Secret squirrel: the CEO on finding the right private equity partner

Our secret squirrel is the chief executive officer of a European mid-market company. Two years ago, the company he runs took its first investment from an institutional private equity firm.

What is the most significant difference between your business now and the business before it took on a private equity backer?

When you go from entrepreneurial ownership to institutional ownership, you behave much more like the future is more important than the present, in terms of profitability and size. You think more about your flows of cash as being your capability to invest in the future.

While this was always the case to some extent, we used to have a sense that the profits were there to be maximised every year, whereas now we are thinking: how do we create cashflows from our profits that we can invest in business systems, sales resources and market expansion and product development.

Has your view on PE changed or developed since the deal?

I now think about private equity in terms of a partner for businesses rather than simply a source of funds. And I take much more notice of which firms are backing which businesses and consider why certain companies will choose to work with certain PE houses… assuming that when it came to it they had the luxury of choice.

My knowledge of private equity has developed and I have learned more about what type of operator goes for what type of business. There are those who find a safe bet and then move heaven and earth to win the deal. Then there are those who go looking for more troubled or distressed scenarios. It’s interesting getting behind the badge on the door and having a think about what kind of personnel they employ. Are they analysts or are they operators? How many people are in their debt team, in their monitoring team? There is a lot to glean from understanding the composition of the staff at a private equity firm.

What piece of advice would you give to someone in the position you were in two years ago?

Meet plenty of PE houses that seem relevant and try to understand their decisions. Try to understand the relationship between the person that is interested in your investment opportunity and their investment committee; who has the influence? And meet the investment committee to understand what makes them tick, because there is nothing worse on God’s earth than a failed process.

Next time you embark on a process, assuming all offers were equal, what would it be that tips the balance in favour of one potential partner?

The right partner would be one who agrees that great leaps are made not with analytics, but with imagination. I’ve met a lot of firms in the last couple of years who would never put a foot wrong on the financial side, but could not conceive of how we could put a new product into a market where the company has never been before.