The Mana­ger in Pri­va­te Equi­ty Tran­sac­tions

The aim of finan­cial inves­tors is to acqui­re estab­lished com­pa­nies with strong cash flows, deve­lop them fur­ther and sell them at a pro­fit. For this pur­po­se, finan­cial inves­tors need a qua­li­fied and high­ly moti­va­ted manage­ment.

Har­mo­ni­sa­ti­on of inte­rests: Turn mana­gers into entre­pre­neurs
The objec­ti­ve of manage­ment par­ti­ci­pa­ti­on is to mana­ge exis­ting con­flicts of inte­rest bet­ween finan­cial inves­tors and mana­gers by brin­ging tog­e­ther diver­ging inte­rests through par­ti­ci­pa­ti­on in value growth. To achie­ve this, mana­gers must neces­s­a­ri­ly beco­me entre­pre­neurs. This is achie­ved by the mana­gers inves­t­ing in the equi­ty of the com­pa­ny (“skin in the game”). The gui­ding prin­ci­ple here is: “The invest­ment should hurt the mana­ger, but not ruin him”. After all, the adre­na­line level of the mana­gers should rise through the invest­ment, but at the same time the mana­ger must still be pre­pared to make ris­ky decis­i­ons for the future, so the risk must not be too high. In fact, it is often the case that the mana­gers’ invest­ment has a hig­her risk pro­fi­le than that of the inves­tors. In return, mana­gers can often expect a hig­her return on the capi­tal inves­ted if the com­pa­ny is suc­cessful­ly sold. In addi­ti­on, manage­ment par­ti­ci­pa­ti­ons also com­pen­sa­te for the fact that, con­tra­ry to the mana­gers’ regu­lar long-term thin­king and their own safe­ty, they tend to pur­sue a rather short invest­ment hori­zon. In addi­ti­on, the manage­ment must be com­pen­sa­ted for labour mar­ket dis­ad­van­ta­ges. The­se dis­ad­van­ta­ges are reve­a­led when the grea­ter risk appe­ti­te of a finan­cial inves­tor and the clo­ser manage­ment lea­der­ship prompt­ed by it are com­pared with the risk appe­ti­te of an owner-mana­ged medi­um-sized com­pa­ny or a lis­ted com­pa­ny with wide­ly dis­tri­bu­ted equi­ty capi­tal and cor­re­spon­ding manage­ment free­dom. Over­co­ming the afo­re­men­tio­ned diver­gen­ces of inte­rest is neces­sa­ry from the inves­tor’s point of view in order to achie­ve the cen­tral goal of achie­ving the grea­test pos­si­ble increase in the value of the com­pa­ny. This requi­res an incen­ti­ve struc­tu­re as descri­bed abo­ve.

What chan­ges does a finan­cial inves­tor bring for the manage­ment
The aim of finan­cial inves­tors is to increase the value of the com­pa­ny and to sell the com­pa­ny at sub­stan­ti­al pro­fits. The manage­ment of the com­pa­ny must ulti­m­ate­ly gene­ra­te this increase in value. This results in spe­ci­fic requi­re­ments and chal­lenges for the manage­ment, but also oppor­tu­ni­ties for entre­pre­neu­ri­al acti­vi­ty. The focus on “Cash is King” should be empha­si­zed. Due to the high level of debt finan­cing and the asso­cia­ted repay­ment and inte­rest char­ges, it is essen­ti­al for a buy-out that the cash flow is sta­ble and can be gene­ra­ted at least as pre­sen­ted to the banks in the busi­ness plan. Accor­din­gly, the manage­ment must pay much more atten­ti­on to cash and working capi­tal issues than in a group envi­ron­ment or in fami­ly busi­nesses. Invest­ments are also exami­ned much more clo­se­ly for their con­tri­bu­ti­on to value gene­ra­ti­on. In addi­ti­on, the banks have con­sidera­ble report­ing requi­re­ments. But the wil­ling­ness to exch­an­ge exis­ting mana­gers and manage­ment teams must not go unmen­tio­ned eit­her. This is main­ly due to the fact that the finan­cial inves­tor only has a short peri­od of time left to gene­ra­te the inten­ded value enhance­ment. As soon as the impres­si­on is crea­ted that dif­fi­cul­ties exist with one or more mana­gers in this respect, con­se­quen­ces are quick­ly drawn. Par­ti­cu­lar­ly in the first few months, the finan­cial inves­tor, with the sup­port of a lar­ge num­ber of con­sul­tants, will attempt to cor­rob­ora­te the fin­dings of the due dili­gence, cri­ti­cal­ly review the cor­po­ra­te stra­tegy and car­ry out an in-depth assess­ment of the indi­vi­du­al mem­bers of the manage­ment team. Finan­cial inves­tors are loo­king for mana­gers who, in addi­ti­on to a clear stra­te­gic view, are able to mana­ge pri­ma­ri­ly by means of finan­cial rati­os. This is alre­a­dy a result of the high level of exter­nal finan­cing. Often in fami­ly busi­nesses, but also in cor­po­ra­te groups, a con­tro­ver­si­al dis­cus­sion about cor­po­ra­te goals and cor­po­ra­te stra­te­gies is avo­ided. Howe­ver, the­se are pre­cis­e­ly the demands that a finan­cial inves­tor places on his mana­gers. While in other situa­tions the ope­ra­ti­ve manage­ment often only pas­ses on a frac­tion of the available infor­ma­ti­on to the con­trol­ling bodies, exact­ly this is not desi­red by finan­cial inves­tors. A maxi­mum degree of trans­pa­ren­cy and com­mu­ni­ca­ti­on is requi­red. The advan­ta­ge of finan­cial inves­tors is in par­ti­cu­lar that they have a clear goal ori­en­ta­ti­on. While poli­ti­cal con­side­ra­ti­ons may well play a role in other owner­ship struc­tures, finan­cial inves­tors focus exclu­si­ve­ly on incre­asing the value of the com­pa­ny. All decis­i­ons are mea­su­red against this prin­ci­ple. In addi­ti­on, the com­pa­ny is always a core asset of the finan­cial inves­tor. The pri­va­te equi­ty mana­gers who car­ri­ed out the tran­sac­tion are per­so­nal­ly inte­res­ted to a high degree and are also incen­ti­vi­sed to lead the com­pa­ny to suc­cess. Accor­din­gly, the full atten­ti­on and resour­ces of the finan­cial inves­tor are devo­ted to the com­pa­ny and its manage­ment team. This is not always the case, par­ti­cu­lar­ly in the case of group com­pa­nies that no lon­ger belong to the core area of the com­pany’s acti­vi­ties.

Con­clu­si­on
Over­all, it can be said that the manage­ment team is being sub­jec­ted to much more cri­ti­cal scru­ti­ny and chal­len­ged, but on the other hand, the­re are con­sidera­ble oppor­tu­ni­ties for the manage­ment due to the pro­fes­sio­na­li­sa­ti­on of cor­po­ra­te moni­to­ring and con­trol and the finan­cial inves­tor’s focus on the com­pa­ny. Under­pin­ned by a genui­ne par­ti­ci­pa­ti­on in the equi­ty capi­tal, the mana­ger beco­mes an entre­pre­neur who­se scope for action in the pri­va­te equi­ty envi­ron­ment regu­lar­ly increa­ses.

Prof. Dr. Alex­an­der Götz