Investing in a business is just the beginning of the private equity process. Nicholas Neveling examines how non-executive directors and observers help management teams drive growth through to a successful exit
Private equity invests huge sums in UK businesses each year. That money comes with conditions – changed goals and revised milestones. But setting new strategic priorities and delivering on them are two very different things. That’s why PE investors install a representative, or representatives, on portfolio company boards. These are usually non-executive directors (NEDs) – or, less commonly, board observers – rather than directors and they are critical roles, with a great deal of nuance. They are there to help management drive the strategic direction of the business and be the bridge between executive board directors and investors. In short, it’s that very simple task of keeping everybody happy.
“NEDs are there to ensure the business is delivering on the investment plan set out at the beginning, and to course correct if market conditions change and the investment thesis has to be updated,” says August Equity director Greg Walsh. He is a NED at three of the private equity firm’s portfolio companies: Integrity360, Polaris and Fargo Systems.
“We provide independent challenges and perspectives as well as strategic oversight and guidance,” says WestBridge director Ed Minton, adding that a PE-appointed NED is not just a representative of the investor, but a statutory director of the portfolio company: “We also have fiduciary duties that define our conduct, and governance responsibilities to ensure that decision-making aligns with the company’s long-term sustainability, growth and stakeholder interests.” He currently sits on the board of four WestBridge portfolio companies: Koto, Smart Capital Technology, Tryzens and Wilcomatic.
The importance of the fiduciary responsibility is echoed by Malcolm Kpedekpo, investment partner at Panoramic Growth Equity: “From a director’s perspective, your responsibility is to all the shareholders, to maximise the value in the business. Sometimes people forget that. You don’t want to pigeonhole yourself as the PE non-executive who is just there to look after the private equity position and nothing else.”
Advisers’ insight
Due diligence advisers commonly get an understanding of the skillsets on the board as part of an M&A process. This puts them in a strong position to offer guidance on the type of person that should be appointed as NED. “Maybe they’d be looking for someone with an accountancy background to enhance the finance function, or with a sales background because that’s underweight. Maybe they’re about to do a rollout so they’ll want someone with experience of that,” says EY‑Parthenon’s Mark Clephan. “We’d help the board and the private equity firm understand what they have and, therefore, what they need.”
Grant Thornton’s Mo Merali expands on how advisers can help evaluate a board’s abilities: “In our interaction with those businesses during due diligence, we get to see first-hand where the capability or experience gaps are around the boardroom table. We spend a lot of time around the finance, commercial, operational and compliance functions. So, we get asked for our recommendations about the broader finance ecosystem, the controls, the resources, the quality of data and management information that the business produces.”
Devils in details
Despite being a non-executive role, it is most definitely a sleeves-rolled-up situation, says Guy Blackburn, partner at Mobeus. “Ultimately, most PE-backed businesses are run and driven by groups of people, and the only way to really get under the skin of a business and understand the dynamics is to turn up, support and participate,” he says. “There’s only so much information you can get from reading a board pack.” Blackburn reads his fair share of board packs, given that he’s NED at six portfolio companies: ABL 1Touch, Ellis Recruitment, Gungho Marketing, LACE Partners, Orbital Internet and Ventrica.
‘The only way to really get under the skin of a business is to turn up, support and participate’
Beyond strategic oversight on behalf of the PE firm, NEDs need to ensure the portfolio business is making progress against the agreed value-creation plan – and continuously assess its validity. “For businesses of the scale that we invest in, management teams are critical,” says Walsh. “If you get the people aspects right, other objectives become a lot easier. The NED has a key role in assessing, influencing and supporting the key people around the table.”
The PE-appointed NED can support the CEO and management team in a variety of ways, providing strategic input based on their experience in their other investments. “We do a lot of primary buyouts, where we back great founder CEOs who know their businesses and sectors inside-out,” says Sam Sinclair, talent director at August Equity. “But they are perhaps less experienced when it comes to areas like M&A or taking a business into different international markets.”
Horses for courses
When it comes to choosing NED candidates, most PE firms tend to opt for a member of the original investment team. “The original investment team will have built knowledge of the company and the management team through the deal process, and can build on that knowledge and those relationships,” says Sarthak Sawlani, investment director at ECI Partners.
WestBridge’s Minton says his firm’s board appointees are also, typically, members of the original investment team. “However, we also operate a ‘best team on the pitch’ approach in respect of specific initiatives, calling on broader skills and experiences across WestBridge, as and when needed,” he adds.
