Tough call – the management viewpoint

How can management teams select the best private equity partner and investor, when they are not meeting them in person?

Richard Rivlin and Sandra Davis provide some tips.

Last week we asked a similar question from the perspective of a private equity investor.

The feedback included various comments from those wanting to know if the advice was exactly the same for those on the other side of the table? As in, if you are the CEO/MD or selling shareholder, what should you be doing to make the best decision about who you select as an investor, especially if you are not going to meet them in person?

After all, unless both sides of the table are willing to engage and adapt to a new way of finding the right partner, the transactions will simply not get done. So, what tips do we have for management teams who are faced by a choice of potential private equity or venture capital investors? All are making promises but how can you make the right decision?

1. Play to your strengths; be unafraid about your weaknesses

Having advised hundreds of management teams over the past decade – the majority of whom eventually get backed – we have yet to meet the perfect, fully-formed unit from the get-go. CEO/MDs/CFOs need to blend confidence and humility: confidence in their ability to run and grow the company; humility in terms of the responsibility that goes with taking institutional cash to build the business. The best leaders are those who are open about the strength of what they are bringing at that moment in time and transparent about where they need support.

2. Know what you stand for as well as what you do

Modern business leaders put huge value and emphasis on purpose and values. Values are a great filter when hiring people to see if there is alignment or not. Values can also work in selecting a business partner, such as your investor. If you are the CEO/MD of a business that has an eat-what-you-kill culture, then you are probably going to find common ground with an equally carnivorous investor. If you want a more paternal and collegiate approach, then those investors are also out there. Invest time sharing values-based perspectives. You will reap the benefit.

3. Don’t try and paper over the cracks

PE firms want to reduce risk. Investors are smart in applying the knowledge that they have gained in a sub-sector and doubling down on it. The smarter management teams respect their levels of understanding in terms of the narrative they weave and in handling questions. Trying to hide faults in technicalities, or jargon will back-fire. Rather, include slides in the deck or in the appendix on how risks are being addressed and reduced.

4. Do your own due diligence

Reference checking is a two-way street. You can be assured that the PE or VC investor is going to take references out on you as individuals and as a team. Do not be embarrassed or afraid to do the same on them. Ask them who they want you to speak with to get a reference. And, if the mood is right, ask them who they do not want you to approach, with a view to approaching them. You need to see them in all shades of light.

5. Think about what it is ‘like’ to work with these people

Fun is more important than ever. Neither side of the table are looking for new friends. But it is perfectly possible and should be encouraged to find people that you build a rapport with, have mutual respect for, and with whom you are able to share the odd moment of levity.

As we noted in our last piece, both investors and management teams need to embrace communicating via video with EQ as well as IQ if they are going to find the right partners and thrive in the new normal. We wish you well.