Succession Planning in Private Equity

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While the focus in private equity is on building immediate value for exit, leaders must consider the company’s development after it’s been sold. Investors will want a growth story and succession is integral to that. A solid talent management plan proves the business has the depth and breadth of skills to support it for the long term.

recent poll by Criticaleye found that while ninety per cent of respondents believed that succession planning built a company’s valuation on exit, none were satisfied with their existing framework for succession.

“It can be uncomfortable to have conversations regarding your successor at the best of times, not least in private equity when other business challenges can seem more immediate. Yet succession is a vital part of building value in the business,” says Matthew Blagg, CEO of Criticaleye.

We asked a range of business leaders within private equity to share their thoughts and experiences on succession planning. Here’s what they had to say:

Understand What Makes a Good Succession Plan in PE

Paul Brennan is Chairman of private equity backed cloud software provider, OnApp.

A succession plan is not only good for the business but for its potential buyer – it’s the insurance that underpins the value of the existing team. If an acquirer comes into a business without a succession plan, it’s really only buying the IP.

Some private equity-backed businesses neglect succession because they just don’t see the importance when they are looking to get out in three or four years. Other PE houses focus on it as a way of replacing the CEO, which isn’t succession planning, it’s replacement planning – there is a fine line at times. A good succession plan is one that the person who will leave buys into.

If you have a strong number two in place because they are a co-founder, that is not succession planning. Good planning brings the whole company upstream.

If it’s handled in a way that’s best for the business then succession shouldn’t be contentious. While the decisions should be made by the CEO and board, an experienced HR Director − which you may only get in a larger business − is critical in understanding the nuances and processes.

For example, people may question what will happen to them when they leave – will they lose their stock or options? Having a HRD who can explain remuneration avoids having conversations about packages on the fly, which is not what you want to do.

Decide Whether Succession is Right for Your Business 

Graham Maundrell is HR Director at The Vita Group, which is backed by private equity firm, TPG.

While I was an advocate of succession in my previous roles as HRD at De La Rue and Diageo, I think succession planning can be less relevant in PE, depending on the anticipated holding period.

I started off with a classic succession planning model at Vita but it wasn’t appropriate for us as it didn’t add anything. One of the things with PE is that if it’s not adding value, you shouldn’t waste your time. What was important was developing capabilities, and the way we did that was by getting the right calibre of people at the top of the business.

We’ve retained a lot of our managers so there hasn’t been a lot of churn but, where managers have left, we’ve been able to do a lot of internal promotion [because of] the development we’ve done [with] our people.

Potential buyers always want to go out to sites and hear managers talk about the business. If they get the sense that management knows what they’re talking about, I think that gives buyers much more confidence than if they’re given a colourful presentation on succession. After all, numbers are audited but who audits succession planning? No one really.

Use Succession to Build Value for the Exit

Debbie Hewitt is Chairman at Moss Bros Group and the private equity owned Evander Group.

When you come to exit a PE-backed business, the value of being able to show you have a very credible team but also that there is some succession within that team – is significant. If you have no demonstrable succession plan for critical roles, many potential buyers are likely to see that as a risk to the long-term sustainability of performance across the business. Having succession options is a critical part of building value.

What I’ve often found is that succession planning becomes part of the exit plan but if you wait until six months before the exit, you won’t have a plan. Assess the team early on in your ownership of the business, be clear about the critical roles, understand how you might build the cadre of talent and then implement that.

It’s really important to understand the vital roles in the exit story, and the strength and depth of your team in those roles. For example, is the digital expertise concentrated in just one person, or across a team?

I don’t see succession in private equity businesses as any different from succession in other ownership structures. Arguably, the value from good succession planning in private equity-owned businesses can be more tangible.

Prepare for Your Departure 

Stuart Coventry is Partner at Jamieson, an advisory firm that supports PE firms in succession.

In private equity you have a combination of new owners, liquidity and management time horizons to deal with. Those three things together mean you have to manage succession more vocally than if you had a business that was not changing hands.

If you think about a typical four-year PE hold, you’d need to have succession in place about mid-way through, which is when most people only just start to think about it.

Leaders must prepare for their own departure and that means succession planning.  We sometimes get asked “Do I always have to roll?” I tell them that if they haven’t prepared anyone to replace them they’ll be too important to the deal to leave, which is why they end up rolling again.

Succession is not a dirty word, actually it’s part of ordinary business process and if you do it in an orderly way there is no issue with it. Investors will want that conversation to be had. While it can be a difficult conversation for management to raise, it’s healthy on both sides.

Don’t Stop at the C-Suite

Shaun Middleton is Managing Partner at Dunedin, a UK mid-market PE firm.

Many of the businesses we buy have been run on a shoestring so don’t have a broad enough base for succession. In those cases owners don’t invest in quality people because they are focused on the short term. Investment into building the right team, and one that can progress, will have an immediate hit on your bottom line but pays off in the longer term when you’re growing.

We continually look at succession and that’s not just regarding the leader, it’s about the entire business. If you look at it in that way, CEO succession happens naturally.

The biggest issues we face are when someone leaves a business and you don’t have the tiers below to step up. Having someone internally is far easier than recruiting from outside.

When it comes to exiting, if you have a strong management structure with good people below, it makes the sale easier. If you’re selling a business that relies on one or two leaders, people aren’t going to pay as much for it.

The better the management team, the more willing they will be to put succession plans in place. Some don’t want the threat they perceive a good succession plan may pose. There are myriad reasons why people might be nervous about it, but you need to deal with the human element and persuade people about the value of succession.

Do you have a view on succession in private equity that you would like to share? If so, please email

Read more on succession for the CEO and wider company.

Plus, join the discussion during our Global Conference Call on Succession Planning for the C-Suite

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An Overview of PE Activity

Ian Jamieson, Managing Partner of Jamieson Corporate Finance, gives his overview of the private equity landscape.

Speaking at Criticaleye’s Private Equity Retreat last week  Ian Jamieson, Managing Partner at  Jamieson Corporate Finance, reiterated the wealth of interest from private equity investors globally.

It’s very competitive out there. The market is frothy; there are a number of deals going on,” Ian told the business leaders, who gathered from a mix of corporate and PE companies to hear the discussion. 

