Attribution analysis addresses the critical question of how value is created and can ultimately help identify GPs who provide sustainable value-add through “building better businesses.” This white paper discusses why the conventional framework for value attribution provides a very narrow view of how value is created, as it is limited by a lack of quantification of industry performance and acquisition inputs. The conventional framework does not measure Alpha, as defined as organic value creation on an outperformance basis, and is therefore of limited value in identifying GP’s that consistently provide operational and/or strategic value-add.
This white paper also highlights a more useful application of attribution analysis, including steps toward identifying Alpha, by understanding the limitations of the conventional framework and by considering and implementing certain enhancements to the framework. These enhancements include:
- Benchmarking of market/industry/sector performance
- Segregation of organic growth from that attributable to add-on acquisitions
- Understanding deleveraging vs. the change in net debt
- Understanding the context of changes in value drivers
- Utilizing value attribution in conjunction with other analytics and data
The conventional framework is an important but insufficient first step in value attribution, and it may very well lead the user astray. The conventional framework can be significantly improved by utilizing the concepts above, and thereby providing LPs with greater transparency, visibility and insight into value creation.
PJ Viscio and George Pushner, PhD. co-authored, in collaboration with the Institutional Limited Partners Association (ILPA), the above white paper, the inaugural installment of The ILPA White Paper Series.