Are you ready to be a Private Equity Chairman?

The future success of your non-executive career is tied to the outcome of the first companies you chair. You’ll have to earn your reputation, regardless of how successful you may have been as a CEO. Success will depend upon the relationship you’ve formed with the CEO, the executive team and the financial stakeholders. Can you influence a headstrong CEO or a divided Board with an advisory style?

In becoming a chairman, you are essentially moving from the role of running the business to an advisory role. Are you really willing to tread that fine line between NED advisory and actually ‘doing’? It’s a balancing act and you will need to be psychologically prepared. Here, Criticaleye provides six considerations before taking on your first role as a chairman of a private equity-backed business.

1. Are you honestly ready to become a chairman?
2. How well do you know the company?
3. Do you know enough about the marketplace to be able to contribute?
4. Can you understand the objectives of management and are you prepared to educate them?
5. Do you understand the objectives of the sponsor/PE house and where you are in that cycle?
6. How much time have you invested in your pipeline of future prospects?

Think about the skills you currently possess. Can you influence, or do you need more preparation? Will you be able to steer a headstrong CEO, for example? What would be the areas where you need more work? Ultimately, imagine chairing yourself – could you do it?

John Lovering, Chairman, Echelon Partners, says: “A private equity chairman needs to be a strategy director and personal councillor to the CEO. You’re not a steward and, although you have a responsibility towards shareholders’ interests, you’re an adjunct to the chief executive. As such, it requires different skills and it’s a harder role than in a public company – it will benefit from practice. You must gain the trust and support of the CEO and other key stakeholders quickly, in what is a very brief period. Naturally, it wouldn’t surprise me if you were better on the second chairmanship, if nothing else because you’ve gained experience and you will know more about what is required.

“Essentially, the chairman’s role is all about personalities. And you’ll be as good a chairman as you’re allowed by the relationship you’ve formed, and the relationship you are allowed, with the CEO, the executive team and the financial stakeholders. You must be able to describe to them in under five minutes that you know something about the business and that you can add value. You learn how to structure that conversation once you’ve done it a few times.”

Vanda Murray, Former Chairman, Eazyfone Group Ltd and Non-executive Director, Carillion plc, says: “Be visible. Be generous with your time, your passion and your commitment. Understand what needs to be done, oversee the plan to achieve it and make sure the right people are in place with the skills and determination to see it through.  A great private equity chairman knows when to go forward and make interventions and when to step back. He or she sets the tone for the organisation and understands its needs, making sure that the right things are happening – those things that will drive sustainable growth and profitability.”

Understand the company and the industry

You should not only understand thoroughly the company you are preparing to chair, but be able to scrutinise the balance sheet, appreciate the relationship with the PE house and understand the intricacies of the banking relationship – how is it funded? If you are a CEO going in to your first chairmanship, consider too that it will be harder to chair businesses that may be smaller than those you have already run. There are also stark differences between what’s required of the chair in a PE-backed board and that of a listed board.

Mike McTighe, Chairman of Pace and JJB Sports plc, says: “The board team of a PE-backed business differs from its plc counterpart in that not everyone has gone through that corporate education. Within PE I’ve had to reinvent my thought process, and how I look at individuals and structures, because not everyone has all the boxes ticked as they mostly do in a listed structure. You can’t rely on anything and you can’t take anything for granted. The key is to have an inquiring mind, a set of context-based experiences from which to draw and to dig in, to really get down to the ‘bedrock’. That’s the only place to get to, and from where I feel comfortable making decisions.”

An acute understanding of the industry and key players that the business operates in will help speed the path to building trust with the management team, CEO and PE House. It will also improve your ability to influence decision making.

