Over the past decade, the number of PE (private equity) and VC (venture capital) funds in the UK has proliferated and deal volumes have soared. Whatever the motivation for a deal – be it full or partial exit, de-risking, or growth acceleration – high-growth ambitious businesses increasingly turn to PE as their preferred investment partner.

There are several factors that have made private equity increasingly attractive to a business or business owner.  Primary amongst those is that PE investors are serial, hands on investors in high growth SMEs. Or phrased differently they are high growth experts. In the simplest terms, they partner with high growth businesses, help them to accelerate growth and position them optimally for an eventual exit that will create value for all parties. They have witnessed the challenges and solutions of scaling a business and understand what is necessary to unlock even faster growth. That extends to an understanding of what will be required of the leadership team.

Beauhurst, the private business database, estimated in 2022 that there were 547 active VC and PE funds in the UK. The right management team is an enabler to attract investment, maximise value, and ensure a smooth investment cycle. Conversely, a flawed or incomplete management team can have the opposite effect. Many businesses seeking investment fail to get a deal over the line when their leadership team is held up to the light.

 

Blair West: We’ve observed what works

 

As an executive search and recruitment partner, Blair West works with numerous leadership teams in North-East and national businesses as they prepare for a private equity investment round by assembling a “backable” team. More commonly still, we work directly with PE firms as they look to supplement, strengthen and – yes – upgrade management teams post-investment.

This three-part blog is an attempt to bring together some of the advice and observations we have gathered from working with businesses that have been successful and unsuccessful in raising funds and from working with investors who have identified leadership gaps post-investment.

Navigating an investment process and then moving a business through a period of accelerated strategic, financial and operational growth is a hugely complex project. Add to this new working relationships, shifting ownership and board dynamics, and you have the potential for conflict, damaged egos and recriminations.

Hopefully, the following observations might help in developing an oven-ready leadership team and avoiding some of the potential pitfalls, making the transition as smooth as possible.

 

Does your team have the leadership capacity?

 

Perhaps the most basic and fundamental consideration, if you’re planning to raise PE investment, is whether you have the leadership capacity to manage the deal process and the businesses simultaneously.

If you have not been through an M&A process before, the demands on your time and on your energy levels, are probably far greater than you anticipate. PE deal processes typically last for six – twelve months and, in the majority of processes, business performance suffers in the months immediately before investment as the months of deal distraction and leadership being thinly spread take their toll.

These final months of a deal coincide with finalisation of diligence reports, negotiation of normalised earnings and working capital and profit adjustments. It is at that point that the PE investment committee signs off the final deal value and structure. In other words, it is the most crucial moment and, therefore, the point at which you need investor confidence to be at its highest.

 

Managing risk and leadership during the deal process

 

Falling behind planned numbers before the deal is even done, can undermine confidence with various consequences, none of them good. The possibilities include that the deal falls over but, more commonly, that price and structure are renegotiated or that the deal “moves right” awaiting stronger performance. Once that momentum has slipped, it can be difficult to recover.

The best, or only way, to mitigate the risk of underperformance is to ensure that you have the leadership and management capacity to run a successful deal process and continue on your growth trajectory. It’s worth asking what the key day-to-day functions that the CEO performs are and how they will be affected.

• Are they a client-facing CEO, and if so, what is the risk to key accounts if the CEO is less present than usual?
• Do they perform a crucial role in business development and negotiation, and what will be the impact on new sales if they are less present?
• Is the CEO a key driver of operational performance and efficiency?

The classic founder-owner entrepreneur, by dent of being 100% submersed in the business, is often responsible for catching dropped balls and spotting missteps before they happen. The consequences, therefore, if the CEO is distracted for a period can be significant.

The CFO is likely to be the point person for various deal streams and to be besieged by due diligence queries. Does the finance team have sufficient senior resource to maintain the day-to-day reporting and business partnering that has underpinned growth?

 

Maintaining team morale and high performance

 

Finally, for obvious reasons, an investment process, or the potential for one, is often not communicated to the wider business until it is done. If various members of the leadership team spend their days huddled in confidential meetings with a seemingly endless parade of advisors in navy suits and brown brogues, it can be disconcerting to the wider team. They will likely infer that something is up and fill in the blanks.

Who is going to be responsible for monitoring the moral gauge across the business, fielding questions and ensuring that the whole operation remains upbeat and motivated during an intense period? Just as importantly, be responsible for ensuring deal pressure does not filter down in an unhealthy fashion.

If you’re considering a PE investment, building capacity into the senior team could be crucial to maintaining performance and protecting valuation. It could well be the best investment you have ever made.

Taking the risk to invest in your team ahead of a deal is not easy, especially if you have never been through the process before. There is, however, a community of advisors, accustomed to deal dynamics that can help. Blair West is proud to be part of that community and would be delighted to talk through your organisational plan and where it might feel the strain as you head into a deal process.

 

Building a PE-ready leadership team continued: Part II and III

 

If elements of this blog have proved useful or thought-provoking, we hope you’ll come back for the next two instalments.

Part II provides insight into what PE expect from a management team, drawn from five years of experience supporting investors to negotiate positive recruitment solutions in the management teams they back.

Part III offers our perspective on practical steps you can take to strengthen your team, meeting PE expectations and securing the right private equity partner.

If you have specific questions for our team or can’t wait for Part II and III feel free to get in touch. Blair West operate out of Newcastle and London. We can be contacted at [email protected], and we’d be more than happy to put you in touch with our relevant sector experts.