Creating Value in Private Equity

Not so long ago there was talk of the demise of private equity as an industry. It transpired that such predictions couldn’t have been further off the mark as PE houses, notably from Asia and North America, continue to raise substantial funds. They’re targeting a full range of assets, from infrastructure and utilities through to life sciences and tech start-ups run by entrepreneurs with a desire to change the world.

For those attending Criticaleye’s recent Private Equity Retreat, there were plenty of positives to take away in terms of understanding the global landscape for investments, fundraisings and exit options.

Here are the six key points to surface over the course of the 24-hours:

1) Global PE is Here to Stay

Investors like private equity again. Bridget Walsh, UK & Ireland Head of Private Equity and Head of UK&I Greater China Business Services at professional services firm EY, said: “A few years ago there were questions about private equity as an industry but it is back and it’s here to stay. LPs see PE is performing and want to invest more, not less….

“There is around $3.8 trillion under management globally in private equity… [It’s] a globally connected industry and at present the competition is high for good quality assets.”

PE firms from China are expected to compete more aggressively with US and European firms when it comes to bidding for large companies and assets. Bridget added: “The active presence of big international investors means there are more exit opportunities for PE-backed management teams. Given that is the case, they should be thinking about how to appeal to these different kinds of buyers… All arrows are pointing at Europe at the moment in terms of where investment is going.”

On the flipside, Tim Farazmand, Managing Director of private equity firm LDC and former Chairman of the British Private Equity and Venture Capital Association (BVCA), acknowledged that increasingly there will be opportunities for US and European companies to invest in China, but warned that joint ventures and partnering would be vital for success. “You need that insight and local understanding,” he said.

2) High-Performing Teams Create Great Businesses

It was agreed there needs to be alignment among the top team and a clear strategy for growth which everybody can buy into and articulate.

Andrew Miller joined Guardian Media Group (GMG) as CEO in 2009 and has been pivotal in leading its digital transformation. “It’s important to be open, honest and completely transparent about change,” he said. “It was about following the consumer and creating value and that meant really thinking about where journalism was going to be consumed in the future.”

Prior to GMG, Andrew was Group Chief Financial Officer of the Apax-backed Trader Media Group. The car sales specialist rebranded as Auto Trader in 2014 and listed on the London Stock Exchange earlier this year – it’s now achieved a market cap of £2.5 billion.

He said: “At Auto Trader it was more of a command and control style of management, whereas at The Guardian, with over half of our staff being creatives and journalists, it’s not like that… It’s about influence and taking people with you. With hindsight, I would have invested more time in that from the beginning – more time explaining and getting people to be involved in change.”

Steve Parkin, CEO of 3i-backed Mayborn, a manufacturer and distributor of baby and child products, noted how the company shifted its model substantially to be more international.

“We needed more diversity, and this means you have to work harder on cultural values and getting integration,” he said. “Conflict should be recommended as long as it is healthy and for the common benefit of the business.”

To achieve this, Steve had to reshape the top team: “In order to create a high-performing team we had to concentrate on inspirational leadership and competency to execute the business plan. We needed to build a global leadership team and blend old and new talent.”

By doing this, the business could move faster. Luke Broadhurst, Head of Private Equity at Criticaleye, said: “Trust is key to a team that outperforms. It’s about having that belief in the people around you, while also being able to provide a critique of one another and being able to challenge.”

Lucy Dimes, Chief Operating Officer at Advent-backed Equiniti, a provider of administration and payments solutions, explained how the past year had seen a renewed emphasis on integrating different parts of the organisation.

“Three of the most important things are choosing the right people; providing clarity of purpose and direction; communicating frequently and varying that by level – to create understanding, cohesion and momentum for change,” she said.

“You can’t do everything at once as time and capital are always limited, so it’s important to prioritise and focus on the opportunities that can create the greatest value.”

Luke added: “It’s not all about knowing your five-year strategy, it’s about knowing what the grey areas are and what steps you are taking to maintain that all-important momentum. After all, you can’t predict the future.”

