Jon is a Director at Evergreene Consulting, advising investors and management teams on their value creation strategies as well as providing support on transformational change projects post-deal. Previously, Jon spent a number of years as Value Enhancement Director at Inflexion Private Equity and, prior to that, held a similar role at LDC.
What is the biggest cause of frustration for management teams in PE-backed businesses?
Ambiguity, expectations that are too high, and poor communication between board members.
When investors back management teams to deliver targeted returns, the challenge set is often an unfair expectation which frequently leads to underperformance. It’s like asking a team of walkers to ascend a challenging mountain, something they have never done before and they are asked to do this without any form of support — without a map or equipment or insight. And we do this at the very point when the management team is exhausted and distracted from the buying process. Then when they’re half-way up this mountain, and it has taken longer than they expected, they’re often dismissed and someone else is parachuted in.
You could almost say it is irresponsible — many teams are simply not equipped for the next phase of growth, development, and the scrutiny of an investor, and little support is provided to help them.
Why do you think that is?
The vast majority of PE professionals are bankers and accountants — we tend to lead and influence based on analysis and logic rather than emotion, so we default to the safety and comfort of numbers for the answers. This is changing, but there are still plenty of instances where not enough attention is given to the people aspects of growing a business.
There is also a change in the type of management teams we are backing. Twenty years ago, you typically backed an MD running a non-core asset of a major conglomerate. The management team in that case, would have been running that subsidiary for years so it would know the ins and outs of corporate life — how to report against a budget, how a board runs, etc.
Today, entrepreneurs start businesses much more from scratch — in their bedroom or out the back of a van. Such founders don’t necessarily know how to corporatize a business. If you expect them to go up that mountain, you need to implement a very different style and approach to support them on that journey than you did twenty years ago.
Is any training or coaching provided by PE houses for that journey?
It’s not as common as it should be. When I ask PE investors how often they put coaching, mentoring, or training support in place to develop CEOs and CFOs, there are rueful looks all round, but when I ask them how often they have come out of board meetings frustrated with the lack of progress, the answer is often “frequently”, so there’s a problem; a bit of an expectation gap. This comes back to the importance of being clearer and more realistic about roles, responsibilities, and expectations.
Why is it difficult for people to admit that there is a problem?
There are plenty of examples of PE-backed businesses who have done this well. It’s not that we don’t get it right, it’s that we don’t get it right often enough. When you are making a 2× return, the underlying notion is that everyone has done a brilliant job. The question I ask is, ‘could you have been even better? Could you have made a 4× return?’. We are kidding ourselves when we think we have driven best practice.
Whose responsibility is it to get it right?
It’s a collective responsibility between execs and non-exec board members but it is incumbent on the PE house to ensure that the people and organisational structure issues get the right amount of attention through their Chair appointee. The Chair should ensure that the board and its constituent members are set up for success.
Some elements of this that are not explicitly discussed enough in the early days and often assumptions are made which become problematic later. Whilst some say this adds complexity to an already challenging dynamic, on the contrary, I think planning and driving focus simplifies things.
What would you do to address this?
When I work with management teams on value creation planning, I hold a board kick-off meeting, where I talk about how the board is going to operate. Things such as: When should we expect the board pack? How often and where should we meet? How long should we meet for? How do we communicate and interact in the weeks between board meetings?
I also take a considerable amount of time to clarify roles and responsibilities — of the chair, the non-executive directors, and the management team. You need to take the time to flesh this out or people won’t necessarily understand their roles. After all, there is a new plan, the board as a unit is new and has not worked together before, so, often perceptions and assumptions prevail which can undermine the effectiveness of a board — particularly if the going gets tough.
What would your advice be to others taking a board seat?
The best advice I was given was from someone during my early years at LDC, who said: “You have two ears and one mouth. Use them in that proportion”. There is a tendency for junior professionals and non-executives as a whole, to try and prove that they are the smartest person in the room. The fact that you are there representing a PE house proves that you are bright.
It’s far better to sit back and listen, watch the dynamic and take time to contribute rather than dive in and dissect the historical trading of the business. I do believe too much time in board meetings is taken up dissecting these numbers and not enough time is spent on value creation initiatives and the people development plan that supports the value growth plan.
And read the board pack properly! However good or bad the board pack is, it is disheartening for non-execs to come to the board clearly not having taken the time to read the pack fully.
Is there a link between effective boards and enhanced returns?
Yes — if board meetings are optimised and have the right balance between looking backwards and forwards, they can help to steer around the icebergs and provide increased focus around the delivery of the value creation plan.
This interview is part of a series researching the Board’s value in Private Equity.