Private equity investors are increasingly sophisticated in how they view leadership capability beyond the immediate executive team. If the tier of managers below can step-up and deliver results after an exit, it improves a business’ durability, making it an attractive target for potential buyers.  

In a poll taken at Criticaleye’s Private Equity Retreat 2018, which was held in association with Santander and Brewin Dolphin, four-fifths of respondents said that management capability is intrinsic to the overall exit valuation of a business. Encouragingly, 64 percent said that they actively invest in developing the capability of the management. 

Phillippa Crookes, Senior Relationship Manager at Criticaleye, comments: “In many cases, management and leadership capability, particularly outside of the executives, is a key factor for prospective buyers. 
“There’s an understanding that as exit timelines become protracted, and it’s harder to achieve scale, you need strength and depth in the senior team to deliver sustained high performance.” 

Rob Crossland, who was CEO and then Deputy Chair for Optionis Group, a business he founded as a freelance contractor, is a firm believer that any successful private equity journey depends on a team working well together. He explains: “Without that, the CEO or leader is often in a difficult position because there isn’t the depth… 

“In my opinion, that will absolutely go to value because there is a single point of failure potentially, or there is a lack of intellectual debate around the board table.”

Ian Edmondson, Non-executive Director at Dunlop Aircraft Tyres, comments: “There are two aspects to this. You need a good quality management team and good business performance – that’s clear. But, at exit, you need a good quality team to continue that, so it brings in aspects of succession planning… That’s the challenge. If you do that, then you get a really good multiple on the exit.” 

Know Your Investor 

For Steve Richards, CEO of Casual Dining Group, it’s management who deliver the strategy and, for this to happen successfully, they must each be fully cognisant of their role in creating value.  

The other key dynamic, he notes, is the relationship with investors. “Making sure that we’re really clear on the plan, the objectives, the value creation, the expectations, I think that is the heart of the matter,” he says. 

On a journey that may be three or four years’ long, it’s crucial “that everybody is very aware of where you are… and just making sure that everything is open and shared in a very clear manner – [that there are] no surprises”. 

Frequent communication is required if the CEO and senior leadership team are to work effectively with investors as that allows divergent views to be spotted early. Steve says: “If you’re in the middle of deal processing or bidding on an asset, particularly if there is a process running, you need to know that they’re good for the money; you need to know that they’re going to back you; you need to be given freedom to negotiate within the terms that you’ve agreed with them, and you need to know that they will deliver.

“There’s nothing worse than going into a negotiation and not knowing if your backers are quite behind you.”   

Iain Ferguson, Chair of EDM Group, comments: “Essentially investors are buying into only a couple of things. [The first is] the potential growth and performance of the company, but the other one is the talent that’s in the organisation because one creates the other. 

“If you’ve got an amazing management team, then new and existing investors will perhaps put more money and more investment behind them in terms of acquisitions and other M&A activity and, in turn, generate more exit value.”

These comments were taken from the following Criticaleye films:

To find out more about 2019’s Private Equity and AIM Retreat, please click here