“Capital is coming from everywhere – sovereign wealth funds, Chinese buyers and North American pension funds.”

In particular, Ian noted a pickup of activity from investors in the Far and Middle East. “The private equity funds raised in China last year equals the whole of PE funds raised in Europe,” he said. “These guys will be generalists, hitting anything with a good running yield and strong brand.”

But Ian called on business leaders to consider whether they are ready to lead a business in Asia. “If you exit in Shanghai or Hong Kong, will you be [willing to be] the CEO of a business in the Far East? It’s a global world and people will exit you if they can get the right price,” he warned.

“The other ones to watch out for are the possible Iranian deals. There will be a huge amount of money invested around the world, particularly in the UK and New York – around $50 billion petrodollars in total.”

Catch up on the highlights from the Private Equity Retreat in this week’s Community Update

How to Exit as a PE CEO

The key to planning a successful exit is to focus on the potential buyer, says Adam Hodges, former CEO of gaming company Playnation. He advises: “Work backwards. Ask who’s going to buy the business. What do they want it to look like? What would make it interesting to them?”

Adam should know. After conducting a private equity-backed management buy-out in 2013, he recently sold the business − which operates 20,000 amusement and entertainment machines over 1,700  UK sites − to Austrian gaming company Novomatic Group.

But like many PE-backed CEOs, during the two years before the sale, Adam had to rethink his exit strategy, draw up new plans and adapt as the circumstances for potential buyers changed.

It’s important to do your research. Assess whether a trade sale, secondary buyout or even an IPO are right for your business, but don’t be afraid to adapt if that alters.

Study the market 

Although the global IPO market cooled in 2015, exits via trade sales and secondaries remain strong. According to research by Big Four firm EY, PE houses have sold 625 companies via M&A this year, with an aggregate value of $262 billion (£174 billion), which is roughly in line with last year. Strategic M&A has been particularly active, accounting for 72 per cent of PE sales, the highest proportion in more than a decade.

Charlie Johnstone, Partner at PE firm ECI, notes: “There’s a lot of money globally and that’s feeding into higher prices across all sectors, from houses through to companies.” Unsurprisingly, he says the tech sector continues to attract the highest multiples and that the three tech businesses ECI sold in the last 18 months − CarTrawler, Fourth and Wireless Logic – each attracted a premium pricing of 17 to 20x their profit.

As ever, buyers want to see the magic combination of predictable income and scale. Ewa Bielecka Rigby, Investment Director at LDC, says: “Management needs to understand the size of their addressable market and where future growth will come from. A track record of sales and profit will be vital for potential buyers, together with predictable, high-recurring revenue and a forward pipeline of earnings, preferably backed by long-term contracts.”

Tell your growth story

When Roger Taylor took the CEO role at PE-backed Quadriga Worldwide in 2011, it was two years into the Great Recession, annual new contract signings had fallen from €120 million (£85 million) to €30 million (£21 million), and the business, which provides technology to hotels, had no product roadmap.

“We realised we had to come up with the growth story because my top line was falling away and the rationale for the product and business was dying,” Roger explains.

It was also his first operational role after a career in M&A advisory and PE investment. He recommends the first point in any exit strategy is to understand the reality of the business. In the case of Quadriga, this meant determining the company’s mission so that it could be easily communicated to staff, customers and potential buyers.

“If I were going into another situation, that would be the first thing I’d look to create. It’s the anchor by which you can align your vision with the board,” says Roger, who left when the company was sold earlier this year to software development and professional services organisation Exceptional Innovation.

Ewa agrees with his advice, adding: “In an exit situation, the same story delivered in a consistent way by different management team members builds trust with potential buyers, especially when backed by facts and a good track record for the delivery of results.”

Right-size the business

Adam had to go back to square one when he was told his initial exit route for Playnation was no longer viable. After assessing various options, he chose to make the strategic acquisition of FunHouse Leisure as it allowed the company to move into a new sector.

“We doubled the size of that business in 12 months,” he says, adding that it wasn’t just a cash grab. “It was about exposure into that market space, which meant that it was more scalable for an acquirer.”

Grand exit strategies won’t count for much if business performance drops. In such instances, raw pragmatism is required to get the company back on track.

This is something Criticaleye Board Mentor John Allbrook has experienced first-hand. Until recently, he was the Executive Chairman of Syscap, a PE-backed specialty finance company. After joining in 2010, John undertook a significant turnaround as revenue had fallen from around £160 million to £60 million per annum.

“We identified one market where we really felt there was an opportunity and that was providing bespoke lending facilities to smaller legal partnerships,” he explains. “This initiative proved hugely successful and was instrumental in our recovery plan as revenues once more climbed north of £150 million.

“Our situation was too challenged to say: ‘We won’t chase that opportunity because it doesn’t fit with the exit strategy.’ We needed to cut cost, redefine the growth strategy and quickly become cash-flow positive. But once the strategy started to work it became extremely clear who the buyers were likely to be, because they were the companies we were competing against.”

Build your team

Investing in the right employees and a strong succession plan can only benefit the business. “Don’t underestimate the value your staff holds,” says James Boot, Senior Relationship Manager at Criticaleye. “High employee retention rates, clear and functioning incentive plans and a positive workforce can be very attractive to the right buyer, perhaps to the extent of an extra multiple.”

A good team will mean the CEO can delegate operational responsibility as they devote more time to the exit strategy and deal itself.
Ewa recommends: “Plan for senior executives to be totally absorbed by the process, therefore the operational team needs to focus on keeping the results going, which is vital to good exit metrics.”

This is precisely what John did for the exit he led at Syscap. “The sale process was handled predominantly by myself and the CFO. Other members of the management team focused on the day-to-day running of the business. Of course we had to bring them into management presentations to prospective buyers and parts of the diligence process, but we kept it tightly managed to minimise distraction,” he explains.

Agree the equity spread  

Suspicion and sniping within the senior management team about the equity spread is in nobody’s interest.

As James notes: “Being clear to potential buyers about the management’s equity expectations is key. Therefore when writing the investment memorandum put the current equity spread, and who is set to make what type of return from the exit, on the first page.”

