The Role of Turnaround Practitioners in PE-backed Companies

15 March 2018 13:50 | Deleted user

Turnaround practitioners and professionals need a clear understanding of the needs of private equity-backed companies in order to provide appropriate service offerings and to deliver these in step with their client’s developing requirements.

Since 2014, the value of venture capital deals in Greater China plus India has been consistently larger than that in Europe.

Limited Partners invest in a Fund which invests in a stake in an Investee.  Typically, of any gain upon the disposal of the stake (or other liquidity event), 80% is paid to the Limited Partners.  A General Partner manages the Fund; typically the GP receives an annual fee of 2% of the fund plus, at exit, 20% of the gain is paid to the General Partner.  Any stake looking unlikely to deliver gain may be referred to a “living dead” and receives little attention from the GP.

The GP (fund manager) agrees a business case with the Investee.  Unless some major mistakes are made in due diligence, the business case should be deliverable with good planning, hard work and little drama.  The main risks are the same as for any other successful company: ill-conceived M&A, supplier solvency, market disruption and inter-personal friction.

The GP’s priority is not making a great company but about changing a poorly performing company into growth opportunity.

GPs tend to prefer to engage over-qualified people.  They do not want to take much risk with key people but are prepared to pay good money for validated experts and to incentivise with equity.  GPs also prefer to experts with a track record working for PE-backed businesses.  A changeover of half of the senior and mid management during the early post-investment period is common.

The average time horizon for a holding is five years.  At ground zero, the main appetite is for fresh management (with equity) and consultants.  Readiness for restructuring and M&A will grow over the first months but drop off in the third year.  Year 2 sees the peak in capex.  Year 4 is about stability and earnings record as the selling process proceeds.

Valuation is driven by performance (EBIT) but also by multiple, a function of a buyer’s perception of the quality of earnings and of management quality.  Therefore GPs are keen to engage over-qualified operational expertise to maximise their exit valuation.

This was the consensus which emerged from the panel discussion at ATTA’s recent annual conference by Warren Beese, T.T. Chen,  Dwight Nordstrom and Olivier Cotard.


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