‘Our NEDs almost always worked on the original investment, so have relationships with the management team’
LDC usually appoints two NEDs to the board and sometimes a board observer too. LDC investment manager Ana-Maria Garaba, for example, joined LDC in 2022 and cut her teeth as board observer at three of the PE firm’s portfolio companies – Cellhire, Pagabo Group and UniHomes – before being appointed NED at cybersecurity business Red Helix. “We almost always appoint people who worked on the original investment and have formed relationships with the management team,” says LDC portfolio networks director Jasmine Megson. “The strength of those relationships and the continuity are very important. The LDC board members are not there to try and run the business, but to use their leadership experience to offer a reliable sounding board, a fresh perspective and strategic guidance.”
Depending on the business, LDC may also appoint an external NED with specific sector or domain expertise. Bringing in fresh perspectives from people who understand a sector’s customers and regulatory frameworks can help unlock growth. “These expert consultants support the management team with specialist knowledge that helps a business anticipate trends, manage risk and accelerate innovation,” says Megson.
EY-Parthenon corporate finance partner and ICAEW Corporate Finance Faculty board member Mark Clephan points out that appointees from within a PE firm tend to be “very financially literate” but are unlikely to have the very specific market relationships that could enhance the portfolio business’s top-line. “There will likely be other candidates who can bring more customer or sales experience to augment the existing capabilities, or provide mentoring to those within that area,” he adds. “That skillset is likely to form part of the role of the independent NED.”
Walsh says August prioritises interpersonal connections when selecting NED candidates. “It is a big emotional decision for a founder-manager to sell their business. They have to buy into the people on the deal team as well as the PE firm.”
At Gresham House Ventures, they avoid too much rigidity in their choice of NEDs. Typically, a deal partner or investment lead will want to sit on the board, so they can work with the founder and the management team they have already built a strong relationship with. That deep understanding of the company and its growth plan should be very useful. But investment partner Rohit Mathur points out that certain portfolio companies require a more flexible approach. “It may be that the deal is in a complex or technical sector, where the deal lead will want to complement their skillset with another experienced NED,” he says. “There can also be a scenario where the company has grown, and it makes sense for the incumbent PE-appointed NED to step away. The investment lead can step away and the sponsor will appoint someone more specialist.”
Different private equity firms adopt different approaches to augmenting the skillset, says Grant Thornton senior partner Mo Merali: “Some firms, particularly US ones, may not necessarily introduce non-exec directors. Instead, they’ll have their own operating partners or portfolio teams to come and perform that role for them.”
The board structure can evolve, depending on a company’s changing requirements. “Sometimes the original investment thesis changes, or the business needs repositioning, and it’s important that we configure the board with the right skillsets to deliver what’s required in the business,” says August’s Sinclair.
‘I’ll speak to the management teams on a weekly basis throughout the hold period’
So, what are the likely time demands of a NED or board observer role? “The NED job extends way beyond attending board meetings,” says Panoramic’s Kpedekpo. “We are quite hands-on. We’ll roll our sleeves up and spend time in the business between board meetings to help the business as required. The time commitment will fluctuate, depending on what the company is doing, but I’ll speak to the management teams of the companies where I sit on the board on a weekly basis, throughout the hold period.”
ECI’s Sawlani says the observer role fluctuates in a similar way, depending on where the deal is in the investment cycle. “Immediately following an investment you’ll be relatively busy, because you’re bedding in new processes, implementing all the items in the 100-day plan and setting up the new debt structure. That can be quite an intense period,” he says.
After that initial intensity, the focus shifts to preparation for monthly board meetings and CFO meetings, as well as any value-creation projects that are strategic priorities. “And after around three years the focus will shift to exit planning,” says Sawlani. “The observer will be working on vendor information packs, crafting what vendor due diligence is needed and working with any investment banks that have been engaged to lead the sales process.”
Board observers: eyes, ears and precious experience
A board observer’s role is to support the lead partner and provide additional capacity to the business. “This will include supporting on M&A and buy-and-build, by reaching out to prospective acquisition targets, triaging data and preparing board papers and investment committee analysis,” says ECI’s Sarthak Sawlani (pictured). “Involvement will vary according to the size of the deal and the management team’s M&A experience.”