Similarly, it’s essential that when a management team originally takes on PE investment, they fully understand the terms of the transaction so they can remain incentivised. ECI’s Charlie warns: “If you’re going in with a high valuation it’s harder to generate returns and the management team, as the deliverer of that shareholder value, is under more pressure. But I’d say the biggest risk is taking on excess debt commensurate with the high price.

“If you can, steer the deal towards someone who is willing to pay the right price but still willing to put in less debt and be more collaborative with the team. There are some parties that will put their loan notes to rank ahead of management, put exit fees in and do all sorts of things that will be very detrimental to management teams.”

It’s one of the reasons why a CEO should take care when deciding which PE house to bring in. Adam spoke to about 15 PE houses before agreeing a sponsor for his MBO − it wasn’t the highest bid, but it was the best fit. He explains: “What was most important was that they [the sponsor allowed] me to get on and run the business myself; they wouldn’t micromanage me”.

By Mary-Anne Baldwin, Editor, Corporate

Do you have a view on this subject? If you have an opinion that you’d like to share, please email Mary-Anne at:

Hear more on PE at the next Private Equity Breakfast, where Nicola Pattimore HR Director at Equniti will share her experiences of the company’s recent IPO.



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 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.


The Landscape for Private Equity

All exit options are open for private equity-backed businesses in 2015. Expect acquisitions, corporate carve-outs, IPOs and the continuing carousel of secondary and tertiary transactions. It means that PE firms can count on the competition hotting-up for quality assets, while the management teams of high-growth companies should be in a strong position to make operational improvements and increase market share.

The general opinion among those in private equity is that businesses should be able to build on the momentum that was gained in 2014. Criticaleye spoke to a range of executives, advisors and PE houses to identify the five trends that will shape the space in the year ahead:

1) A Mountain of Dry Powder

The biggest factor impacting the PE space in 2015 will be the availability of capital. As a result of quantitative easing programmes in North America and Europe, as well as the increasing influence of Asian funds, the market has been flooded with capital, which is inflating the price of assets.

Bridget Walsh, Head of Private Equity for UK & Ireland and Greater China Business Services Leader at EY, comments: “The industry now has $470 billion of dry powder. This is unprecedented… for the industry but investors are certainly choosy about selecting quality assets. That said, I think we’ll have a very busy start to the year, the capital is there to do deals and there’s going to be a lot more M&A activity – we’ve seen some large corporate divestments announced.”

With competition increasing, sponsors may have to work a little harder. Simon Tilley, Managing Director of corporate finance firm DC Advisory, says: “The valuation gap is still there, which is frustrating deal-making. Firms might need to be a bit more creative: it might be that they have to pay a little bit more for an opportunity that really is in their sweet spot.”

For Steve Parkin, CEO of 3i backed FMCG concern Mayborn Group, management teams looking for investment need to demonstrate a growth trajectory and a strategy that’s resilient to macro volatility. “We’ve got an election in the UK, the dollar rate is tumbling down and there’s instability in some of the Eurozone.

“Private equity firms will be looking for quality of earnings and businesses that can show they are able to weather some of these challenging conditions. Very high-performing assets will go at a decent multiple but those that are in that mushy middle will continue to struggle.”

2) An International Outlook

A global perspective is sweeping through the PE space and, while international expansion is hard to get right, the scope to open up new markets is unrivalled. Bridget comments: “If you take European GDP levels, top line growth isn’t going to be achieved by simply looking at the domestic market. I think management teams need to be very mindful of emerging markets and operational improvements.”

Gary Favell, CEO of Bathstore, which is backed by American billionaire Warren Stephens, says: “More and more PE houses are looking for that international development, a brand that travels internationally. We’re working to get into either the emerging markets or those markets that are very liquid: the Arab States, India and so on.”

Of course, there are plenty of opportunities across Europe too. Justin Ash, CEO of Bridgepoint backed Oasis Healthcare, a provider of dental care in the UK and Ireland, says: “More than ever, international expansion [should] be seen a good opportunity. Obviously it’s complicated, so it’s not to be taken for granted, but our acquisition of Smiles Dental in 2014 took us into Ireland and has proved to be very successful. It’s good to have a market with different dynamics.

“Our market is a growth market in most parts of the world and we tend to benefit from environments where there has been a lack of consolidation and a lack of branding. So for us, that’s what a new market needs to have to make it attractive.”

3) Where’s the Exit?

Both trade and secondary exit options are open, and despite a subdued Q4 the IPO market is likely to pick up once again. This means 2015 will be a year of decision-making because there is no longer any excuse for firms to ‘sit’ on assets.

Paul Brennan, Chairman of OnApp, a cloud infrastructure software provider which is backed by LDC, says: “I think everyone’s looking at what is a possible exit strategy or the dilution strategy in the context of where the market is. PE houses are asking, ‘You know what, do we double down re-invest, or do we look at perhaps letting other people lead the next round of funding?’

“I’m not seeing everyone going: ‘Oh, we don’t want to invest,’ but they’re not all saying: ‘Yes, let’s put loads of money into these businesses,’ either.”

Martin Balaam, CEO of Jigsaw24, an IT services company backed by Northedge Capital, adds: “There will be pressure on PE houses to start to show some realised gains before they look to raise their next funds towards the back end of 2015, so yes I would anticipate a few exits. I also feel that there is more corporate activity starting to happen so there will be an increasing number of trade sales.”

Foreign buyers are definitely on the lookout for deals and they’re prepared to pay a fulsome price. Charlie Johnstone, Partner at private equity firm ECI, says: “If you are a business in North America… looking for a launch pad in Europe, you understand the language, the legal system is not too dissimilar and there’s a huge degree of trust that what you’re investing in is what you think it is. The UK is a great place to be buying a business and that will continue.

“You’ve then got US private equity firms coming over here that pay 13 times for a business and think that’s cheap. We’re looking at the same business and would probably pay ten times, but they’d have to pay 15 in the US. That arbitrage, from their point of view, is available, and we’ll see more of that. As such, we know we have to match them on the best investment opportunities.”

