CEO Perspectives: Where Private Equity Truly Adds Value

These insights were generated at an RSM-led panel discussion featuring CEOs, who have had involvement with PE firms, during the CVCA Invest Canada ​’19 conference in Vancouver BC, Canada.

Most owner-managers find that having a private equity (PE) firm take a stake in their company has been wonderful — providing the cash they need to grow, discipline in structure and governance, and access to connections and advice that make additional growth possible.

Here are some lessons learned for PE firms from CEOs whose companies have seen PE involvement. These insights — gained during the transaction process but more importantly, during the period of ownership — can be used as a roadmap to establishing a solid foundation and relationship between the CEO and PE in order to pave the way for business success.

Due Diligence And Strategy

The benefits brought by PE firms do not occur accidentally, and they start during the due diligence phase.

Finance and process leadership are important areas to understand during due diligence. While the traditional perspective is that the process of having experienced PE perform due diligence is all about finding issues to reduce the price in a transaction, CEOs that have been through multiple transactions know that this process also allows for a dialogue with the PE firm to get a feel for how they will approach both issues and opportunities.

CEOs are aware that in today’s deal environment, with competitive processes and high valuations, mitigating transaction risk through thorough due diligence is imperative. As diligence continues to be more holistic, focusing not just on the traditional areas of financial, tax and legal but also operational, IT, cybersecurity and human resources, further areas are discussed. These allow PE firms to work with CEOs to identify opportunities for value creation, which then carries through the initial period of ownership.

This partnership approach to developing a strategy over the PE firm’s ownership is key for PE firms to consider in the due diligence period and is vital in establishing the future relationship between CEO and PE. Creating alignment around the business strategy, and hence on the investment thesis, is key to building rapport. It ensures that the growth aspects are executed on in a way that meets both sides’ objectives, where the CEO and the PE firm are playing together to win.

Networks and Contacts

One of the biggest impacts on value creation that CEOs get excited about is leveraging the PE firm’s network and relationships. The strength of PE firms in making introductions to support growth or the efficiency of a company’s operations, such as supply chains or distribution channels, cannot be overstated. However, the CEOs perspective is that the introduction must be more than just a hand-off. Through active participation, the PE firm can leverage the strength of their relationships to allow for value creation above and beyond what the CEO may be able to achieve on their own.

The value creation opportunities in leveraging the networks and relationships of PE firms for CEOs are often in the areas of growth (with new potential customers or strategic partnerships), finance (whether operationally or from a capital markets perspective to fund these growth initiatives) and procurement and cost-savings (based on supply chains and experts in technology transformations).

In addition to third party relationships, PE funds can also add value through more active collaboration between portfolio companies to support each other’s growth aspirations. By removing silos, companies that operate in the same industry vertical may be able to achieve synergies that incrementally add value. This goes beyond discussions at an annual PE firm get-together with its portfolio companies, and requires hands-on participation from the PE firm to achieve true success.

Finance, M&A and Governance Leadership

Typically, PE firms bring significant capability to the table with respect to leadership and expertise in the areas of finance, corporate development (M&A) and governance that can support the growth of a company.

PE firms are aware of opportunities, often emanating out of the due diligence process, to work with CEOs on optimizing operations across silos and thus creating efficiencies: sales and marketing, purchasing, manufacturing and finance. These improvements can create quick returns for PE firms by optimizing EBITDA and working capital terms without significant investment. A key area of support from the CEO is the implementation of an overall approach to improving cash flow by enhancing discipline across the working capital cycle following the closing of the transaction.

In addition, a buy-and-build approach through strategic deal making is important in today’s deal environment. With all-time high levels of capital in the market, executing an acquisition strategy following an initial acquisition can be lucrative in order to build a highly attractive asset for an exit. What is important, however, is to spend time planning future acquisitions at the front-end of the initial acquisition in addition to being disciplined about executing only on those transactions that add incremental value, not just incremental size. PE firms will be able to execute a well-thought out strategy by working with the CEO to identify a strategy that amplifies growth and by understanding potential target acquisitions based on industry knowledge.

These areas speak to the expertise in overall governance that comes with bringing a PE firm into the ownership of an owner-managed business. The introduction of a board of directors, budgeting and strategic planning, and robust decision making protocols is a new layer of governance. It can take some getting used to. However, it is an often over-looked area of value (not a burden), that a PE firm brings to a company.

In summary, CEOs stress the importance of

• gaining alignment,
• identifying opportunities to increase value in partnership, and
• creating a strategy for execution beginning with the due diligence process and continuing through the initial period after acquisition.

In doing so, PEs and CEOs create a successful relationship and ensure all growth aspects are executed to both sides’ mutual benefit.