Is private equity a force for good?
Richard Metcalfe, Partner, Mazars
We need to look at the context of private equity before we determine whether it is a force for good.
It’s been part of a culture of financing businesses for many, many decades now. I think today, though, it’s in the headlines because some of our larger institutions and high street businesses are seen as targets for private equity firms.
So a lot of people out there are asking: where have these private equity firms come from? How are they financed? How are they intending to take the businesses over? Yet many, many businesses in the UK are absolutely dependent on forms of private equity and venture capital for growth.
In any situation you can look at it both ways. Yes, there are going to be instances where you have inefficient businesses, where private equity firms would come in to take the opportunity to drive efficiencies and that could mean selling off non-core assets. It could mean making people redundant to get those efficiencies and get the return that they are looking for.
On the other side of that, it is clearly important for private equity firms to also derive value from the business and to make the businesses grow. From that perspective there are many private equity examples you could use where the number of employees has actually increased by virtue of the fact that the businesses have grown over time.
How does an FD’s role in a private equity backed business differ to that in a public company?
John Cole, partner, Ernst & Young
There is a difference on a whole series of things. On communication, company FDs clearly have to get a result, do the analysts presentation and it’s a pretty formalised relationship.
With a private equity company, the owners are on the board with you and they are very sharp, very bright guys and you really have to be on top of the detail.
The other aspect often about private equity boards is that they are quite small. They don’t have a lot of non-execs and they don’t have a lot of execs, so the FD then becomes the greater focal point for a whole range of areas.
He is the man in the room with the non-execs, representing their interests and that puts a lot of pressure on them. Often they come from a controlling background for large corporates and therefore are not used to the focus on cash.
The priority is to ensure that you hit the cash flow targets. A lot of financial controllers don’t have that experience about managing the working capital and tweaking that to ensure that you always hit the quarterly reporting requirements.
So there is a lot more pressure on a private equity-backed FD – more than they might have imagined from outside. In many ways it is a much more lonely position. You often don’t have the huge infrastructure that public companies have.
How does governance differ?
Ian Leaman, founder director, Buckingham Corporate Finance
The private equity issue became politicised around a change in prime minister and a particular agenda from the unions.
This led to a dumbed-down debate – a red top debate. It’s a debate with misinformation and ill-informed comment fuelled for a political end.
But from a CFO/FD perspective, the label of corporate governance really sets the scene. Any lending that a bank does to a private equity-backed business is stress-tested before it’s made.
The banks are also much more sophisticated than they were before the current wave of economic growth in their lending. The role of the FD here is to be right on top of all the good quality, high integrity financial reporting on a very timely basis, measuring the performance of the business almost real time.
I would characterise the mindset of the FD of a private equity-backed business not as an employee, not as a FD, but actually as a business partner, a business partner of his investors. That really is a different mindset from the position, which an FD would occupy in either a listed company or a non-private equity backed private business.
There are a couple of areas where that distinction really shows. In a listed company you would probably have a full-time professional or outside agency doing the investor relations role.
That is very squarely in the lap of the FD in a private equity-backed business, a key part of the model in private equity is the alignment of shareholder and management interests.
That alignment is very good most of the way through the process, but diverges at two key points – negotiations of management terms on entry and on negotiations of cutting up the cake on exit. And the FD’s role is particularly acute at those points.
Chaired by Damian Wild
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