Following a bumper year for sponsor backed IPOs, raising over $104 billion (Q3 2014 YTD), the public markets are set to remain a credible exit route. Tim Farazmand, Managing Director of mid-market private equity firm LDC and Chairman of the British Venture Capital Association, says: “The IPO market has been buoyant for much of 2014, with a number of PE-backed companies floating, including one of our own portfolio, Fever Tree, which is a premium mixers business.

“More recently, economic concerns have weighed down on the IPO market but hopefully, with a more benign economic environment… it will open up again.”

4) Taking the Sustainable Approach

As a result of slow growth and potential buyers taking extra care with due diligence, PE firms have had to embrace a more mature, long-term approach to strategy. Gary says: “I don’t think you can go in anymore and just say, ‘Look, we’ll take the cost out, strip it back and then move it on.’ People are coming in looking for a sustainable plan.

“You’ve got to be able to show that the business you want to sell has a robust platform for growth, fully supported by both a strategic and operational plan.”

For sponsors, it’s a case of becoming more creative around the services they provide. “There is certainly a longer-term view in the industry,” says Bridget. “A number of private equity funds have invested in good operational teams which means they can identify assets that may be operationally challenged… and can really help turn it around.”

According to Charlie, ECI has had particular success with this approach. It set up a Commercial Team six-years ago which acts as resource for management teams to draw on when they need guidance with difficult operational dilemmas: “The number of projects they run for our portfolio is huge and the results have been impressive – putting our growth at 20 per cent per annum, that’s an underlying earnings growth well above GDP.”

5) All Important Alignment

Given it’s not so easy for financial engineering to gain a quick win, many PE firms have had to adjust to that longer-term view on how to drive growth. It’s made the role of the chairman even more important in terms of managing expectations around the exit between the executives and sponsor.

Paul comments: “When I’m talking to PE houses about my role as a chairman, what I am finding is they are increasingly asking about how I can be that bridge between the management team and the PE house.

“They are very happy for me to go in there and try to help bring them and the management team together. I think chairmen need to be more hands-on now than they have ever had to in the past.”

Sam Ferguson, Group CEO and President of EDM, an information management provider which is backed by LDC, says: “Too many people do deals just because somebody comes along with money…

“My experience tells me that you have to be able to work as a team, and… you must share common directional agreement. There’s nothing more frustrating than having aspirations or a certain direction for [the company] but not getting the backing from the investment group.”


Expect 2015 to be a busy year for private equity. Firms have a huge quantity of funds to invest and they will be on the hunt for buy-outs and acquisitions. Global trade buyers will also be in the mix, seeking to capitalise on cheaper finance. As Simon says: “2015 will be progressive – there’s more confidence and hopefully we can continue to build on that.”

I hope to see you soon


The Global Outlook for 2015

A resilient global economy means the signs look positive for businesses across a range of sectors over the coming year. With rising employment in the US driving consumption, China’s $3.89 trillion of exchange reserves being used as a war chest for investments, and a pro-business Government in India seeking to kick-start its economy, there are plenty of reasons to feel optimistic about opportunities for growth.

Of course, while the macro-economic situation may be broadly robust, the impact of geopolitics, such as in North Africa, the Middle East, Russia and Eastern Ukraine, and the South China Sea, cannot be ignored. “2015 will be a mixed bag,” says Mark Spelman, Global Managing Director and Global Head of Strategy at Accenture. “The key message for business leaders is to stay agile and watch for short-term signals in the light of longer-term trends.”

The three low performers, according to Mark, will be the Eurozone, Russia and Brazil: “Expect the Eurozone to muddle along in 2015 with political storm clouds crowding in on structural reform; Russia will go into recession with sanctions and weak oil and gas prices undermining economic performance, which will hinder Eurozone growth. Expect a tough year for Brazil; it needs a Prime Minister like Narendra Modi but chose a second term for Dilma Rousseff.”

Dominic Emery, Vice President of Long-Term Planning for BP, comments: “As you would expect, we’re keeping a very close eye on the oil price… The portfolio of the company is pretty robust in relation to oil price scenarios, but there is the challenge of managing this during periods of uncertainty.”

Leaders need to be cognisant of changes to the global political landscape. “We have to ensure that we manage our portfolio accordingly,” says Dominic. “I think the opportunities lie in maybe acquiring assets with a lower oil price… It also provides us the chance to rethink some of our business models, to make them more responsive.”

Supply and demand 

There are plenty of sectors which seem set for rapid growth. Tim Farazmand, Managing Director of mid-market private equity firm LDC and Chairman of the British Venture Capital Association (BVCA), says: “Given the likelihood of strong economic growth next year, we’re positive about virtually all sectors but the three we expect to outperform in 2015 are TMT, industrials and the consumer sectors.

“The TMT sector has recorded strong growth this year, and with the technology and digital revolution continuing to sweep the economy, this trend will only accelerate in 2015. Innovation is the driver, particularly in areas such as mobile and cloud computing.”

Healthcare is another area where growth can be expected. Jane Griffiths, Company Group Chairman for EMEA at Janssen, the pharmaceutical division of Johnson & Johnson, sees plenty of opportunities to form partnerships in countries that are serious about building their healthcare infrastructure, such as the Gulf states in the Middle East and in Africa.

There also remains an urgent need for innovation. “One of the things that’s so expensive in the delivery of healthcare is the bricks and mortar of hospitals,” says Jane. “So, if you can care for people remotely using innovative pharmaceutical and digital technology, you can potentially take costs out of the healthcare system and allow people to be treated at home.”

The expectation is for there to be significant deal-activity among private equity firms across these sectors. Simon Tilley, Managing Director of corporate finance firm DC Advisory, says: “Private equity portfolio managers are feeling a lot more confident about their companies. The opportunity, I think, ought to be to drive growth not just organically, but also through add-on acquisitions…

“The environment now is actually quite conducive to that. You’ve got buoyant credit markets; you’ve got companies that have stabilised, with strong management teams that have got private equity backers with money to deploy again.”

