The importance of the management team in private equity

What do private equity backers look for in potential investments? Most of all, a top-calibre management team, says Paul Marson-Smith, chief executive of mid-market investment business Gresham Private Equity.

We have enjoyed tremendous successes backing first-class management. Some of these have even in businesses where the market opportunities might be seen as mundane but we have also seen some glittering market opportunities wasted by sub-optimal management teams. In our view, therefore, it’s all about management.

But what makes for good management? Business success requires a team effort; individual strengths combining to create a greater whole. Running a successful business is the same as playing in a great football team: individuals will have strengths and weaknesses but, when working together as a team, they consistently outperform the competition.

There may be a misconception that private equity backers most like to invest in raw entrepreneurs – people with highly innovative minds who have created a new product or spotted a new way of tackling a market. In reality, these people are few and far between and are not necessarily most suitable for private equity backing. Looking at the investments we typically make, we support people who have strategic vision, strong leadership skills and massive drive to succeed even if the market opportunity is not new. They are often highly adaptable people, who have succeeded in a blue-chip corporate world, but now want to apply themselves in a more entrepreneurial environment.

Vision, leadership and drive are three essential qualities that we look for in the chief executives of the businesses we support. First, the CEO must have clear, strategic goals and know exactly how to take the business there. Then they must also be able to inspire the management team; leadership means winning hearts and minds. Drive is the third essential requirement. Markets are getting tougher and CEOs have to be absolutely determined that their business will succeed, whatever it takes. Overall, the CEO needs to be like the squash player standing on the T: balanced, aware, listening and able to move to any part of the court.

While we look for a track record of success in the CEO, no one is perfect. We like to see people who have demonstrated high performance in the past because that gives us confidence they are likely to perform as well – or even better – in future.

However, everyone is allowed a mistake, especially if they have learned from it. So some evidence of past errors will not necessarily rule an individual out, though repeated failures probably will.

In addition to a strong CEO, we also look for a strong finance function. Where businesses struggle, the reason often lies in poor management and financial information. You can have the world’s best striker up front but, if the midfield can’t support him, the team won’t score. A strong finance function producing reliable, timely management information based on strong systems is a ‘must have’ for success.

A third key element that we look for in potential investments is the strength of the chairman. While the CEO is the team leader, a strong chairman adds value, thinking strategically in more lateral ways, helping to develop the customer base or assisting with flotation plans. What the chairman definitely is not is a crusty old gent who turns up in a Jaguar once a month for tea and biscuits.

The businesses we back are successful because they demonstrate these essential characteristics. Two examples: in late 2003 we invested in IT services business 2escape2 when it was generating revenues of around £6 million. Those revenues have now increased to around £140 million, while the business is making a ten per cent net margin.

The company’s outstanding revenue, profit and value growth are down to the quality of the CEO and the management team around him to exploit an exciting market opportunity. The second example is office2office, a stationery supply company that we backed at the end of 2000. Our recent exit made a return of seven and a half times money. There is nothing particularly sexy about the stationery sector but the management team built a great business through their own determination and combined abilities.

For Gresham, there has to be chemistry between the private equity house and the management team. We see ourselves as in partnership with management and behave as a highly interested shareholder. It is essential that we feel a strong bond with the members of the management team – that these are people we can and want to work with, and who want to work with us.

This article was originally published in Masterclass magazine.

Nick Britton

Nick Britton

Nick was the Managing Editor for when it was owned by Vitesse Media, before moving on to become Head of Investment Group and Editor at What Investment and thence to Head of Intermediary...

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