Buy-In Management Buy Outs (apologies for the title) seem to be the preferred route for institutional transactions...
It was very interesting to come across the following analysis of how management teams interact with new Private Equity owners during the first years of an investment. So often the message from PE firms is 'who are we backing?' and it seems that the incumbent management alone may not be the answer after all. It goes without saying that when a company is sold by private owners into an institution it will change - the reporting, access to capital, risk profile and expectations for growth all change very significantly.
From our own experience of PE buyouts the most successful scenarios post investment are when a new non-executive Chairman or hands-on FD comes into the business with the new investor to guide and lead the sector experts that have been with the business and can provide the continuity of relationships with customers and suppliers. In this scenario the incoming leader not only provides the interface between company and owner but also provides the coaching and guidance required to deliver on a new business plan which is necessary to increase growth.
The added benefit of this approach for the investor is that they open themselves up to many more opportunities where private shareholders may not have been able to create the 'perfect team' prior to seeking a sale.
More than half of portfolio company chief executives are sacked by their private equity owners within the first two years of investment, a new report by Alix Partners and Vardis reveals. Some 58 per cent of company leaders are removed inside 24 months, while 73 per cent will be fired over the course of the investment. The most common reason for a dismissal cited was a chief executive’s lack of fit with the portfolio company’s new strategic direction. Overall, 78 per cent of private equity respondents said the pace of change as the most significant source of conflict between the two parties. Furthermore, the survey of more than 100 buyout firms and portfolio companies uncovered alarmingly different expectations about the private equity process.