David Soskin, Chairman, Mysupermarket.co.uk and co-founder of Howzat Media LLP, says: “Can a PE chairman get by without sector specialism? Of course, generalist experience is vital to bringing rounded expertise to bear on the CEO’s decision making. But increasingly in the digital media industry, a chairman must also understand the nuts and bolts of the business. This requires a range of skills outside the parameters of the old economy, such as understanding SEO [search engine optimisation], social network marketing and smartphone developments. The pace of change is staggering so, if you are coming in from outside the digital space, you may find it hard to keep up. In this sense, while it’s not necessarily a pre-requisite, a PE chairman will have a tremendous advantage of succeeding in his or her role if he or she has come from an operating background in the digital sphere.”

Know the objectives of the management and PE House

The better the management team is, and the more experience and skills it possesses, the easier it is to be chairman. But you must also be prepared to understand their different objectives and be able to influence them where necessary.

Jane Tozer, NED of Elexon Ltd and former NED of John Lewis Partnership, says: “At some point as chairman you will probably need to act as a bridge between the PE backers and the management team, explaining each side’s point of view in order to decide on the best way forward. This is especially likely, and especially important, at times of fund-raising or exit. Before these crucial junctures everyone is pulling together for the company, but when a sale or dilution is in prospect it is everyone for themselves, and motives diverge. Some of the management team may feel that the PE backers are duty bound to put in more funding, but they are not. The PE backers may feel the management are duty bound to honour their wishes over a sale, but the management has a powerful position if their continued involvement is a key factor in setting the price. In my experience, the only way to resolve these differences is for the chairman to take time to understand all viewpoints, and work ceaselessly to bring everyone to the most effective solution overall. It has to be win-win, not win-lose.”

John Cole, Chairman of Facilitas Group and Motorclean Group, and Criticaleye Associate, adds: “Early in the process I try to make sure that I understand the real aspirations of each member of the management team; push them in to the open and then try to find alignment where it does not exist. There is always a potential for conflict between the management and the PE investors at the point of entry and exit. For the chairman, it is the exit process that is critical – I’m better at managing this critical period now than I was on my first PE chairmanship 10 years ago. As ever, experience helps and you soon realise that you must have established a reputation for independence if you are going to influence behaviour and get the best result for all involved.”

You must also understand the objectives of the PE house and where you are in that cycle. You might not be the first chairman appointed to the board or, if the fund is fixed-term, you could be walking into the wrong end of the funding cycle.

“Do you understand the sponsors’ objectives, over and above money multiple and IRR [internal rate of return]?” asks Steve Richards, Chairman of Gettingpersonal.co.uk and The Third Space. “Where are you in the life of the fund? If you’re at the end, it might create a different attitude to follow-on investment, for example. Don’t assume that all PE houses are the same.”

It’s also essential that the PE house has established their need for a chairman, has explained the role to the management and that the requirement is willingly accepted by management.

“Remember, the PE House will mostly have backed the management team as a core component of the investment,” says Steve. “In the event of a conflict, unless the management is underperforming, the House may not be supportive and it could be a very uncomfortable situation for the chairman.”

Invest in your pipeline of potential roles

There’s an expectation that the PE chairman will leave on exit. This means you have to make time to find your next roles, while doing your current one.

Steve continues: “If you’re busy being a chairman, but not investing in your pipeline, you risk long gaps between deals. Extending your pipeline will require some aggressive networking, rubbing shoulders with contacts through services afforded by the likes of Criticaleye.

“It takes several years to establish your portfolio, so you need to keep developing many strings to your bow. After all, it’s easy to get pigeon-holed in a certain sector. Retail investors will tend to choose a chairman with a retail background, for example, so PE can be quite self selecting. At some point you must ask yourself, do I sit in the sidelines or get involved? This could be crucial to extending your footprint outside private equity.”

If you’re serious about your portfolio career in a non-executive capacity, you will need to attend a constant stream of networking events, conferences and meetings, often swimming with unlikely fish in many different circles to understand what’s coming up next. In the end, many successful chairmen find themselves as busy as when they were running the company.

Please get in touch if you have any comments about the issues raised here.

I hope to see you soon

Matthew

www.twitter.com/criticaleyeuk

 

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