Value Creation in Private Equity: Making Our Own Luck

Markets go up and down, trends come and go, and luck can change. But when it comes to creating value in a portfolio company, we have developed repeatable processes that help us make our own luck.

Our formula includes industry-specific playbooks for capturing upside, mitigating downside, and unlocking step changes in performance within our portfolio companies. Fundamental to our approach is using our toolkits and experience to support operational improvement in our investments.

Josh Weisenbeck, a Partner, Head of Industrials on our Americas Private Equity team, and an Americas Private Equity Investment Committee member, sat down recently to talk about his experience over the past 16 years at KKR with value creation in industrial companies.

In your experience, what does it mean to create value in a company?

Josh Weisenbeck: I think of value creation as something that is within our control and repeatable. When you create value, you must change the company over the investment period to make it more profitable, help it grow more quickly, or position the company strategically to do one of those two things later. Anyone can lever a company financially or buy something in hopes that the economy or the market moves in the right direction, the company continues to benefit from market momentum, or that they’re in the right place at the right time by accident. Anyone can get lucky once or twice, but KKR has been investing for almost 50 years. We’ve been creating our own luck since 1976.

What is unique about value creation in the industrials sector, specifically?

JW: Industrials is one of the most cyclical of the seven sectors our Americas private equity team covers, and I think that makes value creation even more important.  In positive economic environments, when the wind is at our back and the economy is growing, value creation amplifies investment returns. In less supportive environments, value creation can protect our downside by increasing margins and amplifying growth relative to the market. Of course, because of the cyclical nature of the business, the diligence process is also critical to avoid the types of companies that may carry downside risks with the potential to overwhelm any value creation strategy we could come up with. The time-tested filter we put investments through is key to repeatable equity value creation.

What are some of the strategies that you’ve found to be most effective?

JW: Sometimes, you have to change the entire narrative of a company. One of our early deals back in 2011 was a carve-out of a company called Capsugel. It primarily made pill capsules, which was thought of as a low-growth, sleepy business. Most novel drugs, like biologics, are not in a capsule; they’re in a shot or some other delivery form.

But Capsugel also had a few small product lines with different drug delivery technologies, so we moved those into a separate unit and acquired several businesses with more novel technologies. Essentially, we reshaped the business from being almost totally dependent on capsules into a drug delivery company with a variety of solutions in faster-growing parts of the market. That really helped make it more valuable to future buyers.

It sounds like M&A was a critical part of that strategy. Can you talk more about how M&A can make a company more valuable?

JW: We’re really proud of our acquisition strategy. We don’t just slap together a lot of companies and then try to sell the new entity right away. We want to acquire businesses that bring new products, geographies, technologies, and innovations to the table and then integrate them with our existing company in ways that makes the company stronger, turns it into a better supplier, or makes it a better contributor to society.

A good example of this is a company we bought called Bettcher Industries, which sold semiautomated tools for pork and beef processing. In the bigger picture, we saw a need for increased food processing automation because of global labor constraints, safety considerations for factory workers in food processing plants, and a need to improve food yields within those plants. We first acquired through Bettcher a company that made robotic machinery and had full lines of automation for food processing. Then, we branched out to other types of food: an automation business for post-harvest fruit and vegetables and a company that makes ready-to-eat chicken. The combined business, Fortifi Food Processing Solutions, has 33 sites around the world and is truly a global leader in food processing automation.

We’ve talked a lot about big strategy changes. How much does the team get involved in operations?

JW: We’re there to support our talented management teams every step of the way. First off, we partner with our CEOs in assessing their organizational design and making sure we have the right players on the field to work with KKR on value-creating strategies. On the industrials team, we have a standard set of repeatable strategy toolkits that we seek to execute at all our companies.

How do you put these changes into practice?

JW: When we first look at a company in due diligence, we try to forecast and quantify the increase in profitability and growth we can achieve through the toolkits, based on our prior experience. Once we own the company, we collaborate with management teams on specific value creation strategies that are overseen by our KKR Capstone team, who are operational experts, as well as our investment team and the talented boards we assemble. Generally, we seek to increase the profitability of the businesses meaningfully. Importantly, we don’t outsource this work to management consultants—we consider it a core competency.

Let’s talk about people. I know that employee engagement is near and dear to both you and Pete Stavros, our Co-Head of Global Private Equity.

JW: Absolutely. KKR began implementing a new model of broad-based employee ownership with Capital Safety in the early 2010s. We think there are important ways that broad-based equity ownership can help contribute to economic equality in society, and we have found over the years that it can also change the culture, values, and engagement at a company. We always seek to leverage the engagement of the workforce to improve safety and raise a company’s valuation over our period of ownership through some of the value creating strategies we have discussed.

We developed a three-pillar strategy that includes making everyone in the company an owner; investing in the workforce, which for us in Industrials starts with safety; and investing in communities through donating time as employees and giving financial and other resources to non-profit organizations. We measure engagement every year through quantifiable, repeatable metrics to make sure our plans are working. 

What makes KKR’s approach to value creation stand out, in your experience?

JW: On the Industrials team, we often talk about “operational value creation.” We have industry advisors, executive advisors, and of course our Capstone team, but we are proud that our investment team is also very operationally oriented. Our investment team members have to participate in at least one Kaizen event (a multi-day problem-solving exercise) at a factory each year, walking the floor and trying to come up with ways to improve the operations with our teams on the ground. This is not something you do if you’re not 100% committed to creating real, lasting value in these businesses. We are here for real results.

Interview has been edited and condensed for clarity.