In the final part of our Building Successful Businesses series chatting to Colin Tenwick who ECI worked with as Non-Exec of Auction Technology Group, we ask him how do you make a private equity partnership successful, and what is the role of the chair or Non-Exec:
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Transcript:
Fiona: In our latest episode, chatting to Colin Tenwick, a prolific private equity chair, I ask him, how do you make a private equity partnership successful, and how can a chair or non-exec help.
Colin: I mean, the fundamentals are that everybody should be aligned. The differences are that there are essential financial models that are key in the private equity world. The use of equity and debt in terms of just the way the deals are structured, the CEO and the CFO of the business need to understand how that works. They also need to understand what that actually means, particularly when you’re dealing with the banks and you’re dealing with what the structures of the debt are, etc. Having clear visibility on expectations, clear visibility on timelines, they’re really, really important.
But the role of the Chairman is an interesting one because you are a little bit like the meat in the sandwich. Sometimes you are the conduit by which the investors are going to express views, concerns, or whatever. And you will listen to those and you will impart whether you think that’s realistic or not, or right or whatever. And then you will deal with the management team, the CEO, and whatever to do that. But conversely, it goes the other way. And very often you’ll see a number of people in the private equity world who are fantastic at buying and selling businesses. But when it comes to running the business, there are certain things perhaps they’re not so strong at. So, again, the role of the Chairman is one to say, “Look, you know, I listened to that, I hear that, but actually we need to do the following work with the management team the following way.” So, you are very much ebbing and flowing. Your job is to try and keep everybody on the same page and ebbing a flame when people are being unreasonable, try and make it clear.
Personally, I have found it to be an incredibly rewarding, exciting way of doing business. To have a fantastic work environment with very, very smart, bright people who can enable the business when working with the management teams to actually drive that vision. But private equity firms don’t all come in the same shape. And I’ve chosen to work with the firms I have, who are people that are backing management teams to actually deliver on a vision which they believe in. There are other firms, I won’t mention any, who basically are there to tell the management team how to execute. “This is the model, this is what we’ve done, go and execute it.” That is a very different type of relationship, and it’s important that the CEOs and the management teams understand what they’re getting into and what type of firm because that’s critical to the success long-term.
Fiona: No, it’s definitely something that we, obviously, when we’re meeting prospective management teams, something that…that focus on absolute alignment is key because, actually, that’s what you need in order to deliver on the growth plan, which is what you’re all backing in the first place.
Colin: To be frank with you, you want to feel confident that when things don’t go so well that you’re gonna have the right backing and you’re going to have a good hearing and you’re gonna be constructive, all parties constructive to get yourself through that.
Fiona: So, you also worked at both private equity-backed and listed businesses. What do you think the key differences are for CEOs when they’re thinking about that next stage of growth?
Colin: For me, public businesses are very, very good because, ultimately, if you’re running a business, it’s about the structure of shareholder funds that enable you to execute your business. It’s about, can you actually access funds and growth capital to do that? I found the public markets very supportive, but there are a very important few provisos and those provisos really sit around a couple of things. One is the size of the business. If you are going to float a business, what is the actual amount of stock and shares that are going to be in free flow? If you have a relatively small free flow, then actually the stock price itself makes no difference because it doesn’t reflect, actually, people’s views, because there’s no trade.
And in the UK, in particular, you don’t see many businesses less than really sort of a billion-plus valuation that really start to get traction. There are a lot of smaller businesses that are marooned and don’t have good movement in their stock. So, that is something that people should look very carefully at. The other side is there’s a lot more, I would say, pure governance, responsibilities, and requirements. There’s governance in all businesses, but particularly in the public markets. And as a CEO, you will typically spend, you know, possibly 20% to 30% of your time actually working with shareholders and governance, which in the private equity world is not the case. There are some key differences.
You also have the public gaze on you, which some people thoroughly love and other people don’t. And you need to know, are you a CEO, and the chairman actually, who really covets that? Or are you somebody that would rather get on and do your things in the nice quieter world and focus more on what the business is doing? So, there are differences.
Fiona: It sounds, in some ways, similar to the decision whether or not to be chair. You have to really know yourself and actually what you’re like and what you want.
Colin: Yeah, I think these things always happen. And in my experience, your colleagues, friends, and loved ones are the ones that are very often the best source to tell you that.
Fiona: You mentioned the listing earlier of AVG Technologies. What is the process like for the board when it comes to the actual process of going through an IPO?
Colin: Well, it’s actually relatively straightforward. And obviously, if you look at more recently where we’ve had people sort of reversing into shells, essentially, that’s an extraordinarily fast way. Whether it’s effective or not is questionable at the moment. So, I think some of the valuations have been devastated in terms of the way to do it. But if you go through a normal finding a sponsor and doing a lot of the work, I would say actually in my experience that there’s less detailed due diligence required doing a float than there is if you’re doing a private equity transaction. It’s less onerous from that side, but post-events, I think it’s more onerous. So, it’s a balance, but it’s relatively straightforward. It can be done relatively quickly.
The key thing, in my experience, is you’ve got to look at least two years out in terms of making sure that the business is sustainable. The worst thing in the world is somebody comes to market and then misses their first-quarter number – then you’re toast. You’ve got to have visibility of your business long-term and you’ve got to actually pretty much guarantee you’re going to deliver it if you’re going to have any credibility at all. You spend more time focused on that, probably, than you would in a non-public market.
Fiona: And then last question from me. So, what is your top piece of advice for CEOs or entrepreneurs when it comes to building successful businesses?
Colin: Take the rough with the smooth, but make sure that you really do hire the very, very best people around you to get you through that rough. And the smooth then should be enjoyed.
Fiona: Colin, thanks so much for your insight into a fascinating career, from Eastern Bloc to dot-com boom to…then IPOs. So, loads of fantastic advice in there. So, thank you.
Colin: Thank you very much.
