We caught up with Ranjith Rajendran, who recently joined TBM as Managing Director of the U.S. Private Equity Practice.  Rajendran credits TBM's ability to quickly identify hidden value as a key benefit of the firm's approach to operational due diligence.

Private equity firms navigated the challenges of 2020 relatively well. And they aren’t slowing down now. Even as the rollout of vaccines brings hope that life will eventually return to normal, the economic and business impacts of the Covid-19 pandemic are still unfolding. With many businesses having endured a highly atypical year, PE firms are needing to find new ways to scrutinize companies’ potential. Often there’s limited time to conduct operational due diligence and difficulty in determining when certain sectors will fully rebound.

Ranjith Rajendran lives this changing landscape every day. As the new Managing Director of TBM’s U.S. Private Equity Practice, he guides private equity firms through pre- and post-LOI operational due diligence. He also works with PE firms and their portfolio companies to identify, prioritize, and implement operational improvements that support their growth agenda and accelerate value creation. With more than 20 years of hands-on experience as an operations executive, Lean leader and process engineer, he has helped brands like Pella, Safran Cabin, and Zodiac Aerospace improve on-time delivery, increase profitability, and optimize inventory.

Most target companies have not reached their full potential to improve operations or enhance the top line. But as Ranjith notes, there’s nearly always opportunity if one knows where to look. We spoke with him about private equity’s COVID journey and why innovative and insightful due diligence has become more critical than ever to pre- and post-deal success.

Q: To start, you’ve spent a significant portion of your professional career in operations. How has that shaped your approach to due diligence?

Somebody once asked me why I enjoy taking on the challenges of a turnaround situation. When a firefighter goes toward a fire instead of away from it, it’s because they have both the experience and skills to put it out. They know exactly how to handle it, and they tend to do so with confidence. In addition, they’re also knowledgeable about preventive measures. It’s the same for me. As a lifelong operations guy, understanding what works and what doesn’t work makes the challenge easier.

The opportunities in operations and supply chain can be difficult to realize if you don’t have a hands-on background. That’s why PE firms seek expertise like ours to help them better understand a company’s true operational capabilities, identify the risks, and determine methods to mitigate or eliminate those risks.

Q: Why should investors be interested in on-site visit during due diligence in addition to remote gathering of information?

When we do a site visit, we’re looking for a correlation between what a team is saying and what we see. I call it identifying the baseline and validating the data provided to us. If a team tells us they are implementing certain improvement activities, we look for evidence on the floor and in their results. If there’s a gap, or if we see barriers that keep them from reaching their true potential, we’re in a much better position to understand the risks and the opportunities for improvement.

Q: What are some of those risks and opportunities when it comes to assessing a target company’s growth capabilities?

For any company to achieve growth, it’s critical that they are able to profitably meet customer expectations and that they have the capability to drive and sustain hard-won improvements. We are often asked, “How to we deliver our products on time?” and “How do we meet quality expectations?”. Any organization that is taking care of these two things is typically in a good position to drive organic growth. Teams that consistently deliver with faster lead times than their competition tend to gain market share.

There are times when I have seen companies meeting their customers’ expectations but struggling to maintain performance. There are specific processes that are critical for sustainment that could be missing, including as a well-documented management system. If the portfolio company has a reason or an activity that is helping them recover, we share that objectively with the PE firm. We also look at the maximum capacity the company has ever achieved to understand if they have the capabilities to meet a future demand.

Q: Are there pandemic-related themes you continue to see in your due diligence process?

Most companies have a demand profile that they have never experienced before—and it is evident across several industries. We are seeing pent-up demand, supply chain disruptions, and difficulty with hiring and retention. Companies that see these as opportunities for developing solutions handle these themes better than those that see the issues as short-term challenges.

Q: Is anything surfacing as most critical or vulnerable?

There is a lot of debate now about how much inventory is the right level of inventory. Some companies are doing more ordering with the hope they will continue to get increased demand. It’s the same as the toilet paper shortage response: Get only what you need, when you need it. At the same time, you should give visibility of your demand profile over the next 12 to 18 months to your suppliers and share it every month. This would allow your suppliers to act as a partner and adjust to market need. Just asking suppliers to deliver extra for the sake of it does not help the them or you.

Q: TBM is known for its Lean heritage and expertise. What makes Lean methodologies such a critical part of post-deal success?

We look at everything through a Lean lens — by everything, I mean people, process, and product. When you analyze it from this perspective, you can easily identify the gaps (waste and variation) versus what’s best in class for an industry.

One thing I see in companies with an experienced workforce is that they tend to rely on tribal knowledge. Or some companies may have value-added activities, but they lack a process for repeating them consistently. Documenting their current practice as standard is the starting point for improvement.

Lean practices create a simple way of documenting routines to eliminate wasteful practices and improve efficiency. For example, if you have new employees, having that standard documentation and know-how can help them transition into their roles faster and execute better. If there is a change that yields a better result, the documentation is updated, which will always allow the team to succeed and sustain.

Q: Once you get through due diligence, what do you see as most critical for the PE firm and the portfolio company in the first 100 days?

The number one opportunity is change readiness. When a new owner comes in, there’s an agreed- upon strategy that needs to be communicated effectively to all employees in terms of Key Performance Indicators. It’s imperative to convey the expectations of the leadership team immediately.

Then it’s critical to leverage a process like Lean to start making those improvements so the team can see and celebrate quick wins. It’s so important to focus the team on what’s expected and how to get there — that is, here’s what’s happening in week 1, here’s what we’re doing in 30 days, defining the critical KPIs for their teams, the actions that are going to be taken, and the results that will be achieved.

That’s where TBM comes in. We not only have the capability to understand the goals of the firm, but also what it would take for the portfolio company to achieve them. We become a force multiplier. We can also put a management system in place for tracking performance and sustaining the gains.

Q: After several years in operations, what motivated you to move into the private equity space?

My experience gave me an understanding of the impact of operations on profit and loss and the means and methods to achieve them in short period. PE firms expect change for improvement at a fast rate. So the combination of speed, time-based improvements, and process made this a unique opportunity for me.

Q: What’s the most rewarding part of the job?

A true relationship between a PE firm and a portfolio company is win-win. PE firms not only bring in capital, but also outside perspectives that can contribute to successful growth. The satisfaction is when I see a team understand the change, accept it, and start finding solutions. Once they see multiple results and begin to enjoy their success, it turns into a culture.

Ranjith Rajendran, recently joined TBM as Managing Director of the U.S. Private Equity Practice. He and Gary Hoover, Vice President, of the Global Private Equity Practice will attend the PEI Operating Partner Forum in New York on October 21-22, 2021 where TBM will moderate an operating partner panel discussion on operational due diligence.