Provided pricing expectations become more reasonable, the hope is that M&A activity starts to pick up. Simon comments: “There are international trade players that are interested in the industrial, tech and consumer space. They’re coming from Asia and the US; there are definitely US private equity investors looking at the UK and Europe more confidently…

“There are also US corporates with cash to spend. They have a lot of cash in Europe as they can’t repatriate it without incurring significant tax liabilities. So, I think, there is a desire on the part of cash-rich US corporates to deploy that money in an accretive way, rather than suffer significant dilution by taking it back out.”

In 2014 there was an increased appetite for Asian PE houses acquiring Western companies, and according to Simon, this will continue. “Examples included Hony Capital acquiring Pizza Express and Baring PE Asia taking a significant stake in Cath Kidston. The motive is to bring technology and brands back to Asia to tap into local demand… The next step we’re likely to see is more Asian PE houses looking to partner with European firms,” he adds.

The public markets are predicted to pick-up again in the first quarter. John Millar, Head of Primary Markets at the London Stock Exchange, says: “We’ve seen a lot of momentum build up in 2014. It was a great first three quarters of the year for trading volumes, IPOs and capital raised… However, in August, the geopolitical situation got a little more uncertain and, what with the Scottish Referendum, we saw the market take a pause.”

Clearly business leaders should be keeping an eye on the political landscape, while also looking at how convergence is reshaping customer behaviour. Steve Parkin, Chief Executive Officer of Mayborn Group, which makes products for babies and children, says both “political instability and consumer promiscuity” need to be watched closely.

Paul McNamara, Group Chief Executive of financial services company IFG Group, comments: “Right across 2015, I think it’s going to be a year of further adoption of technology; customers are using new technologies very rapidly. And their expectations are rising.”

There is a sense that companies are very much on the attack. Howard Kerr, Chief Executive of business standards company BSI Group, says: “We’re keeping an eye out for our competitors. A lot of companies kept their heads down in the last four or five years, retrenching, right-sizing, adjusting their models based on the tough business environment.

“Now that people are a little bit more bullish, they’re are going to innovate, they’re going to invest and they’re going to try and be a bit more creative.”

It’s the businesses with agile leaders at the helm who are watchful, constantly planning and ready to seize opportunities that will establish successful growth in 2015.

I hope to see you soon


Planning for the Best Exit

Comm update_22 October2

The expected frenzy of private-equity deals in 2014 hasn’t quite come to pass. For CEOs with an eye on the exit, a secondary buy-out remains the likeliest route, with many opting to roll with a deal so they can keep building the business. While the opening up of the public markets is certainly another welcome option, trade buyers are continuing to show caution due to perceived overpricing.

Indeed, with the availability of debt back at levels seen in 2006 and 2007, valuations have been the sticking point for a number of transactions. “Pricing expectations are high,” says Stuart Coventry, Partner at corporate finance firm Jamieson. “Bids often come in below where the sale-side expectations were set, and those expectations have probably been built on the back of a very bubbly IPO market earlier in the year.”

To maximise the value of a sale, the CEO and management team need to stay focused on the fundamentals. Rob Crossland, Chief Executive of employment services company Optionis, which completed a secondary buy-out through MML Capital earlier this year, says that “in any kind of exit you need to demonstrate how the business has grown under your tenure but, equally, why there is more growth to come”.

The potential for scale is what drives value, often through global expansion. Simon Tilley, Managing Director at corporate finance firm DC Advisory, says: “[PE investors] are getting much more excited about opportunities where there’s either a UK business that operates overseas already, or there’s an opportunity to take it overseas and get more international exposure.”

Grant Berry, Managing Partner at private equity firm NorthEdge Capital LLP, comments: “Nobody wants to buy a business at the top of the market, so it’s important that when someone is coming in on the buy side they are confident about the business being able to grow in the medium to long term.”

Fit for the Future

From the outset, the management team should be assessing the market and deciding upon who the potential buyers might be. Catherine Wall, Non-executive Director at investment management firm Mobeus Income and Growth VCT, says: “What is the totally compelling story for their business? Does this acquisition give [a buyer] entry to innovative or fast growing markets, products or customers? Does it give them new skills or capabilities?”

Ian Edmondson, Chairman and Managing Director of Dunlop Aircraft Tyres, says: “Understanding the likely interest of different potential owners will help to define the exit. This needs to be done by exploring, networking and developing a range of relationships…

“In some cases there may be equally interested future owners from different backgrounds, meaning a possible secondary buy-out might be just as likely as a trade sale. If the current owner wants a complete 100 per cent exit at a point in time, then an IPO is not usually the favoured option.”

Douglas Quinn, Chairman of homecare provider Baywater Healthcare, comments: “You want to end up with a strategy that is very portable. Thinking through all the options and having a range of scenarios depending on the circumstances is very helpful.”

The chairman, usually appointed by the sponsor, certainly has a role to play here in ensuring there is alignment on the exit strategy. Ian Stuart, Chairman of four mid-market PE-backed companies, including manufacturing concern Aspen Pumps, says: “It’s about getting people around the table to talk together and be honest about what they want, and achieve a compromise.

“Specifically, if private equity wants to exit later and the management want to go earlier, you will generally arrive at some sort of incentive arrangement for management to stay longer.”

Of course, preferred exit routes won’t count for much unless the management can demonstrate strong performance, good governance and show there are no nasty surprises for buyers, such as big ticket customer contracts coming up for renewal, leasing issues or weak intellectual property. “You can’t dream those up at the last minute,” says Gerry Brown, Criticaleye Board Mentor and Chairman of logistics concern NFT.

The importance of succession cannot be underestimated. “We worked on the buy side of a deal that fell through over the summer, where the owner CEO wanted to exit but there was no work put into succession planning – it’s just awful when you see that happen,” says Simon. “It’s partly down to the value, because you won’t get the same price as if you’ve got a strong management team solution in place, but it also comes down to deliverability and, in this case, they couldn’t get the deal [finalised].”

It comes back to having a long-term approach so that the business is an attractive proposition. Tania Howarth, Chief Operating Officer of frozen food company Iglo, says: “Any PE-backed CEO has to balance exit considerations with the need to focus on building a strong, sustainable business…

“From the beginning, a CEO needs a strategy to build a better business and then understand where on that journey his or her current investor will exit, so that the business evolution can be tied into the investor goals.”

