As private equity firms increasingly involve experienced operating executives in critical investment functions – including deal sourcing, due diligence, and board engagement – demand for visionary industry leaders is stronger than ever. Heightened competition for executive talent has made recruiting and cultivating relationships with potential Operating Partners, Deal Advisors, and Outside Board Members (OBMs) more and more challenging. In this white paper, Notch Partners discusses the benefits of transforming executive relationships from transactional interactions to lifelong assets.
Notch previously published a white paper based on a survey of private equity investors regarding their use of Outside Board Members (OBMs), “Laying the Foundation for Outside Board Members to Add Value Inside PE Portfolio Companies”
Our research measured investors’ satisfaction against various approaches to recruitment, compensation, and engagement of OBMs. Survey responses revealed a striking positive correlation between active interaction (between PE investors, OBMs and portfolio company management teams) and board satisfaction. Those PE investors who cultivated the most robust three-way dialogue were ultimately most satisfied with their portfolio company boards.
As a follow-up, Notch conducted a survey of OBMs regarding their experiences serving on PE boards. Based on respondents’ feedback on over 60 unique PE board experiences, we analyzed expectations, satisfaction, and engagement and measured these variables against company performance and post-board engagement. Not surprisingly, executive feedback was consistent with Notch’s central conclusion from the first survey: that active dialogue and engagement between PE professionals, OBMs, and portfolio company management teams lead to success. Findings from our second survey indicate that the most effective executive-PE relationships are cultivated over time. Knowledge and experience from multiple and varied interactions with PE translate into board effectiveness.
Notch’s survey responses revealed the following about the most effective PE portfolio company boards and their OBMs:
Building robust and mutually beneficial partnerships with industry executives has become critical to investment success. As the competition for executive talent increases, private equity firms that employ OBMs will need to maintain robust pipelines of talent, but importantly, they must also actively maintain their existing relationships. Notch has developed a four-stage framework for working with executives to increase the utility and success of PE-Executive relationships. The four stages are: Outreach and Recruitment, Engagement and Kickoff, Board Activities and Portfolio Company Management, and Exit/Post Exit.
1. Outreach and Recruitment
This is a critical and challenging first step in the process of adding OBMs, most of whom join PE portfolio boards at the beginning of an investment. OBMs are typically identified based on their industry reputation, their leadership track record, as well as strategic strengths and mentoring style. When OBMs are recruited for a specific investment, it’s important that their background be evaluated against the investment thesis and that their personal style fits well with the PE investors and the management team.
Once the board is staffed, setting expectations, defining roles, building trust between board and management team, and charting a course forward with a clear investment thesis are of critical importance. Transparency goes a long way during this phase.
3. Board Activities & Portfolio Company Management
When it comes to active portfolio company management, it is all about communication. For highest impact, OBMs must communicate regularly with all leadership groups and be actively engaged with the management of the portfolio company. In line with our previous research, communication between the management team, the outside board members, and the industry executives is strongly associated with successful investment outcomes.
4. Exit/Post Exit
About 40% of OBMs surveyed said they played a meaningful role in the sale process of the portfolio company. After the deal closes, maintaining a relationship with the OBM, particularly without an actionable opportunity, requires proactivity and effort.
For PE firms, retaining and cultivating OBMs is vital to future board success. As demand for leading industry executives grows – particularly those with prior PE board experience – maintaining dialogue with executives between board engagements is worthwhile.
How does one engage with an OBM post-exit? There are several opportunities, such as collaborating on a deal thesis, partnering in due diligence on future acquisitions, or utilizing the executive on another board. While a PE firm can engage with an operating executive at any stage of the investment cycle, collaborating early to generate ideas and source deals together is a good way to get optimal leverage, impact, and cultivation.
In our survey, executives who served on three or more PE portfolio company boards reported the highest levels of satisfaction with their PE relationships. Because of their experience, not surprisingly, they had exposure to a diverse range of PE activities, including co-sourcing investments, opening doors to valuable contacts, and interacting with potential acquirers. These executives exemplify the value of cultivating relationships beyond the board.
The PE world is transaction-driven, but the most valuable executive relationships serve as lifelong assets. Executive insight and on-the-ground experience are vital, not only during the ownership phase, but increasingly – as multiples climb in a frothy deal environment – during the deal evaluation period. Given unique investment styles, holding onto successful executives who understand their PE partners is imperative.
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