Private Equity—Setting up for Success Post-Deal

Most relationships begin with an exciting courtship followed by a honeymoon period. Then the hard work begins. We often hear the excitement in the voices of both private equity investors and their new management teams as they focus primarily on all the wonderful opportunities that lie ahead. The annoyances and frustrations tend to show up after six months or so—perhaps the business isn’t performing as anticipated and then the board and/or operating partners are closer to the nuts and bolts of the business than either they or the management team expected. Even if the business is performing, being “managed” by a new set of investors with often unspoken expectations about communication or preparation for board meetings can begin to sour relations.

Rather than “learning by bumping into things,” there are a handful of best practices that, if followed, can really set you up for success. Not surprisingly, it isn’t rocket science.

Clarity and Alignment

Having a direct and open conversation about work styles and expectations, ideally in the diligence process, can go a long way toward paving the path toward success. Topics should include the following with a review of points of alignment and difference between both parties:

1. Business objectives—do you have a common view of what can be achieved within an agreed-upon timeline?
2. Paths to growth and how they will be resourced—are you all on the same page (truly) or not? What are the sticking points? Are they valid?
3. Ways of working—e.g., degree of oversight and type of involvement from the private equity sponsor; what support does the management team want versus need?
4. Expectations around transparency and communication—formal and informal—including preparation for board meetings, what gets reported on, and the level of detail that is really needed.
5. Change agenda—including how change will be sequenced within a given timeframe.
6. Including the right stakeholders in the discussion—are the people who need to be involved in the above discussions and agreements actually at the table and are they being heard?
7. Expectations should be made explicit, documented, and revisited. Without some semblance of formality around this process, it is easy to go sideways and for a management team to feel blindsided when their private equity sponsors have a very different view of the future and how the partnership with the management team is structured.

Urgency Versus Importance

Everyone generally hears the clock ticking in a private equity operating environment. The private equity sponsors have relatively few levers they can pull to make a difference (such as changing the CEO), and they want to use them as quickly as possible. After that, they will still want rapid change but have to work through the management team in order to get it. The complaint we hear from management teams is that their private equity sponsors are not adequately tapped into the complexity of some of the business changes that need to be undertaken and the amount of time needed to do things well. It is critical to differentiate between business requirements that are urgent and those that are merely important to ensure that speed is not injected just for the sake of it. Change takes time; if it is rushed, it generally doesn’t stick. For example, the integration of an acquisition can be a one- to two-year process. It is critical to get aligned on issues that can be fast tracked and those that need adequate attention to detail.

Test of Relationship

Often, the true test of the board and management team relationship is when the business hits some headwinds. We have seen knee-jerk reactions from some private equity boards, which can often result in diverting from the original plan. In these moments, it is important to maintain cohesion and to increase transparency. The result might be the need to reset expectations, but first a forensic analysis of the business problem is required to truly understand what is happening and how to manage out of it. If the management team has no clue how they ended up in the situation and have few ideas about how to get out of it, then changes are likely justified. Before getting to that point, it is important to hear their plan and guard against the creation of two groups—the private equity firm and the management team—getting frustrated with each other versus coming together to assess the problem.

Humility (on Both Sides)

The secret to a strong relationship is the pooling of mutual humility. Deal and operating partners can learn a lot from their management teams and vice-versa. The idea that “our private equity partners do things to us versus with us” is a sentiment we sometimes hear that causes angst and frustration. Getting clear on where and when board members/operating partners should and shouldn’t weigh in on business issues is important to tease out. And if the private equity firm is managing the business, it is clearly a problem that should be remedied quickly.

Open Communication and Feedback

It is amazing how far we all let issues advance before stating them or talking them through. Often, a small issue that could have been raised by the private equity firm with the management team gets glossed over. Then it grows, and having the corrective conversation becomes difficult. Setting up a norm around open feedback is strongly encouraged. It is important to expect that a new relationship will require some intestinal fortitude to set up the right way. Plan for it, push for it, and create the time and climate to make it happen proactively.

One Team

The bottom line is that if private equity firms and their management teams are working at cross-purposes, everyone fails. Getting aligned at the beginning of the relationship and continuing to have an open dialogue about what is and is not working is key to a healthy and productive setup.