Is Private Equity For You?

Operating Environment

For those who are used to the processes, systems, investment and resources of a well-established, listed or private business, rolling up your sleeves, operating in a lean environment and optimising everything from your team to your network can be incredibly rewarding. For some, less so.

Many portfolio companies make aspirational appointments, hiring for the business they want to become. But their current need is for someone to be hands on and put the building blocks in place to drive growth. Once you join, you may be the one creating the remuneration strategy, the succession plan and building the leadership team.

The infrastructure may be lacking in several areas such as headcount, development or reward and benefits. Therefore, it would be more helpful to articulate what a solution could look like rather than expect the solution to come to you.

The portfolio company's Board of Directors appointed by the private equity house typically comprises of industry advisors and partners running the deal on behalf of the private equity company. They can often be very involved and have far greater oversight of the company's strategy and the CEO's performance. As a result, it is important to research and understand the approach of the members of the Board and whether this will be a hands-on or a hands-off Board. 

The Individual

Today means today. The pace and expectations are high. Being data driven, accurate with reporting and highly numerical are a must. 

Ensure you spend time with your future peers to understand their motivations and style of working. The timelines for investments are significant - usually at least five to seven years - and with the ultimate pay-off coming at an event, you must be comfortable with the management team you are joining as you are all in it together for the long term. 

Reward

Given the potential for a significant financial upside, some private equity backed firms focus primarily on equity as a reward mechanism and they may not offer short term or annual bonuses. Walking away from this can require a shift in mindset; those who have been through the cycle before and have benefitted from equity can appreciate the value. For first timers, this can be perceived as risky but the upside can be life-changing.

Before accepting a role, it is important to review terms such as the cash compensation, benefits, termination-related provisions, restrictive covenants and how the executive's equity grant will be affected in the event of termination. Understanding the long-term incentive and the value of this is crucial, including the imminence of a potential event. You need to understand the kind of event investors are anticipating, whether a sale to another private equity house, an IPO or SPAC, or a divestiture. Getting this right at the beginning is key as it is likely this will not change with tenure.

Whilst employees from public companies are often compensated in a mix of cash and equity grants on an annual basis, PE-backed firms ask their executives to co-invest at the outset. Unlike long term incentive compensation (typically granted only at the outset of the initial PE investment or employment and taking many different compensation forms), a co-investment will be in the form of actual stock or membership interests in exchange for a cash payment. Some companies will offer loans to assist with this which can be a mental shift for people particularly if the future value is not explained properly.

For more information on private equity companies, get in touch with our author or follow the links below, or you can also find your local Odgers Berndtson contact here.