, with no success fee and no share of the gains. Engagements run 12 to 30 weeks. Senior people do the work, inside the company and alongside the management team. Management owns the plan and the results. We own the diagnosis and the operating rhythm until it runs without us.

12 to 30

Weeks per engagement

Fixed fee

No success fee and no share of the gains

What You Receive

Floor-level diagnostic.

What the business delivers today, checked against what it reports, with a value on each gap.

Priority plan.

Two or three initiatives, each with one owner and a dated EBITDA or cash target, ranked against the hold period.

Operating cadence.

A weekly management review and a monthly board KPI pack, with an EBITDA bridge that ties to the monthly close. The team keeps both running after we leave.

Program delivery.

We work the initiatives with management until the results land in the accounts.

Interim leadership, where needed.

An interim operating role while the board recruits a permanent hire.

Discuss a Portfolio Company

Questions

Frequently Asked Questions (FAQs)

What does private equity performance improvement involve?

Private equity performance improvement is operating work inside a portfolio company during the hold, aimed at EBITDA and cash. It usually covers pricing and discount discipline, cash conversion, procurement, and plant or delivery performance. The work pays off only when each initiative has an owner inside the company and a value the board can track every month.

How is performance improvement consulting different from a turnaround firm?

A turnaround firm usually arrives once a lender is already involved, and its first job is survival. Performance improvement consulting starts earlier, while the company still meets its covenants but is missing its plan. The levers overlap. The difference is time: earlier work fixes margin and cash before they turn into a liquidity problem.

How quickly should a portfolio company see results?

It depends on the lever. Pricing moves fastest: on one program, the price increases paid back in under 90 days. On one sourcing program, savings were realized within eight months. A full turnaround takes longer. Revenue can stabilize within six months, while the full earnings recovery can take two years.

How should a board tell whether performance improvement savings are real?

Count a saving only once it appears in the monthly close, and keep an EBITDA bridge that ties to the accounts. Identified and annualized savings are still plans. Timing also matters at exit: a buyer's quality of earnings team usually discounts savings that are not yet in trailing twelve-month results.

When should a sponsor bring in outside help for an underperforming portfolio company?

When the company has missed plan for two quarters and management's explanation has not changed. By then the gap is usually structural, in pricing, cost, cash or the operating rhythm. Bringing help in while covenants still hold keeps the options open. After a breach, the lender sets the timetable.

How long does an engagement take, and who does the work?

Engagements run 12 to 30 weeks on a fixed fee, with no success fee and no share of the gains. Senior people do the work, inside the company and alongside the management team. Management owns the plan and the results. Where a company needs it, we take an interim operating role while a permanent hire is found.

Do you work with the existing management team or replace it?

We work with it. Most performance gaps come from priorities, information and operating rhythm, and the people already in the business can close them once those are fixed. Where a role cannot be filled from inside, we tell the board early, and we can cover it on an interim basis.

Next step

A Question Worth Asking First

Ask any performance improvement advisor what happened to the numbers a year after they left.

We take a small number of engagements at a time and stay until management runs the new rhythm without us. If the gains in your portfolio company cannot outlast our time there, we will tell you on the first call.

Discuss a Portfolio Company

Insights for performance decisions

DPI in Private Equity: Why EBITDA Growth Is Not Reaching LPs

The DPI Conversion Rate: how much of a portfolio company's EBITDA can reach LPs, and which fixes in the hold release it.

Exit Multiple Diligence: Will the Next Buyer Pay Your Multiple?

How to work out what the next buyer can pay before you sign, and what to do when the model assumes more.

Related advisory

Private Equity & Venture Capital Advisory · Buy-Side M&A Advisory · Commentary: Working Capital Quick Win That Moved Your CCC, CFO Drive