Every step must be taken to eradicate easily avoidable mistakes that either damage a valuation or scupper a deal. After all, the exit process will be demanding enough for a management team, without them having to address deep-rooted issues in the business at the last minute. Ian Stuart says: “Don’t get so distracted by the exit that the company goes haywire in the meantime. You’ll then almost certainly have a bad exit if results fall away.”

According to Rob, it’s important to keep having conversations around the exit. “Having done it twice now, [I know] you need to be discussing it sooner rather than later. It should definitely be on the strategic schedule for review at regular points as, if this isn’t the case, there’s the danger of becoming misaligned and unclear about the future.

“Private equity, I think, has a bit of a challenge, because initially they don’t want people talking about exit… They want them focused on the day job. If they let that continue, I think that can create some difficulties down the line.”

Timing has a part to play in any sale and that’s not necessarily something that can be controlled. Pardip Khroud, Investment Manager at private equity firm LDC, comments that political and economic uncertainty can suddenly have a significant impact on the behaviour of buyers. “It makes businesses far more difficult to value and deters potential buyers from committing,” she says.

The nightmares of private equity occur when communication breaks down between sponsor and management team, resulting in misguided assumptions. It largely falls on the CEO to ensure this doesn’t happen, so there is a healthy focus on performance – short and long term – which is what will matter the most when a potential buyer does come along.

As ever, a little luck always comes in handy too.

I hope to see you soon


Growing Pains for Private Equity

Comm update_12 Nov1

With growth resolutely back on the agenda, many financial sponsors are rethinking how they should be supporting portfolio companies in an increasingly complex, global landscape. For attendees at Criticaleye’s recent Private Equity Retreat, assistance in the form of new contacts and forging a route to market are to be welcomed, but there was a strong push-back on firms interfering with how management teams look to execute on strategy.

Ian Stuart, Chairman of four mid-market PE-backed companies, including manufacturing concern Aspen Pumps, says: “The job of private equity is to back management and every so often intelligently challenge. But the point where PE sets out the strategy for growth, even though they are not the ones actually running the business is, I think, dangerous.”

While a fine line needs to be walked, there is an aspect to this which is cyclical. Keith Holdt, Investment Director at LDC, comments that over the past two years the firm has used more generalist managers to assist management teams, but “the ideal investment is one where the management is not only competent but knows what it needs to do to grow the business”.

Carl Harring, MD of HIG Capital, makes the point that as a company looks to evolve and develop, new personnel may well need to be brought in. “We always look at a portfolio company and ask: ‘What will the business look like when we’ve gone through a period of change with it?’

“A different style… [and] new blood may be needed in the management team as a business changes focus from cost saving to pursuing a growth agenda.”

Brighter outlook

The mood among attendees at the Retreat was noticeably upbeat in terms of businesses investing for growth and increased exit opportunities, not only via trade and secondaries but also through IPOs.

Glen Moreno, Chairman of media company Pearson and Non-executive Director of Fidelity International, says: “[There are] record levels of unrealised returns; many LPs are at their asset allocation levels and will want to see distributed gains in their portfolios…

“The exit potential is improving… The underlying demand is there for corporates to buy PE-backed companies. Secondaries remain important but don’t have the same positive impact as trade sales and IPOs on the PE environment.”

According to Thomas Kalaris, Distinguished Executive in Residence at the University of Chicago Booth School of Business, sponsors and businesses are emerging from the “mess of 2008” but there are also wider adjustments that need to be made. “Changes in demographics, geography and technology are fundamentally reshaping the global economy and financial markets,” he observes.

Understandably, if companies are to flourish in such an environment then the executive team must be able to candidly evaluate the skill-mix within an organisation and, particularly in a PE-backed entity, be focused on succession so that the next tier of leaders is seen to be coming through.

Bill Ronald, Chairman of ComplEat Food Group, a supplier of chilled foods, says: “Senior executives must regularly take time out to get together and debate where the business is in relation to its marketplace. You need to get to the stage where the strategy is simple enough that everyone around the table can explain it in two minutes…

“Never be complacent about people. You need to be rigorous about filling the roles that are required to develop the business for the next three to five years.”

A similar point is made by Tania Howarth, COO of frozen foods company Iglo: “Incentivising the ‘mighty middle’ is a key challenge because they effectively do most of the work in the business without the pay-off at exit, and the last thing you want is divisiveness in this group.”

It puts pressures on leaders to create a long-term vision through which staff and investors alike can identify. Rob Crossland, CEO of employment services company Optionis, says: “There’s always an equalising pressure on short-term results in PE, but having a business centred on a goal and incentivising the workforce and other stakeholders to achieve it is something that I’ve found PE will buy into.

“We’ve been fortunate in that our investors have allowed us to try different things in order to move the business forward… [and] that relative freedom to experiment has created a positive environment within the management team.”

Unquestionably, the real problem facing both PE firms and management teams is around international expansion and globalisation. For PE, it’s a case of developing the know-how and reach to be able to make a difference as executives are faced with the need to form partnerships, make acquisitions, develop distribution channels and obtain licenses, on top of getting to grips with the regulatory and cultural unknowns (indeed, it was suggested that PE firms themselves may need to start looking to a more diverse pool of talent to meet these needs).

Building scale remains imperative for a company heading towards an exit.Glen says: “The key challenge for all of us [in business] is growth, both in economies and customer revenues. Management teams that can shift the business into high-growth markets, and new customer groups, will be rewarded.”

I hope to see you soon.


5 Steps to the Perfect Exit

Comm update Face - 31 july

Two types of private equity-backed exit have occurred in recent times. The first entailed executives being ejected from a company with the explicit understanding that they ‘never darken these doors again’, while the other was of the more traditional variety involving a lucrative sale. Thankfully it’s the latter that is now the focus for many PE firms and their portfolio companies.

The notion of a ‘perfect exit’ is perhaps misleading. Each business will have its own challenges to overcome, as will PE firms given the lifecycle of their particular funds. Criticaleye spoke to a range of leaders within private equity to canvass their views on what needs to be done in order to get the odds in your favour when selling a business.

1) Management Must Take Charge

Time and again executives are too subservient to their PE backers when it comes to defining and driving an exit.

