First of all, what is a Private Equity?
Private equity is the practice of investing in the equity of companies of all sizes, usually unlisted (private), by taking a majority or minority stake for a limited period. Private equity aims to finance innovation, provide managerial expertise to executives, support the development of companies and facilitate their transfer.
Also, the goal of the investors is to create value in a 4 to 7 year horizon and then sell the company with a capital gain. On the contrary, a family business seeks to develop its company over the long term, often with a patrimonial vision.
From a governance perspective:
In a private equity company, the CEO is primarily a manager, but he or she has often co-invested as a minority shareholder.
–> As a result, the interests between the private equity and the executive are aligned.
This is therefore rather healthy, but the objective of creating corporate value for a successful financial exit can carry risks in corporate governance when it is focused on this sole objective.
The contribution of the Independent Administrator is important in this configuration to be the guarant of :
- Good governance of strategic decisions during the ownership of the company. This may include innovation intensity, business, IT and industrial investments as well as human resource development.
- Defending the medium and long-term interests of the company beyond the
private equity ownership. It can be about the subjects above but also prepare technological ruptures, or business model transformation which could weaken the company on the long term.
Finally, the contribution of the Independent Director is not so much to contribute to the balance between the Private Equity and the Management but to put on the agenda and promote the aspects that protect and strengthen the company in the long term, and in particular after the exit of the investors .
What is the profile of the Independent Director on the board of a private equity owned company?
There is no ideal profile, but there are a few things to keep in mind when hiring an Independent Director:
- Is the value creation agenda more about revenue growth or cost improvement? It is best that the independent director’s experience be aligned with the agenda.
- Private Equity generally does not know the industry and the business of the company. It may choose to have an Independent Director with experience in the sector to enrich the exchanges and discussions with the CEO and his team.
- The Independent Director’s past experience as a former CEO or executive is often appreciated. It’s a way to build the right communication bridges with the leader. It is often the case that the private equity teams in charge of monitoring the assets are often junior and mainly interested in results and may forget about the human element.
If we were to recommend an ideal profile for an Independent Director for this type of advice, he or she would have executive experience, would know the codes of private equity, and finally would put human relations on the figures and rationality on the complexities of human relations!
We would like to thank Didier Forget, APIA member and Independent Director for his great involvement in the creation of this article.
The entire APIA team is here to inform and assist you in choosing a competent independent administrator who meets your needs.
APIA Swiss Team