Private equity firms have a variety of value creation tools to draw on when working with portfolio companies, but perhaps none as important as the management teams they partner with.

The relationship with management will often decide whether a firm backs a deal in the first place or not, and rare is the deal where a private equity firm won’t strengthen a management team during its hold period.

In a recent Real Deals podcast, Rutland partner Ben Slatter and Mark Andrews, the chief executive of Rutland portfolio company Armitage Pet Care shared their experiences of the private equity firm/management team dynamic and how to make the relationship work to its fullest potential. Here are some of the highlights

Listen to the full recording here

Navigating the pandemic

Andrews said Armitage had traded well through the lockdown period. The business did have to work through some supply chain disruption, but demand has held up well.

With respect to working with Rutland when social distancing measures were in place, Andrews said contact between management, Rutland, and Armitage’s chairman had in fact increased through the lockdown period, with a focus from all parties on staying close to current performance and how the business was operating under lockdown periods.

“We have had to make some quick decisions, but it has all worked very well. On top of that, we have had our usual monthly meetings. Fortunately, we already had a good working relationship as a board. That has really helped us to navigate the COVID period together,” Andrews said.

Slatter said that Rutland’s portfolio of seven businesses had all faced different periods during the lockdown, but that frequency of communication had been a critical theme for all companies in the portfolio.

“The early phase was focused on protecting employees in the workplace, adapting to working from home and understanding the various government support schemes that have been put in place,” Slatter said. “It was then a case of working with each company to form a realistic assessment of what businesses were facing and reforecasting for the short and medium-term.”

The line between hands-on investing and interference

Where is input from a sponsor welcome, when isn’t it, and how do you communicate where that line is?

Andrews said that before taking on the Rutland role, his first in a private equity setting, he received some “very good advice” that has continued to inform his approach to working with Rutland years later.

“Keep your chairman and your private equity firm well-informed. Don’t leave them at arm’s length and make sure that they are part of the team. That sits very well with me as a way of working and very early on we sat down with the chairman and Ben and discussed how decisions were going to get made,” Andrews said. “That is where interference can be a problem… when it isn’t clear between parties who makes what decisions and how those decisions are made.”

Andrews said this had facilitated a very open relationship that encouraged input from the sponsor and gave management teams the confidence and security to take on additional support when offered. 

What makes a good private equity chief executive?

When asked about the qualities a sponsor sought in the chief executive of a portfolio company, Slatter said Rutland was looking for people who were “driven and ambitious” but also able to step back and think strategically.

“The ability to think strategically and clearly is particularly important for Rutland, as we are often working on more complex situations. You have to be able to drive through change but also adapt to bumps in the road,” Slatter said. “You are looking for someone who can think on their feet and adapt to change, and also someone who can build teams, because no one can do it on their own.”

Aligning on exit

Maximising the value attained at exit is much easier when management and sponsor are on the same page.

“We constantly talk to management about the timing for an exit and they are involved in that decision when it comes,” Slatter said. “We do encourage chief executives to meet prospective buyers before sales processes. I am a firm believer in teams across all sectors meeting their competitors, particularly those that may end up becoming potential trade buyers down the line. Trade does take longer in auctions situations, so the more engagement you have upfront can only be a positive.”

Andrews said he believed it was very important for any portfolio company chief executive to be very clear and open about any meetings with potential buyers and debrief on how those meetings had progressed.

“One of the things I really like is when there is alignment about what success looks like. It is in the best interest for both sides to have any meetings with potential buyers out in the open.”

Good advice

When asked for what advice to offer first-time private equity portfolio company management teams, Slatter said most important thing was to be “totally honest, open and transparent” with the private equity sponsor from the very beginning. Frequent communication and good relationships were crucial when navigating any bumps in the road.

Andrews said, “no surprises” was an important mantra, which was enabled by openness and trust. A management team that has earned a sponsor’s trust will receive the freedom and space to implement new ideas and make fast decisions.