Mind the manager

Private equity practitioners believe that when investments go wrong, it’s down to a lack of top quality management, according to a report by SJ Berwin.

A survey of 300 senior venture capital and buyout investors in the UK, France, Germany and Spain has identified finding the right management team as one of the most crucial aspects of successful private equity investment.


The report, entitled The Human Capital Equation, was commissioned by European law firm SJ Berwin and produced by MergerMarket, the M&A research firm. It found that 69 per cent of senior executives at venture capital and private equity firms believe that the inability of a management team to deliver on a business plan is the single-most dominant reason for a deal to go wrong.


However, despite the perceived importance of management, a large majority of investors said they would be willing to back a business with a weak incumbent team if other conditions are thought right.


Those surveyed identified the UK market as having the highest level of good quality management teams. However, the report found that UK private equity practitioners have in recent years attached less importance to the role of management in larger leveraged buyouts, and that willingness to invest in businesses with poor incumbent managers remains relatively high.


French fund managers placed the greatest emphasis on a strong incumbent management team at target companies, although French firms were revealed to spend less time assessing managers than their British counterparts, and to have the least formal training in the assessment process of the four countries surveyed.


German buyout investors were seen as most prepared to back a weak incumbent management team, and spend the least time on human capital due diligence. But they were found to be most reluctant to make senior management changes after a buyout.


Spanish private equity investors described themselves as influenced in their decision-making more by a manager’s qualifications than by track record. Spanish private equity houses also rewarded managers more with salary and less with equity than elsewhere in Europe.


“The ability to select the right management is increasingly important in the current challenging market,” says Simon Witney, partner at SJ Berwin. “It is the most important variable in selecting a target company, as managers will ultimately be responsible for driving change.”


The report concludes that in general financial investors do not spend enough time on analysing company managers prior to making an investment decision, primarily because reliable metrics for assessing a management team are hard to construct.


However, Jonathan Blake, head of private equity at SJ Berwin, believes that going forward, greater emphasis will be placed on backing the right team rather than on financial engineering. “The term ‘management’ will once again be inextricably linked with the buyout transaction, after years when the term ‘MBO’ seemed to have been replaced by ‘LBO’.”


SJ Berwin presented the research yesterday at a dinner held in London to mark the pan-European firm’s 21st year in business.