Andy Dunkley, CEO of jeans brand Lee Cooper, who completed a $72 million (£47 million) trade sale to US company Iconix earlier this year, advises: “In the current environment there are a number of private equity firms chasing only a few opportunities. Investment periods have been extended to the point where many PE houses are desperate to find an exit. The challenge for senior management is to take the initiative and outline a vision for the future. Ask yourself: ‘What’s the next stage?’”

Don’t leave anything to chance. Sam Ferguson, Chief Executive Officer of information management provider EDM Group, argues that some PE firms “get mixed up and think it’s their job to be running the business”, when what’s needed is a backer who can provide extra investment where necessary or support when looking to do acquisitions.

The expectations of management and the PE firm need to be set out from day one (the chairman has a huge role to play here) and, if you get that chemistry right, everything becomes a whole lot clearer. “It’s great to have money men that have got faith in your team and are prepared to back your ideas,” adds Sam.

2) Trade, Secondary or IPO?

When it comes to deciding on an exit, market reality will inevitably clash with wishful thinking but it’s essential to scope out the likeliest options.

Terry Stannard, Chairman of the PE-backed TSC Foods, comments: “Our preferred exit route would be trade because there may well be synergies [for a number of potential buyers] that represent value, but we are equally clear that the business has sufficient growth in it to be attractive to another PE house.

“Once we’ve decided we’ve built sufficient value in the business for existing shareholders, while also having enough growth left for future ones, then that will be the right time for us to exit.”

Andy says: “When I joined Lee Cooper in 2008 and looked at where I wanted to take the business, we came across an exit partner in Iconix, which was a licence only business. Although this was way too early in the process to think about selling the business, I suddenly realised it was a business model that could work for us and that it might be a viable exit route.”

Say it quietly, but the public markets are also an option. John Kelly, Chairman of Novus Leisure, says: “Some of the bigger companies are heading for IPOs and it is a healthier market than it has been. Just look at the equity values; the IPO market is there now. It’s going to be tricky and secondaries and trade are still areas where, if your business is shaped properly, they’re more immediate opportunities than an IPO, but at least it’s another option which didn’t exist a year-and-a-half-ago.”

Carl Harring, Managing Director of PE firm HIG Capital, agrees: “We’re in the sale process for one business which we thought was going to be a trade sale, but we were advised to consider an IPO; so we’ll probably do that now and run a dual track.”

3) Get Fit for Purpose

Lack of access to capital, unsustainable debts and radically changing markets, have seen a number of management teams and PE firms fighting to get businesses onto an even keel.

“It’s taken [the UK] a while to stabilise since 2008,” says Sam, whose business, EDM, recently acquired US-based competitor DIT. “We’ve still got the ongoing effects of that period in that funding is not as readily available for growth capital. It is there but looking at five times or six times multiples for earnings is no longer the norm; it’s now more like three times, even for companies that are doing well like ours.”

According to Carl, European businesses have been slower to deal with their cost bases and are facing the tricky task of trying to deliver sales within a leveraged structure. “It’s a case of needing to right-size the business, making sure that you’ve got the right management team in place as they’ll soon need to move from fire fighting to a strategy for growth,” he says. “It’s very important for board-level executives and non-executives to realise we’re in a very different environment right now and maybe we need some different skill-sets.”

4) Is the Business Built to Last?

The goal for any PE firm and management team should be to build an excellent company with bags of potential. Terry says: “In the early stages we invested in people and marketing to develop the branded side of the business, which will help with the value on exit. At the time it represented an extra cost… but there was an acceptance that this investment would make us more attractive to buyers and I think it was a far-sighted attitude by the PE firm.”

For Carl, whose firm, HIG, recently closed its second fund raising in excess of €800 million (£698 million), the numbers have to stack up for a business and it’s then a case of devising ways to ramp up sales. He explains: “Typically, what we do with all our investments is that we go in and [improve] financial reporting, which gives the management team clarity on what the business is doing. There is a big focus on cash and reinvesting it into profitable growth…

“We’re also good at making the sales force better in the way they are structured, incentivised and interact with customers. A lot goes into pricing and sales force efficiency, then applying resources where they should be able to drive growth.”

It can also be useful for a PE firm to open its little black book of contacts, especially for smaller companies. Paul Brennan, Chairman of OnApp, which provides cloud software for hosting providers, says: “My experience with good PE houses is that they are well-connected and probably have different portfolios of investments, which can be part of the overall value chain or ecosystem that you’re working in. Therefore, they can help you connect the dots between partnering and end customers; sometimes they can help with technology transfer too.

“So rather than providing money, the benefit of PE is really all about the access to markets and to connections, be that individuals or companies, that you probably wouldn’t have access to otherwise.”

5) Manage Your Talent

Succession is a serious issue. There simply must be people who can step up and take on the senior management roles after the exit, otherwise there can be ugly discussions about how long executives stay on and where the intrinsic value in the company lies.

This raises questions around incentivising the best employees and how to identify and nurture talent. “You set out to create a great company that will get stronger each year, so that if a trade buyer acquires you they are doing it because they are buying the assets you’ve built up in terms of people and ideas, and you know the company will be around long after you’ve exited,” says Sam.

Tania Howarth, Chief Operating Officer of frozen foods company Iglo, puts a different spin on succession and broadening skills: “PE firms are missing a huge opportunity because they have to take a risk on too many people too often, when they could be moving the talent around from within existing businesses.”

The timing of moving management around would need to be handled carefully, but there seems to be sense in transferring individuals to sharpen their overall leadership skills (like you would in any corporate). “What PE firms generally don’t seem to do is to look at the talent they’ve got across their portfolio,” adds Tania.


Sure, there are zombie private equity firms, snared by a business model that was created for an economic environment that no longer exists. They can’t raise new funds and they can’t sell portfolio companies – it’s a case of winding down operations, slowly.

But that’s not the whole story by any means. Good PE firms realised that the toppy valuations and over-leveraged markets of 2007 were abnormal and have since made the necessary adjustments. These firms are now raising funds and executing deals – as opposed to sitting on their hands, waiting for things to return to how they once were.

