While it may come across as self-serving, delegating deal tasks to experts is likely to improve the outcome. Here at Liberty all we do is support management teams in private equity deals. We have a large pool of data from deals across multiple deal sizes and jurisdictions. We have seen how different investors approach various topics and what does and doesn’t work. Leveraging this expertise in the deal process both takes a task off your hands and gives comfort that what could be the most important investment of each member of the team’s life is optimised as far as possible. Your buyers are experts in investing (and negotiating as mentioned above), know industries inside out, and even they ensure that they have first class advisors on board for virtually every aspect of the deal, so follow their lead and make sure that you surround yourself with people who can get you the outcome that you deserve.
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Five lessons Brexit can teach management teams in private equity deals
Whatever your political persuasions, there is a general consensus that the execution of the Brexit negotiations has been less than smooth.
The lessons learned from this saga can be applied to any situation where you are trying to negotiate a deal, and very much so in the context of a management team negotiating the terms of their investment with a private equity buyer. Below are five lessons that stand out to me:
Lesson 1 – understand your playing field. Recently there has been criticism levelled at Mrs May and her government for failing to identify the steps needed to get a deal agreed. Several members of the negotiating team have walked away from the process, and subsequently shared opinions that there was not enough attention paid to adequately studying the power structures and dynamics involved within the EU.
For management teams in private equity transactions what does this mean? Firstly, you need to get up to speed on the private equity business model and how your performance as a business will reward the deal individuals. You need to understand how the acquisition of your business will be structured and when you are committing capital to this structure, how your capital behaves in both good and bad outcomes. You should also delve into liquidity timing and run the ‘what if’ scenarios around follow on capital (for various reasons), leaving the business (again for multiple reasons). Finally, you need to pick your team, think about who is going to be critical to delivering on the investor’s equity story and have a crystal-clear view on what would incentivise them to play their role in that story.
You also need to consider how and when you negotiate your deal. Engaging with the buyers while they are in a competitive process clearly provides the most amount of leverage, with different tactics being required where a buyer has been selected.
Lesson 2 – be realistic about what can be achieved. Giving the UK a fairy tale deal as some at the forefront of the leave campaign suggested would likely have serious ramifications for the EU. Facing a surge of nationalism and a renewed willingness to vocally support far right politicians, allowing the UK to waltz off into the sunset with everything we wanted, and no downside would likely trigger a push for further breakaways and potentially prove fatal to the EU project. Regardless of how much EU countries wanted to trade in our market, or they needed the UK’s products and services, the cost of restrictions to these would likely be dwarfed by a collapse of the EU. From the EU’s perspective the outcome needed to be a warning shot to those states harbouring a nascent vision of splitting.
Within private equity structures, the amount by which management can benefit has to come from somewhere. As incentives are aligned to capital events, this needs to come from other shareholders. This therefore has a cost to either their investors, the private equity executives or both (depending on fund performance and their own incentive structure). As the industry has evolved a well-established set of parameters have developed alongside its evolution, providing an outline of structures that deliver amounts that a) align the interests of management with the shareholder, b) are life changing for the management team, and c) delicately walk the line of acceptable investor dilution. While the market has set parameters, do bear in mind that private equity executives are professional negotiators and are hardwired (and professionally obliged) to get the best deal they can for themselves and their investor group. You therefore need to be robust and skilled in response to this to ensure you get the deal that the entire team deserves.
Lesson 3 – think about how you communicate. Negotiating with a future partner runs some significant risks. The Brexit debate played out so understandably publicly, and while those campaigning for leave tried to rally the troops behind their cause they were critical and at times disparaging of the very party that they were about to try to cut a deal with. While it is not uncommon for politicians to revert to hyperbole in pursuit of support for their agenda, there is danger in using this approach where you need to forge an ongoing mutually beneficial relationship. Those tasked with thrashing out the detail are human and will be naturally tribal about their side, and insults and overt criticism typically don’t improve the outcome of a negotiation where compromise and collaboration is key. The UK would have been far better served from understanding and sympathising with the EU’s challenges and working with them to create a future that is as fair as possible in challenging circumstances.
When a management team are negotiating with their incoming investors, there are inevitably going to be differences of views and tension in arriving at a deal that works for all parties. Understanding how to communicate asks, with backing data and analysis where necessary, and positioning in a way that is palatable to the buyer will help to smooth this path. Also know when to use and defer to advisors to depersonalise this process and allow you to keep your relationship with your investor about what matter to you both (maximising the value of your company).
Lesson 4 - don’t lose sight of your day job. Mrs May and her government have understandably become consumed with the Brexit process, and in trying to navigate the deal terrain, the conservatives have lost their majority, UK growth has slowed, the currency has taken a hit and the global view of the UK appears for the most part to have diminished. While Brexit has distracted the public from the normal levels of criticism, they will likely be problematic for the government once it is finally wrapped up and a Brexit debrief is carried out
For management teams, a deal adds a few more full-time jobs on to everyone’s to-do lists. On top of their day to day executive roles, you can add diligence (vendor and buyside), management presentations, coffees / fireside chats, arranging financing, managing internal messages, and negotiating the terms of management’s investments. This is an unbelievable workload and can (and often does) have an impact on current trading outcomes which can as a result have an impact the relationship management have with their new investor. This leads nicely into lesson 5…
Lesson 5 – Maybe experts are important. One of the more discussed parts of the Brexit debate, was Mr Gove’s infamous statement “Britons have had enough of experts”, and while there was probably more nuance behind the statement than was reported, experience is valued in most walks of life and pursuing a complex outcome without leveraging the experience of those who have been there and learnt already often makes things harder than they need to be. Brexit was (and is) an incredibly complex and challenging event, and a different approach to obtaining and accrediting experts’ views could have resulted in a different outcome either to the vote or the execution of Brexit negotiations.