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.  

Blair West work directly with PE firms as they look to supplement, strengthen and – yes – upgrade management teams post-investment. 

Following on from Part I’s focus on the likely pressure a deal process will place on your leadership team’s capacity and the importance of maintaining performance levels, this second instalment seeks to give some insights into what PE will expect from a leadership team.

It is important to note that those expectations are not universal nor rigid. PE can be unfairly maligned as being inflexible or even ruthless; however, over five years of working with numerous PE investors, we have not found that to be the case. We have seen PE back and build positive relationships with countless CEOs and leadership teams, with the full knowledge of all parties that the management teams are not perfect. Neither are the investors, for that matter. We want this blog to provide insight into how PE think about management teams rather than perpetuating a lazy myth that they are androids with unrealistic expectations of management.

 

Great Expectations 

 

It is worth remembering that most PE firms target a 2-3x minimum return on their investment in a three-to-five-year period. Taken in the context of the growth rate in the wider SME marketplace, such a scale of value creation in that time frame is nothing short of exceptional. PE is not, therefore, seeking to back average or even good management teams; it is seeking to partner with exceptional ones. 

Ambitious growth and exit aspirations mean that everything needs to happen in a faster timeframe than most SME businesses are accustomed to. Decisions must be analysed and made quickly; actions must be acted upon, strategies formulated and adjusted, and projects must be delivered all in a timely manner and of high quality. 

As a trusted recruitment partner working with PE-backed firms, we are often privy to the unfiltered expectations of both sides of a deal. A successful PE Chairman once summed up this attitude with this (paraphrased) summary of expectations: 

‘How intelligent is the management team? I only work with people operating above a certain level of intellect – that is where you have a good-quality strategic debate and decision-making. Wading through board packs explaining concepts to people who are lagging behind does nothing for me.’

This is one fairly blunt, personal position and not one that many people will find particularly endearing. It does, however, emphasise the point. Good management teams will typically deliver good results, whilst exceptional ones will deliver the rates of return PE is seeking. The aforementioned Chairman did get the role – for those eager to gain closure on that anecdote.

 

 

Defining “Exceptional”

 

Accepting that PE firms have high standards, what constitutes exceptional? The truth is that different PE houses and the individuals within them will all have slightly different lenses on what makes an exceptional management team. There is no one-size-fits-all checklist. There is plenty of scope for different leadership styles and approaches. All of the PE houses we deal with actively welcome a diverse range of perspectives around a board table, provided they deliver results. Common denominators in any PE list will likely be ambition, a bias to action, a deep understanding of their market, strategic clarity, pragmatism, cultural synchronicity and receptiveness to new ideas. 

A useful article providing a direct private equity perspective can be found here. John Garner, Managing Partner at LDC – one of the UK’s most active PE investors, outlines what business leaders need to do to ensure they are well-placed to attract the right growth partner. 

Garner clearly values pragmatism in the CEOs he has invested in. Having a realistic sense of what is achievable and where support might be needed and allowing for some bumps in the road will be helpful in attracting PE investment and also ensuring a good relationship from the start. 

 

 

Board Alignment

 

PE investors want to know that the leadership teams they are backing are aligned. That does not mean they speak with one voice and agree on everything, far from it. An overbearing CEO and a team of “yes people” are likely to be flagged up as a risk. 

However, they do want to know that the leadership team, particularly those with equity, believes in the growth plan and is supportive of the partnership with private equity. We have witnessed several occasions where one founder is dragged into a PE process by their partner, not sharing the same growth ambition, and it rarely ends well.  

Frank, honest and early discussions about what a PE cycle will entail, the demands and the carrot at the end are enormously important. A failure to do so can result in recriminations down the line, and if one party is less enthused by a deal or unclear about their motivations, it will show during a trying deal process. 

A scenario that occurs surprisingly frequently, where board alignment can be missing, is when an exiting owner thrusts an MBO upon a management team. Suppose the team leading the business forward has insufficient exposure to board-level decisions, the details of the deal and the deal process itself. In that case, it is possible, and some would say probable, that they might not have fully grasped what is going to be entailed nor feel full ownership of the growth plan. Again, that rarely ends well. 

 

 

Busting Common Misconceptions

 

The reason most commonly provided to us at Blair West for delayed hiring ahead of a deal is the belief that PE will want to appoint “their person”.  

That is, by and large, a myth that is understandably perpetuated by people who have unfortunately been moved out of their roles post-investment.  

We spend a lot of time talking to PE investors ahead of a deal and have never heard any of them say, “We really like this business, but we’re disappointed that they have a very good CFO because we were looking forward to hiring one.” 

Running a senior hiring process is one more thing on a busy 100-day plan that the PE investor would far rather avoid if they could. The more complete the management team, the better, as far as most PE firms are concerned. 

The exception to that rule is the Chair. This is an independent position, which, recruited correctly, will act as a conduit between the management team and the investor. Inherited Chairs, who are already in post, can cause a PE firm consternation based on the perceived risk that they may be too close to the management team and their independence may be compromised, known colloquially as the Chair having “gone native”. 

We have seen that risk overlooked on many occasions where the Chair is demonstrably adding value, and therefore, would not let it stop anyone from appointing a Chair; they can be crucial in helping to position your business to attract investment. Just go into that arrangement with your eyes open, knowing that an incoming investor may want a new Chair regardless of performance. If they do, management and PE should select the new Chair as part of a joined-up process. 

 

Embracing PE Experience

 

Whilst PE does not, contrary to popular misconception, have the desire to flood a board with their own people, they will want to know that any senior hires you are making during the deal process are of a calibre that they are happy with. 

Where possible and appropriate, you should involve them in the recruitment process, whether that be a review of the CVs and presentations from afar or attending interviews. Treat it as a trial run for how closely you will be working post-investment and that you are on the same page. 

Remember, they have sat on the Board of many successful businesses and know what exceptional looks like compared to good. Their experience can only benefit you whether or not you choose to go with any steer they may offer. 

 

Seeking Advice?

 

If you’re looking to make key additions to your team ahead of a potential fundraising event, have yet to enter the process, and haven’t worked with PE investors before, how do you know whether the new additions will be above the PE bar? 

We can help. We specialise in supporting scale-up businesses, and more than 75% of our income is from PE investors or PE-backed businesses. We understand the challenges and rewards of operating in a PE-backed environment and the types of individuals that will thrive. 

As mentioned at the beginning of the article, this was a follow-on blog from Part I of the Building a PE-ready Leadership Team mini-series. In Part I, we focussed on whether your team was or is ‘deal ready’, exploring potential pitfalls and advice. Continuing the series, Part III will provide practical steps that you can take to maximise PE investment appetite. We hope you’ll return to read it shortly. 

If you have specific questions for our team, 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.