Operational Value Creation in Private Equity: A Case Study Approach 

The days of buyouts have shifted into an industry that is reliant on operational expertise as a form of creating and sustaining value. The Operational Value Creation in Private Equity: A Case Study Approach  first appeared on The Blast

The past several decades in the private equity landscape have witnessed subtle but monumental forms of  change. The days of leveraged buyouts and balance sheet optimization have shifted to something  different—an industry that is increasingly reliant on operational expertise as a form of creating and sustaining value.  

The adoption of lean manufacturing, in particular, has helped usher in firms that are specifically focused  on building value rather than buying value. Analyzing the decades-long career of John Stewart— Founding & Managing Partner at MiddleGround Capital and a staple in the sphere of private equity since  2007—can help those newer to lean manufacturing understand the shift. 

Private Equity Firms Historically and Lean Manufacturing 

Historically, creating value in private equity has depended on leverage. Firms typically raise capital and purchase organizations using the debt they’ve acquired. They then aim to improve the company they’ve  purchased in myriad ways before selling for a profit several years down the road. What mattered first and foremost was financial structuring. 

But higher interest rates and a vast increase in the competition for deals have led to the downfall of this model. And it’s forced many private equity firms to shift their operations in terms of generating capital.  That’s where operational value creation via lean manufacturing techniques has thrived. 

An evolution of the Toyota Production System, lean manufacturing is an approach that focuses on  minimizing waste while maximizing production and empowering frontline workers. Lean emphasizes the  Japanese philosophy of Kaizen, a concept that focuses on continuous improvement. Lean methods are proving particularly useful in industrial sectors that haven’t been fully optimized yet, which are the exact companies that many private equity firms look to purchase and reshape.  

John Stewart’s Trajectory and the Founding of MiddleGround 

Since delving into the world of private equity in 2007, John Stewart’s career has been one that  exemplifies this shift toward lean manufacturing. While most private equity founders come from money or a background in finance, Stewart started his career as an hourly worker on Toyota’s factory floor.  

He ascended through the ranks and would eventually lead Toyota’s largest division in Europe before  making the transition into the world of finance and investing. That background was specifically what led  him to believe in lean manufacturing principles. To Stewart, the backbone of value creation lies in supply chains, production systems, and buy-in from a company’s workforce. He shaped MiddleGround Capital around that exact philosophy. 

His company’s approach differs from many traditional equity firms in that it relies on hands-on operational improvement. Much of the team at MiddleGround Capital is made up of experts from industrial backgrounds—workers who have developed expertise in shop-floor efficiency and inventory management. And they use their expertise at every level of the organization. 

Lean Manufacturing in MiddleGround and Other Firms’ Approach  

In terms of operational value creation, lean manufacturing principles are critical to the MiddleGround  Capital’s approach. John Stewart’s aim has specifically been to introduce advanced forms of automation 

and standardize processes. With these additions, Stewart and his team have worked tirelessly to unearth  productivity levels in under-optimized companies.  

For instance, since 2023, MiddleGround has utilized an in-house automation team that specifically  identifies automation opportunities and supports safety improvements for the organizations they work  alongside. MiddleGround’s automation roadmaps have offered a holistic path forward for combining and replicating opportunities across various sectors. The goal is to have ownership teams at companies build  their automation plans from the ground up.  

MiddleGround’s focus on lean manufacturing and automation hasn’t been all about cost-cutting, either.  Instead, the company has emphasized that the implementation of lean principles can lead to increased  work outputs and improved wages for frontline workers. This approach runs in contrast to traditional  private equity firms, which often extract value at all costs.  

It’s not just John Stewart who has adopted this method, either. Private equity firms across the United  States and globally have implemented lean manufacturing principles to varying degrees of success. Just look at the philosophies and success of Core Industrial Partners and American Industrial Partners. Across  the board, lean is altering the way companies view value. There are firms that still place a high priority on  deal-making prowess—and there are firms that want to stimulate value through ethical execution and high  levels of expertise.  

How the Shift Impacts the Present and Future of Private Equity 

So, how does this shift impact both the present and future of private equity operational value creation?  Firms that prioritize operational value tend to adopt longer-term perspectives and take more proactive measures with companies that require overhauling. They’re also prepared for economic fluctuations, as  their ROI is less dependent on beneficial financing conditions. This approach can especially be effective  in the industrial manufacturing sector, where issues tend to be structural. 

It must be noted that the lean manufacturing model is not without its challenges. It’s difficult to scale. It’s resource-intensive. And, more than anything, adopting a complete operational overhaul is incredibly complex. It requires an open mind, specific industrial know-how, and long-term investing acumen.  

Still, the rise of lean manufacturing principles in the private equity sector comes as a welcome and  encouraging shift. Firms like Alpine, Core Industrial Partners, American Industrial Partners, and John  Stewart’s MiddleGround Capital have seen exceptional results over the years and helped usher the  principles into the mainstream. And as financial engineering continues to develop and broaden its views,  the ability to improve how organizations operate from a lean perspective might lead to incredible value  creation in the future of private equity.

The Operational Value Creation in Private Equity: A Case Study Approach  first appeared on The Blast