A private equity investor will consider dozens of factors when evaluating a potential investment, but the integrity and capability of the management team is considered the most critical when assessing future growth potential. Ewan MacKinnon, Partner at Maven, discusses why this is the case.
Many factors will influence the decision on whether or not to invest in a company. Revenue growth, current market position, the particulars of the product/service, whether there is sustainable competitive advantage, and the business strategy are just some of the key criteria which will be scrutinised and subject to rigorous due diligence if a potential investment is to be taken forward for serious consideration. Ultimately the most important component in delivering a positive investment return is backing a capable, experienced and tenacious management team. After all, a private equity (PE) investor is relying on management to execute the operating strategy.
Companies which operate in high growth markets or have a great product which solves a problem better than the competition will not realise their full potential without the right people at the helm driving growth. Likewise, talented management teams can transform otherwise unexciting businesses, adding significant value across all areas of an organisation.PE investors will look closely at the make-up of the senior team to assess whether they can adapt and persevere through the inevitable highs and lows of their company’s development. We often meet businesses with a great salesperson or engineer at the helm, but these individuals can sometimes be too focussed on the product/service rather than also considering the wider requirements of the business such as finance, governance and risk. Creating the right team is therefore about having the optimum mix of skills for the business at the that stage of its development. Getting this balance right will add further value to the business, beyond the individual talents and skills of each employee.
The role of PE is to work in partnership with businesses to build scale and help add value. It is this active management which sets this type of funding apart from others. Prior to investment, a PE firm will spend time with the management team to get to know them and to understand their motives and drivers. While they will not get involved in the day to day running of a business, an investor will take a significant interest in the companies they back as it is a shared journey, and results will only be optimised when there is alignment in interests. It is therefore essential that there is a chemistry between the investor and the management team.
In addition to the collective skills and experience of the senior people in the business, and how they complement one another, another critical aspect is having a management structure capable of supporting growth. Although the balance of a management team will vary from sector to sector, investors will always look for strong leadership, a robust finance function and effective governance through a non-executive Chairman.
The role of the CEO, as the leader of the organisation, is critical to an organisation’s success. A CEO must have a clear strategic plan, the ability to inspire their team and have the drive and determination to succeed. With technology changing faster than ever, a CEO also needs to have the willingness to learn and adapt to changes quickly and effectively in order to stay ahead of the competition.
Experienced CEOs, and in particular those who have successfully grown and exited a business in the past, are usually excellent leaders, so track record is crucial. They will have learnt from previous mistakes and can bring best-practice to future roles. They also often bring great teams with them and have trusted advisors/ consultants to call upon. If a CEO has previous private equity experience, they will understand the needs of the investor and will be able to balance the interests of other stakeholders, including management, staff, customers and the bank.
A strong finance function is another key consideration for a potential investor, where a company with comprehensive, accurate financial information will stand a far better chance of securing private equity backing than a company whose information is out of date and inaccurate. The CFO is, therefore, a crucial role for a private equity firm in assessing an investment decision, as the CFO is often the main link between the portfolio company and its investor. If a company does not have someone in this role pre investment, an appointment will usually be made post investment. If growth is predicated from M&A, then a CFO who is experienced in acquiring and integrating companies will be invaluable. Equally if the exit strategy is to float, then a CFO with IPO and/or public market experience will add significant value.
The role of Chair is also very important, especially as the business develops and expands. Being a CEO can often be a lonely role, so being able to talk through issues with someone experienced and approachable can be very helpful. The chairman should be respected by both the management team and the investor, acting as an “independent broker” between the two to increase alignment and introduce an element of objectivity critical to achieving growth. The chairman will also ensure proper governance procedures are in place and will challenge and scrutinise strategy. At Maven have we have a network of non-executive directors who we can introduce to companies to strengthen their management teams and help add value.
Private equity investment is a proven driver of sustainable business growth, achieved through operational expertise, sound management and a close working relationship between the investor and the company’s senior executives. Whilst there is no guaranteed approach to ensure the success of every investment, there are measures that a skilled and experienced PE manager can take to ensure that the investment risks will be mitigated as far as possible and protect the interests of all stakeholders. More often than not these measures will begin and end with the management team.
Selecting the right private equity partner will be one of the most difficult decisions any business owner or management team will have to make. If you would like to find out more about how Maven works closely with management teams to add value to their businesses, please get in touch on funding@mavencp.com