Findus and the weakest link(2)

For most GPs, it’s a nightmare scenario: a portfolio company gets dragged into a burgeoning national scandal, with all the inevitable negative headlines and reputational damage that entails.   

UK firm Lion Capital experienced this first-hand in February when Findus Group, a frozen food company in which Lion holds a 33 percent stake, was found to be selling beef lasagne made out of horse meat (several big food retailers have had similar problems). Although there was no evidence of the products putting consumers’ health at risk (tests ordered by the Food Standard Agency found no signs of the veterinary drug phenylbutazone), the howls of customer outrage suggest the brand damage could be substantial. 

At press time, it still wasn’t clear exactly what went wrong at Findus; there has been some suggestion of foul play. (PEI asked Lion to contribute to this article, but the firm chose to go down the time-honoured PR route of declining to be interviewed).

Either way, however, it highlights the huge risks that complex supply chains can pose. 

Usually, thorough checks are made during pre-investment due diligence. But that in itself is not enough, says Mike Lander, founding director of Profitflo, a consultancy that specialises in procurement. “What you need is reassurance throughout the investment cycle that what you found in due diligence is still the case.” 

That’s particularly true since most firms are rushed during the due diligence stage, according to Mark Simmons, managing partner at Argon Operation. “When there is a tiered supply chain, there should be a cascading of responsibility through the supply chain enforced through contracts and through processes [post-investment],” he said. 

If anything, the macroeconomic climate has increased supply chain risk in recent years. “It’s logical that in the current climate, people are driving to preserve their margins as best they can,” says Jon Gatfield, a senior director with Alvarez & Marsal. “But that increases the risk. And you have to compensate for that risk by being more diligent with your quality systems – almost intrusive – to check those risks are being managed.”

Switching to cheaper suppliers abroad can be a false economy, says Simmons. “[PE houses] like the savings … but there’s a cost and effort to manage a global supply chain. You need to ensure that you are managing your suppliers formally and informally. You need to visit them and audit them.”

Lander says his firm often advises clients to put a ‘change of control’ clause into suppliers’ contracts. “If a supplier company is bought by a third party, then the customer has the right to terminate the agreement. You wouldn’t want the supply chain being bought by companies that you saw as a competitor, or potentially increased the risk of supply chain failure.” 

Firms will often have a partner on the board of the company who can flag up potential issues on a risk register, which is typically reviewed quarterly against a number of possible scenarios. “For instance, could horse meat end up in the supply chain? You would then ensure that management give you confidence that the risks have been identified [and that] a mitigation strategy created in case it does happen,” says Lander. The trouble is, he admits, such risk registers “can often take second place to the urgent issues of the day”. 

Leadership is key when it comes to risk management, according to Simmons. “Often in private equity, if you buy a company with the intention to sell it, the focus is more on the turnaround of the business rather than leading from a cultural standpoint. Large food corporations, whose core business is food, have a culture of zero tolerance to compromising quality, from the top down. I think private equity firms can do more [to limit risks]. With their influence and their board positions, they can have a stronger influence on reduction of supply chain risks,” he argues. 

But how do you exercise influence if you’re only a minority stakeholder? Lion has been quick to brief that it is no longer the majority owner of Findus, while founder Lyndon Lea admitted in a recent interview with Sky News that he doesn’t sit on the Findus board. 

Keeping an eye on things can be “pretty hard”, says Lander. “The best way of monitoring things is to raise issues with the board and to require operational data and risk assessments on a quarterly basis,” he says. 

Of course, however many safeguards a company has in place, it can never be completely safe. “Things will always go wrong; you can’t mitigate for every risk,” Lander admits. 

And the good news is that most GPs are now pretty clued up about the importance of risk management, according to Gatfield. For those that aren’t, the Findus situation is likely to serve as a very clear wake-up call – proof that investing in risk management is never an unnecessary cost. “I think a lot of businesses and private equity owners are [now] really making sure that their processes and systems are robust,” he says.