Management Assessments

Increasing the value of private equity companies with the right people

By Dominic Pfau Dennis Tanke Göran Petersen

The success of a company depends on its management. This is a proven reality amongst venture capitalists: “It is better to invest in a bad business model with a good management than vice versa”. However, private equity investors still tend to focus primarily on financial, legal and industry-relevant aspects in their deals. All too often, the scrutiny of the management involved falls by the wayside - but this increases the risk of getting into rough waters after the closing.

Before private equity investors include a company in their portfolio, they usually put it through its paces: The due diligence. In addition to the business model and the finances, there are numerous legal aspects to consider before a deal is struck. But even experienced private equity investors freely admit that one factor is regularly neglected in the due diligence process: the thorough and professional assessment of the management. As a rule, little attention is also paid to the second and third management levels. Although everyone knows about the risks involved, there is a simple reason why little is done in practice: When several investors seek to buy a company, the founder or owner and his management can choose which investor they bring on board. An investor who wants to do a thorough management assessment before the deal surely doesn’t improve his chances to win the race.

In addition, the acquisition of each portfolio company is an individual case. There is simply no such thing as a one-size-fits-all manager. Instead, attention must be paid to the specifics of each case. Generally speaking, the purpose of an investor's entry is either to get an ailing company back on its feet or to exploit existing but up until now untapped growth potential. The situation of the top management of a portfolio company in need of a turnaround or an impulse for further growth is similar to that of the coaching staff of a football team in crisis. For such teams, a change of coach is not a remedy that always works, but it is usually an option to be taken seriously into account. The same applies to the management team or at least individual executives in portfolio companies.

From our close cooperation with private equity companies, we know the time and success pressure under which they work during due diligence and immediately before closing. The high importance attached to financial, legal & tax and commercial due diligence for a successful deal should finally also be attached to the assessment of the management – and this already in the run-up to a transaction. A professional management due diligence achieves two important goals at the same time: On the one hand, you find out which of the previous managers should definitely be kept in the company. Secondly, it identifies the missing competencies that the company needs for successful further development. If the management due diligence is not possible before the closing for competitive reasons, the management assessment should take place immediately afterwards in order not to lose any more valuable time.

The right examination is cheaper than a wrong decision

In our view, the biggest danger for private equity investors comes from two knowledge gaps: One is not knowing the managers in the portfolio company to be acquired well enough. The other is a lack of information which personalities and competencies the new company needs in the portfolio. It is easy to catch up on both of these things after the deal if there was no time to do so before the closing.

  • Management audits reveal the need for action
    The success of managers is usually measured by business figures, but these only ever reflect the past. Past successes lose even more value when the investor is planning a realignment or significant challenges from the market and competition require proactive action. If you really want to know whether your company will continue to be successful in the future, it is better to look at the management and its potential. The right tool for this is the management audit. Managers often misunderstand it as criticism or doubts about themselves, although it offers the opportunity for further development and optimal utilisation of potential. The goal of the management audit is not to convict a manager as unfit or to replace them. Rather, it is about the methodically correct assessment of their personality and competencies, combined with recommendations for better utilisation of their potentials that have not yet been exhausted.
  • Personnel assessment methods allow the precise placement of candidates
    In order to fill individual positions in a strategically correct manner, the personality of the managers intended for them must be objectively portrayed. As a standardised procedure, personnel assessment methods make it possible to map the individual competencies of a person that are relevant for coping with professional requirements. In addition to a self-description, they primarily test the analytical skills of a candidate. The self-description, which consists of both self-portrayal and targeted personality questions, is completed by further test procedures that assess job-related characteristics. Finally, an interview is conducted based on the test results. In addition to strengths and weaknesses, personnel assessment methods also identify a person’s working style and social skills. It provides information about motivation and character - two important factors when it comes to finding the right type of manager for the company situation.
  • Paying attention to the second and third management levels as a basis for recruiting
    Private equity investors are usually in close contact with the first management level of the portfolio companies. In order for measures to have their full effect, it is worth taking a look at the relationship between top management and the second and third management levels. On the one hand, this provides more information about the work of top management, and on the other hand, suitable talent can often be found there that can be developed. These junior staff members bring three invaluable advantages over external candidates: they know the company, are loyal to it and usually have the right mind-set.
  • Executive search for new impulses and skills
    When the existing management has been thoroughly examined and the second and third management levels have been screened for suitable talent, there may still be a gap between existing and necessary skills in the management team. However, if you know exactly what you are looking for, the processes described above can ensure that you find and retain the right executive. Filling a top position in a company is not a one-way street – applicants also want to know what requirements, tasks and goals they can expect and how their success will be measured. Being able to clearly state this during the interviews is definitely a competitive advantage, not only for portfolio companies.

Conclusion

Further professionalisation in filling management positions at private equity firms during and after a deal is urgently needed. Failing appointments can never be completely ruled out, but they can be significantly reduced through thorough and structured selection procedures. This is also demonstrated by our success rate of 94 per cent (DNV GL certified), which means that the candidates we find meet or exceed the performance expectations of the companies we advise in more than nine out of ten cases.

Due to the increasing importance of private equity for corporate transactions, we will deal with this interesting market segment in further articles. So stay tuned! If you would like to know more about this topic or would like to contact us personally, please do not hesitate to call us:

Dominic Pfau  |  Partner & Director
Mobil: +49 172 67 26 093  |  Office: +40 85 17 16 15

Dennis Tanke  |  Senior Consultant
Mobil: +49 170 97 40 364  |  Office: +40 85 17 160

Göran Petersen  |  Consultant
Mobil: +49 170 30 13 643  |  Office: +40 85 17 160