Chief executives and finance directors in the UK have a one in four chance of being sacked after private equity firms invest in their companies, but the risk has not deterred either manage
Chief executives and finance directors in the UK have a one in four chance of being sacked after private equity firms invest in their companies, but the risk has not deterred either managers or non-executive directors from repeated involvement in private equity deals, according to a new report from business and financial adviser Grant Thornton and board recruiter Directorbank.
The survey of 283 executive and non-executive directors that have completed at least one private equity deal found that financial directors have a 28 per cent chance of being replaced should they become involved in a private equity-backed business, while chief executives have a 24 per cent chance of being replaced.
The risk for non-executive directors including chairmen was less but still significant, with more than one in ten (12 per cent) changed following private equity deals.
The research aimed to understand the deal process from the point of view of management teams backed by private equity houses. The report found that the UK has now followed the trend of the US in accumulating a growing body of directors who have completed three or more private equity deals – 41 per cent of directors now fall into this category.
‘When a football team is on a bad run the chairman fires the manager,’ says Directorbank founder Jonathan Hick. ‘In the UK today, at any one time, there is a queue of more than 2,000 highly experienced directors ready and waiting on the touchline to run with a private equity ball. It has become a super league of modern business.’
The report found that despite the level of boardroom turnover, directors were largely satisfied with the deal process, with 67 per cent happy to deal with the same investor again and 25 per cent preferring to deal with a different private equity investor, while 8 per cent would prefer to avoid private equity investors altogether in the future. Executive directors showed far greater reluctance to work with the same private equity houses again.
According to David Ascott, head of private equity at Grant Thornton, the research was designed to help directors prepare for the sometimes daunting realities of private equity investment.
‘Finance directors in particular suffer from several risk factors, including the demands of leverage calling for a significant change in financial sophistication, and external investors scrutinising their work more closely than that of other executive directors, their skills being seen as more of a commodity,’ he says.
Management changes were seen as somewhat or fully justified by 74 per cent of directors surveyed. However, anecdotal evidence suggested executive directors already successful in one deal were highly prized for future assignments.
In examining management returns from, private equity deals, the survey found many directors reluctant to offer monetary figures, instead reporting their gains as ‘significant’, suggesting the average reported deal return of GBP1.53m was considerably lower than the market reality. Seventy per cent of respondents saw their financial expectations met or exceeded, with only 18 per cent describing their return as ‘significantly below hopes’.
A serial director involved in private equity deals, Lars McBride has completed seven management buy-ins in engineering and manufacturing over the past 15 years, the most recent being Edinburgh-based microwave components manufacturer Thales-MESL in August last year. The former finance director of paper manufacturer Portals, McBride did his first deal at the age of 41 and says the biggest risks are not to do with money but career.
‘When you do one of these deals you are probably saying goodbye to a corporate career,’ he says. ‘It took 10 months to do my first deal, and I didn’t earn anything in that time. But the reward is being the boss.’
The report found that while the prime motivator for directors to pursue a private equity-backed buy-out or buy-in was to build wealth, cited by 50 per cent of respondents, 18 per cent of those surveyed said their key reason for seeking a deal was to ‘pursue a more ambitious vision’, while the desire to take ownership and the ability to make decisions faster were also significant drivers.
