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Management Remains Key to Buyout Success, Study Reveals

Tuesday 11th February 2003

69% of senior venture and buyout investors across Europe agree that when deals do not succeed, the failure of the management team to deliver is the single-most dominant reason.

A report published today identifies that a better understanding of the dynamics of a successful management team, and greater ability to assess and monitor this through the investment lifecycle, may hold the key to successful investing through this phase of the economic cycle.

This important research study was commissioned by SJ Berwin - one of Europe's leading law firms - in association with mergermarket. In it, SJ Berwin canvassed the views of over 300 senior venture and buyout investors across the United Kingdom, France, Germany and Spain.

The report also identifies a range of characteristics indicative of diverse cultural factors relating to management style, academic background, the availability of management evaluation metrics, management/investor dynamics, investor risk profiles, and management incentive schemes. To receive a complimentary copy of the report, please email simon.witney@sjberwin.com

Jonathan Blake, Head of Private Equity, SJ Berwin commented:

"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will once again be inextricably linked with the buyout transaction, after years when the term 'MBO' seemed to have been replaced by 'LBO'."

Paul Evans, The Shell Chaired Professor of Human Resources and Organisational Development INSEAD, Fontainebleau and Singapore, commented:

"The name of the game is, above all, leadership - though what good leadership means varies from one deal to another. Congratulations to SJ Berwin on sponsoring important comparative research."

Key findings of the report include:

• the quality of the management team is the single most important factor when evaluating a buyout or venture capital investment opportunity and poor management is usually blamed when companies fail
• perhaps paradoxically, less time is spent analyzing this aspect of the deal than others - partly because reliable metrics for assessing a management team are hard to construct

A number of other key messages emerged from this research:

• despite the paramount importance of management, a large majority of investors will back a business with a weak incumbent team if other conditions are right (although this varies between countries)
• respondents - including those from France, Germany and Spain - felt that good management teams were most abundant in the UK
• a manager's track record is a vital part of the equation, but the value of different competencies varies: larger deals require strategists with financial experience; smaller deals need stronger leaders with sector expertise
• one-third of the respondents have backed managers or teams which have failed in the past, and a high proportion of those investments were judged to be successful, showing that analysing a track record is more sophisticated than simply seeking to back proven winners
• education and professional qualifications are largely irrelevant to private equity investors, who rate their importance very low on the list of attributes they look for in managers

As to the ongoing relationship with management:

• a board seat - or at least a very active monitoring role - is still crucial for investors, although when things are going well, management are largely left to manage
• it is vital to make essential management changes quickly when problems do emerge: an overwhelming proportion of the respondents who had changed management wished that they had done so sooner, but were side-tracked by seeking to make other - less painful - changes first
• the use of equity incentives varies substantially across Europe; in more established markets - like the UK - more employees are incentivised with equity-related reward structures
• the degree of control by investors of investee companies varies across Europe; in France, the most extreme example in the geographies we surveyed, exit opportunities were restricted by the incumbent management

In relation to each country surveyed, some of the main themes were:

• In the UK, the country with the highest abundance of good quality management teams, management has been less critical in larger leveraged buyouts in recent years, and willingness to invest in businesses with poor incumbent managers is high. However, as the market has become increasingly competitive, many believe that a renewed focus on management quality will be key.
• In France, the importance of a strong incumbent management team was rated most highly. Yet French investors spend less time assessing managers than their British counterparts, and have the least formal training in the assessment process of the four countries surveyed.
• German buyout investors were most prepared to back a weak incumbent management team, and spend the least time on human capital due diligence. But, paradoxically, they were also the most reluctant to make senior management changes after the buyout - preferring to stick with the team more often than their counterparts elsewhere in Europe. There are indications that this conservative approach is changing.
• In Spain, the least developed of the four private equity markets considered in the report and the country where good managers were thought to be most scarce, investors are more influenced by qualifications than by track record. Reflective of a more conservative approach, private equity houses also rewarded managers more with salary and less with equity than elsewhere in Europe.

Notes:
About SJ Berwin

• SJ Berwin is a full-service international legal practice with more than 470 lawyers across its offices in London, Brussels, Frankfurt, Berlin, Munich, Madrid and Paris.
• With a formidable profile in mid market M&A across Europe and a dedicated European private equity team comprising over 150 full-time corporate private equity lawyers, SJ Berwin advises clients on the full-range of M&A and private equity business.

About mergermarket

• Life blood of advisors is deal flow. Mergermarket is unique in the provision of origination intelligence to the investment banking, legal, private equity, acquisition finance, public relation (PR) and corporate markets.
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