3) Get Clarity on Incentive Schemes

In conjunction with communicating the strategy in a way that inspires and motivates people, it’s essential to be clear about incentives and how equity may be shared in a PE-backed business.

Stuart Coventry, Partner at Jamieson Corporate Finance, urged CEOs to be involved in discussions with sponsors from the outset: “Buy-in from management teams when devising an incentive scheme is crucial – ask yourself: ‘What are your returns in relation to the return profile [of] the PE house over time? What is the target pot for delivering your plan and how should it be allocated across the team?

“Everyone needs to be on the same page but it’s also important to take into account the personal circumstances of managers. For example, a blanket 50 per cent approach to a rollover process is not always the right way.”

Graham Love, Chairman of life sciences measurement and testing company LGC, which is backed by Bridgepoint, observed that the chairman certainly has a role to play in the incentives debate: “You need to ensure that when new equity becomes available it is going to those who contribute to the business, rather than simply giving it to people who have been there a long time.”

4) Be Prepared to Move Fast 

With an effective leadership team in place and backing from a sponsor, a company should be able to move at pace. Ian Edmondson, Chairman and Managing Director of Dunlop Aircraft Tyres, commented: “It’s important to react when an opportunity arises. We expanded into Asia five years ago and now it is 20 per cent of our business. Last year we expanded into the US…

“High expenditure may not be great, however, if you wait and do nothing that all important profit-making chance will slip through your fingers.”

Simon Calver, Chairman of Index-backed Moo.com and former CEO of LoveFilm, said that leaders must be brave: “You need to build a culture where you understand that not everything you attempt will work. Rewarding the people who try to do something different will inspire change.”

5) All Three Exit Routes are Open

The perennial question for management and sponsors is whether to choose between a trade sale, secondary buyout or to go down the public markets route. Ben Slatter, Partner at PE firm Rutland Partners, said that “it is important to get the business in shape as soon as possible so it is in a constant state of readiness for an exit at any point in the cycle.”

Others agreed, noting that running a dual or triple-track process should maximise interest in the business, creating that vital competitive tension among bidders. Trade buyers are definitely back in the market and, given the level of funds at the disposal of PE firms, secondary and tertiary deals are also there for the right kind of business.

Tom Attenborough, Head of UK Large Caps – Primary Markets at the London Stock Exchange, commented that while the IPO market may have slowed down in the first quarter of 2015, there remained interest from PE.

“Market conditions and valuations have vastly improved, driving a significant pick-up in PE-backed IPOs. There is also much better engagement with investors about assets a lot earlier, often six to 12 months in advance of an IPO,” he said, going on to add that “we have moved a long way from the days when the relationship between PE sellers and institutional buyers had broken down”.

6) Management Calls the Shots

If the executive team has a strong grip on the business and the numbers are good the company should, in many ways, sell itself. That said, the executives need to be thinking about the exit, what it means for the future of the business and them personally.

“At the end of the day, it’s the management team who sell the business,” said Graham. “It’s not the investors or the non-executive directors. Indeed, a lot of the time they have more ability to influence the exit process than they probably realise.”

The chairman should also be making a valid input at this stage, working as an intermediary between the various stakeholders. “PE houses want the management team to drive the business and decide where it is going,” commented Simon. “[But] if they don’t agree with your vision, they will challenge it.”

Carl Harring, Managing Director for the UK at private equity and investment concern HIG Capital, said: “When it comes to change, the hard discussions don’t get any easier. It’s really important to have an independent chairman in a PE-backed business. You need someone impartial who can sit between the PE firm and the management team.”
***
It’s natural for there to be points of contention during the lifecycle of an investment. The reality is that, by and large, the strength of the management team’s opinion will be dependent on the health of the business. Provided they’re hitting the numbers and have a plan that all parties buy into, the current set of market conditions seem ripe for seizing opportunities.

As Steve from Mayborn put it: “We needed an aligned strategy that worked at an executive level and across a global leadership team. It needed to be understood by everybody… Clarity of strategy is everything.”

I hope to see you soon.

Matthew

https://twitter.com/criticaleyeUK

Advertisements

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s