How does private equity drive FD behaviours?

Thursday, December 02, 2010 | Posted by: Fiona Cullinan
Categories: Research, Thought Leadership | Tags: statistics, report, survey, M&A, data, advice, CFO, FD, investors, Directorbank, finance director, analysis, private equity, skills, shareholders, risk attitude

Private equity remains a significant part of the UK economy and is often under the microscope. It remains a dominant force in the M&A market. In our survey of 350 directors, we asked whether having a stake in a private equity business drives different behaviours – 70% of them said that it does.

Free download
You can download the full survey and report What makes an outstanding finance director? as a free PDF. Or, to read just the key findings of the survey of 350 directors, see our post on Elevate – for business leaders.

Invested behaviours
The directors’ views were that an equity stake for an FD in a private equity business is a good thing as it brings about proper alignment with shareholders’ goals.

The FD’s attitude to risk is likely to be less averse and there will be a greater focus on cash and costs in the short term, as the business manages itself aggressively towards a desirable exit. Most agreed that this behaviour is wholly appropriate to the business model.

The outstanding FDs themselves generally felt the skills needed are much the same. The biggest difference they talked about was in the nature of the relationship with investors. In private equity, an FD can be talking to their investors several times a week, whereas in a Plc this level of relationship is more likely to rest with the chairman and senior independent non-exec.

Our respondents noted some of the differences:

‘Ownership mindset and focus on wealth creation.’

‘More thinking like an owner.’

‘Direct equity stake brings any board member much closer to the issues that are prominent for all shareholders.’

‘Cash, cash, cash.’

‘Looking for bigger wins, greater willingness to take risks to get the bigger win.’

‘Will be prepared to take more risks.’

‘Short-term conclusions to maximise profit multiples.’

‘Less emphasis on silken investor relations and more emphasis on hands-on delivery.’

“We’ve got two sets of major investors and I often talk to each of them three or four times a week. They tend to be much more hands-on than a Plc environment in terms of their thirst for knowledge and their desire – not to meddle – but make sure the business is going in the right direction and maximising opportunities.”
Stephen Harrison, Group FD, Sandpiper CI

“A Plc FD is very good at relationship building, particularly with external investors and this will be a big part of their job. In private equity, the FD’s job is more punchy and therefore probably more driven around business performance on a day-to-day basis. It is good to be able to do both.”
Richard Guest, CFO, Stock Spirits Group

“The question we get asked a lot is ‘How would you run your business differently if you were owned by private equity?’ The answer is, we wouldn’t run it differently at all.”
Anon

As always, we welcome your thoughts on this and any other aspects of the What makes an outstanding FD? report. If you would like to speak to anyone about any of the details in the report, please get in touch with Jo Parr at jo.k.parr@uk.gt.com. Next week we will be posting about how best to incentivise finance directors.

You might also find these posts useful:

* How does an FD gain commercial skills?
* Is your FD a chief exec or chair in waiting?
* How to get noticed as an outstanding FD (and get the top jobs)