Why Post-investment monitoring is where private equity returns are made

As South Africa's private equity market matures, one question deserves more attention than it typically gets: does what happens after a deal closes matter as much as the deal itself? Simply put, yes, post-investment monitoring is no longer a compliance function sitting behind the transaction; it is where returns are made.

For much of the past decade, this was easy to overlook. Research on global buyout deals entered in 2010 or later and exited by 2021 found that roughly two-thirds of total returns could be attributed to market multiple expansion and leverage, not operational improvement. Rising markets did much of the work. Active ownership, in many cases, was a secondary contributor.

That environment has shifted. With multiples compressed and leverage more expensive, the return composition investors have relied on is harder to replicate. Research across more than 100 post-2020 vintage funds found that managers who focus on creating value through asset operations achieve an internal rate of return two to three percentage points higher, on average, than peers who do not. In a market where every basis point of return is contested, that is not a marginal difference. It is the difference between a good fund and an average one.

Where does that outperformance come from? Governance is a large part of the answer. Research covering 70 successful private equity deals found that the primary source of value creation was the outperformance of the company itself, driven not by financial engineering but by changes in how the board worked. 

Research from Egon Zehnder describes four characteristics that distinguish private equity boards from listed company boards: 

• a shared, aligned shareholder base rather than competing interests
• decisiveness, with directors probing management in a level of detail that traditional non-executives would often consider a step too far
• a results orientation, setting expectations well ahead of the company's historical performance rather than anchored to it 
• a distinctive depth of engagement, with directors visiting operations, speaking to staff, and developing real familiarity with the business rather than reviewing it from a distance

In practice, this engagement takes a consistent shape across well-run funds: regular touchpoints with the CEO and CFO on the specific initiatives driving value, and disciplined tracking of a small set of operational key performance indicators rather than a backward-looking review of financial statements alone. 

South Africa's own market is moving in the same direction. The South African Venture Capital Association's most recent industry survey notes that the ability to collect, analyse and report meaningful financial and non-financial metrics is now table stakes for attracting institutional capital, and that most local managers report ESG strategies actively enhancing exit proceeds, not simply reducing risk. Monitoring, in other words, has become a source of return, not just a safeguard against downside.

There is a trade-off worth naming here. Sourcing and structuring a deal is the visible, celebrated part of private equity. Monitoring is not. It is unglamorous, ongoing and rarely produces headlines. But the evidence increasingly suggests that this is precisely where disciplined managers separate themselves from the rest of the market, particularly in conditions where multiple expansion can no longer be relied on to do the work.

Ultimately, deal-making creates the opportunity for a return. What is done with that opportunity afterwards, quarter after quarter, board meeting after board meeting, determines whether the opportunity is realized.