For management teams on the exit journey, as we’ll be discussing at our forthcoming Private Equity Retreat, it’s a case of having a vision, communicating with investors, generating some competitive tension in the marketplace and using advisors wisely.

All of this won’t count for much unless the business is performing well. If you’re looking for a fulsome exit, then hit your numbers and demonstrate the case for scale and future growth.

Simple, really.

I hope to see you soon.


Finding the Upside in PE

Driving growth requires management teams to combine ruthless focus with an agile response to both challenges and opportunities. Ernst & Young’s private equity specialist, Harry Nicholson, explains why CEOs of PE-backed businesses should be doing more to create fresh exit options

The total number of exits of private equity-owned businesses across Europe rose to 83 in 2011, according to Ernst & Young’s research of European businesses worth more than €150 million at the time of PE investment. This was the highest recorded number of exits since the peak years of 2006/7.

Harry Nicholson, Partner at E&Y, who has been advising on PE deals for more than two decades, provides a snapshot of European deal activity in the mid and large buyout sectors of the market.

What drives a successful sale in the current market?

Quite simply, it has to be a very good business. Remember, the majority of buyers of PE-backed businesses at present are other PE firms. While there are plenty of PE buyers around with cash to spend, they are selecting only the very best assets. To continue to generate attractive returns, PE firms must seek out the investments with the most potential, then work actively with those companies to achieve that potential.

However, secondaries are not going to clear the overhang of unrealised PE investments, so the piece that needs more thinking about is the hook for trade buyers. Therefore, as the interested seller, what more can you do to really think about who might be interested and why?

In practice, what can vendors do to attract trade buyers?

It’s harder to sell a business today unless you have demonstrated a scalable, often international model for driving growth. Trade buyers from the US and Asia-Pacific are clearly showing more interest in the mid to large end of the market in Europe. So as a potential seller, you’ve got to broaden your horizons and think creatively about who might be interested, particularly on the international stage, and why they might be interested in your business. Sometimes the trade buyers, and their investment rationale, may be obvious. But there are evidently benefits to be gained from management teams challenging their own thinking. It is something that, to date, too few private equity owned businesses have undertaken.

It’s then a case of helping to make it happen. Wear out some shoe leather and get out there and spread the word. Remember, there’s a huge backlog in the market, all hoping that it happens to them too. There are simply too many sellers and not enough buyers. With buyers more circumspect and with the focus, as ever, on business fundamentals, achieving any exit in today’s context means more effort is required all round.

Does the PE model need to change in order to create new opportunities for an exit?

It’s about rekindling the intensity of the original investment case, looking for new drivers of value that others haven’t seen, the pooling of great minds, intelligence and expertise. It’s about returning to the mentality of ‘this is what we’re going for and why’.

It’s always a big challenge. I’ve seen examples of where a business will almost hit the wall but manage to limp along. There’s a great temptation to just survive when you’re in such a position and the macro market looks unkind for years ahead, but that’s not enough.

This is a challenge of leadership. Can CEOs find the inspiration and decisiveness needed for change, which will increase cash flows and create fresh exit options? Waiting for the tide to rise just doesn’t feel like the right thing to do. Business leaders should be asking, ‘How do I make something happen to create value?’

What’s the mood among PE firms?

For the PE guys, they’re thinking: ‘I really want to crystallise my best deals, which will help me raise funds, but for the rest of my portfolio, as long as they don’t mess up, we’ll wait and see…’ That’s why it’s beholden on management in some of these companies to rattle the cage and create the urgency, because there won’t be that intensity coming down from the GPs [general partners] to force that in many cases.

Is the financing landscape for deals improving?

Deals are getting done and leverage hasn’t gone away. There’s still finance for a performing business that’s shown some ability to absorb external shocks and has some resilience to its earnings and cash flow. Sure, the leverage ratios are off their peaks, but it’s not a reformatting of the financing model and there’s still a significant leverage arbitrage built into the PE model. For the right deals, the money’s still there.

What about refinancing the existing portfolio?

That’s the bigger question because there is a raft of businesses struggling under the capital structures that were taken on in 2005 to 2007. The data we’ve looked at shows that in the biggest buy-outs, close to one-in-five may still be facing financial distress. Few are acting recklessly. So, as a PE firm faced with a business that is still making some money but which can’t refinance then, actually, you don’t want to sell it in today’s market because you won’t get top dollar. If it’s still meeting its interest repayments, you’ll keep it running. The LPs [limited partners] could kick up a fuss and get a consortium together to try and put a bit of pressure on the GP, but if they ask them to act fast and crystallise those investments to release cash, are they going to get the right value for those assets selling in today’s tough market?

Has the dynamic between management and sponsor changed?

In the largest deals, the boom years of the early noughties where PE backing was a one-way street to riches are over. For great management, they’re now asking: ‘Is PE the path to fame and fortune or not?’ Therefore, the opportunities have become more of a hard sell for PE to get management engaged and interested.

For incumbent management teams, incentive structures that looked good in 2006/7 don’t look very exciting in 2013. The model for me has always been a combination of carrot and stick: the stick being the financial leverage and the discipline that brings, with the carrot being the alignment of objectives, so if you can make it work we’re all going to do very well.

But the crash meant it ended up being just a stick for management teams. As a result, some management teams have been changed, while others have reacted to the challenge and opportunity of the ‘new normal’. Often, this has been followed by a rebasing of management incentives to re-create equity upside (for management, the prize of creating the new plan). It’s been a major trend in the last few years and it is still working its way through the PE environment.

Incentive structures that looked good in 2006/7 don’t look very exciting in 2013


Harry-Nicholson-webHarry Nicholson, Partner, Ernst & Young

Harry Nicholson is a Partner at Ernst & Young, the global professional services firm. He heads the Commercial Advisory practice which provides market, customer, industry and business advice to clients engaged in transactions and strategy development. Harry advised on his first PE deal in 1992, and has been actively engaged in the industry since then on new investments, realisations, re-financings and restructurings. He leads Ernst & Young’s annual global research programme, ‘How do private equity investors create value?’, and is a member of the British Venture Capital Association’s Research Advisory Board.

Contact Harry through