PE Exit: Effective Representation of The Management Team

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Marcus Shah, Partner within the Interim CFO & Finance Practice and Private Equity at Eton Bridge Partners, meets the man who has the backs of the management team when it comes to Private Equity (PE) buyouts.

COVID-19 might well have put the brakes on private equity-backed deals for the time being, but all the indications are that when business returns to ‘near normality’, it is very likely to pick up from where it last left off.

According to McKinsey’s latest ‘Global Private Market’ report, private equities’ net asset value has grown seven-fold since 2002, and twice as fast as global public equities. In fact, Private Equity (PE) fundraising has grown 18% annually since 2015, and expectation is that when the recovery comes in the economy, PE money will not be far behind. There might even be some bargains to be had.

At Eton Bridge Partners we believe this only makes the business of understanding what happens during a PE buyout even more important. CEOs and CFOs I talk to are increasingly discovering a hitherto unknown, (but increasingly vital), service their management teams need to enlist when they enter a PE buyer’s buying funnel – getting in an essential intermediary to ensure their interests will be maintained.

Marcus Shah recently caught up with Simon Hill, Partner, Liberty Corporate Finance, one of the leading management advisory firms that tasks itself solely with negotiating the management’s incentive plans, typically working alongside specialist legal and tax advisors. They do it for the people most directly impacted; the members of the boards themselves on purchased companies. Simon’s business has dealt with transactions right across the value range from mid-market to large cap, has advised more than 300 management teams, and faced 100-plus equity houses. In short, if it has happened in Private Equity, they’ve seen it.

Simon says: “In theory, PE deals should deliver a great outcome for all parties – the whole philosophy of a PE investment is about creating and rewarding growth; This should mean the right deals with the right management incentives are struck. Due to the growth and complexity of deals (e.g. multiple repeat buy outs of a business), and the fact that no two are ever the same, there is now a huge demand for specialist support on deals by an independent advisor.”

Some PE investors are extremely well focused on the management aspect of a deal process; seeking to get management support quickly by offering excellent terms. These may require less commercial intervention but will still need to be properly evaluated and communicated to the team.

But often, new funds entering the market are simply not used to cutting attractive management deals. Simon argues that management could be signing up to terms and structures that not only materially disadvantage them but may impact the ongoing engagement and relationship with their new investor post-acquisition. Ultimately this may jeopardise the whole rationale for the deal in the first place.

However, there are also a number of PE deals which, due to the nature of the process or the asset itself, see terms struck that are downright opportunistic.

Simon says: “Egregious deals – maybe these comprise 10 – 20% of deals and are those which simply try to squeeze everything they can, and which need careful review.

Often there are ‘down-the-road’ elements that are less visible, but need bringing to people’s attention too – like the fact that targets might be set for management, but the post-acquisition business strategy takes the business away from being able to meet these.

Helping to evaluate how the position changes for management in a range of scenarios is critical so the team know what they are signing up to. A more subjective but equally important role is talking to the management team about what the funds are like to deal with through the investment journey.”

As a service that is not widely known about, it might come as a surprise to some that it is also a service that the management team won’t actually directly pay for themselves, despite standing to gain a huge amount! It is a cost of the transaction alongside the various other advisory, diligence and financing fees that are funded as part of the overall deal. Another reason why any management team going through a PE buyout should see a service such as this as a no-brainer.

Simon says: “What’s interesting is that while we are wholly on the side of management, the PE fund actually learns a lot from working with an essential intermediary. The M&A market sees new entrants every year; PE funds from other jurisdictions, long hold funds, family offices, infra funds and strategics (which may have a PE backer themselves). Many of these may have limited experience in doing these sorts of deals. The expertise of a specialist advisor like Liberty is invaluable in showing up future roadblocks, educating them on elements that management should or shouldn’t accept, but at the same time we will be mindful of the sensitivity that is needed when dealing with a counterparty who may think differently, or simply not understand the local nuances – all will be an education to them.”

Mostly Liberty Corporate Finance will enter the process in the later stages of a deal – around the last six-to-eight weeks of the process – at the point where the shortlisted parties are building toward their final bid position. Even at the very end of the process when all the i’s are being dotted, and all the t’s are being crossed, there can be a real benefit in getting them involved.

In closing Simon said: “We firmly believe that PE funds themselves will benefit by having their deals better scrutinised and negotiated, because even though it may seem counter intuitive, putting more equity in the hands of managers and, almost more importantly, listening and responding fairly to their proposals on the management plan, will build immense goodwill, engagement and a real motivation to deliver the growth potential of the business post-acquisition. Ultimately our service is about the alignment of interests which should, and does, benefit all stakeholders in the deal.

Often the biggest issue is when the teams either don’t know about this sort of service, or if they do, they call later in the process than they really should. As with all business deals, the earlier we can start inputting to the discussion, the better.”

This is a service you may not have heard about before, but we argue it is vital to engage if you are involved in a PE buyout. The phrase forearmed is forewarned could not be more appropriate.