LDC’s Jasmine Megson believes taking on a board observer role is a vital step in every junior investment executive’s development. “We like to give younger team members the opportunity to learn on the ground,” she says. “We do a lot of work internally to develop our teams, supporting them when they are ready to take that next step into a board position.”
An observer doesn’t have the same formal responsibilities as a NED. There are no voting rights and no mentions on the Companies House registry. “Apart from that, the role is not too different,” says Gresham’s Rohit Mathur. “You are there to work with management, provide input into discussions and ensure that governance is being followed.”
Multi-tasking
In addition to M&A projects, the board observer will often be involved in ongoing financial analysis and budget cycles, working closely with the CFO. “The observer will be the first port of call for the private equity sponsor when screening materials and doing early checks on budgets,” says Sawlani. “The position gives you exposure to how a board works, the different dynamics between the chair, the management team and the private equity sponsor, and what is involved in taking all stakeholders on a journey through the hold period to exit. As observers build up more experience, they contribute more to board discussions.”
‘Serving on a board is something you only learn by doing’
Guy Blackburn at Mobeus says it is important for everyone to get exposure to board roles for learning and development: “We make sure that our investment managers and our investment directors have at least one board observer role. It helps to support the PE non-executive on the board, so that we can get more done. It’s also there to make sure younger team members get the learning and development they need to become well-rounded investors.”
With this experience under their belts, observers are ready to take on a NED role – in which they’ll be expected to make significant contributions to board meetings and add value to the company (supported, if necessary, by a partner in the background).
“Starting off in an observer role is a good way to understand how a board works and learn,” says Mathur. “Serving on a board is not something you can train for. It is something you only learn by doing.”
Chair is more than a seat
The role of the chair in a PE-backed business is absolutely crucial. As well as being responsible for governance, the chair has to bring significant value to the board. “The role is much broader than that of the PE-appointed NED,” says Rohit Mathur, investment partner at Gresham House Ventures. “We always aim to appoint someone with specific sector expertise and the credibility to earn the trust of the management team. You want the chair to be a person the CEO and senior leadership can turn to on a regular basis for experience, guidance and as a sounding board.”
It is essential that the appointed chair is independent. Some PE firms use headhunters to identify potential chair candidates, who are often brought in pre-deal to assist with due diligence. This is a good way to test team chemistry too – if they connect well, the appointment to chair will follow seamlessly.
“The chair will always be a joint appointment by us and the management team,” says Panoramic’s Malcolm Kpedekpo, who stresses the need to be patient. “We will suggest candidates, as will management. We will be looking for someone with the necessary experience and sector expertise. The chair is such an important role that you don’t want to rush it. You would rather wait for the right candidate than race to simply have someone in on the day a deal completes.”
In addition to having a strong relationship with the private equity firm and management, the chair should help to ensure stakeholder alignment. “The business needs somebody who can translate the expectations and the language of private equity for the board, as well as helping the management team focus on delivering to those expectations,” says Grant Thornton’s Mo Merali. “For that they need somebody who’s been in a business, in operations, and worked with private equity – someone who can nurture and support the management team and take them along on that journey.”
‘Most of our chairs have been sponsor-backed C-suite execs, so empathise with management’
Where management teams are working with private equity for the first time, the chair’s role in reporting and board pack preparation is a significant one. “The chair, who will usually have experience of working with a private equity partner, is well placed to guide management through that and explain what the investor wants and why,” says LDC’s Jasmine Megson. On the flipside, she adds, “the chair will work with the private equity firm to explain why the business has to prioritise certain actions, even if the firm has made other requests.” Supporting the dialogue between management and the investment team makes the chair’s role absolutely critical.
The chair may also have been appointed because of some specific operational experience or skillset that ties in with a company’s value-creation plan. If the strategy is to expand into the US, for example, the chair should have a track record in that.
The chair can also be leant on to help develop and mentor CEOs, who may be working with private equity for the first time. “We’re usually looking for a blend of situational and sectoral experience, depending on the mission,” says August’s Sam Sinclair. “Most of our chairs have been sponsor-backed C-suite execs before, so can empathise with the management teams. There is very little value in forcing a chair on a CEO, considering the close relationship we hope they form.”
The seemingly simple act of taking on institutional capital for the first time is a challenging transition for a management team. “For us, a great chair can help navigate the transition and mentor senior management on the journey,” says Mobeus’s Blackburn.
The Corporate Finance Faculty’s HR Due Diligence Guideline, published last year, can be downloaded at:
