Tough call – the private equity viewpoint

How can a private equity investor get comfortable with backing a CEO they have never met in person?

Sandra Davis and Richard Rivlin investigate.

Assessing the relative strengths of a management team has always been part of the investment process for private equity. There is a need to check on suitability for the current job, having the skills to deliver a growth strategy and, of course, chemistry.

One could liken it to dating: it starts with a tentative ‘getting to know you’ low-key outing; progresses to more formal meetings; and, finally, if all is going well, the meeting with the rest of the family.

But the current pandemic has put a stop to this face-to-face courting.

Now, if private equity firms are going to continue to make new investments, they must learn a new skill. Building an open, collaborative relationship via a screen. No more handshakes. Distanced site visits. No more ‘getting better acquainted’ dinners.

Does it mean that video calls have to get tougher to replace the in-person due diligence and relationship building? In fact, the opposite is true.

Building rapport through a screen can be done. It means adjusting to the new context. Here are our five top tips for private equity practitioners relying on video conferences to make these decisions.

1. Be honest – PE executives who are brave enough to say they are uncomfortable making this decision without the face-to-face contact demonstrate humility while also forcing a reaction from the management team. It is a smart tactic to use honesty to make the management team open and speak candidly with you. If they remain wooden and stilted, lacking in empathy, then it is a missed opportunity.
2. Be mindful of body language – It’s not just what you say but how you say it. PE executives should ensure they are watching the management team presentations with a partner. And one of them needs to particularly focus on watching the body language of the management team – both when they are speaking, and when they are not – because they are still communicating when they are listening – even over VC. Do they look like they’re in agreement? There are just as many non-verbal cues on display on a VC. If anything, it is easier to watch the facial body language of a management team when they are on a screen right in front of you.
3. Notice the relationships – Body language may also give clues to understand the dynamic between the CEO/MD and FD/Group Accountant. Their relationship is particularly important. Last week we supported a technology business with a fundraise and there was a notable gap between the CEO’s financial strength and the confidence of the FD. A negative became a positive when they decided to be open about wanting to get input from the potential investing PE firm to improve the financial controls.
4. Appreciate agility – Whether the coming 12 months is going to resemble the past four months is impossible to second guess. Seeing MDs and CEOs who relish the challenge is what this is all about. They should eagerly articulate how they have responded in an agile way to protect what they have or even graft on growth.
5. Flip it, using VC as a CV – There was the adage that CV stands for competence and values. That is as true today as ever. But we now live in a VC world where CVs are turned upside down and back to front. The requirement for leaders to find a way to connect over VC – whether 1:1 or 1: many – is an essential skill.

It is the most important communications skill for a leader in 2020 and is likely to continue being very important in times to come. Either the leader you are thinking about backing has this skill or they don’t. If they do, that is wonderful, especially if their competence and values check out. If they don’t, then are they willing to invest the time necessary to get better at it? If not, are they the right person for the job?

Essentially, private equity firms have been learning to survive during the pandemic. They need to embrace communicating via video with EQ as well as IQ if they are going to thrive in the new normal.

In our part two blog, we ask a similar question from the perspective of a management team.