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The Changing Landscape of the PE-backed Chair

December 15, 2020

Introduction

While the Chair of a private equity backed business has long been a coveted role, the investor and management expectations, as well as the requirements and profile of candidates, are now evolving compared to just a few years ago.

It’s long been said that the days of the ‘tea and biscuits Chair’ are gone and, perhaps unsurprisingly, investors expect their Chairs to do more than hold a well-organised board meeting once a month, and this has been the case for quite some time. The more recent and interesting shift is in the type of profile that investors and management teams seek for their Chairs, but only if prior definition and shape has been given to the position.

What do PE want from their Chairs?

To better understand the changing landscape and role of a Chair within the PE-backed environment, it is important to consider what private equity want from their Chairs and the factors they perhaps consider (or don’t consider) when deciding. There isn’t a unified view across all private equity firms, and understandably so, as every deal and situation are different. There are so many moving parts when considering the appointment; including the sector, the current management team, business model, value creation strategy, etc.

The historic treatment of prior experience as a prerequisite is perhaps understandable and largely borne out of a desire to de-risk the appointment, as moving from Executive to Non-Executive can be a tricky transition that not all would be well suited to. Identifying the skills and experiences gap during your executive career and looking to address this could arm with you a skill set that PE like and are willing to consider alongside multiple other factors.

Roger Siddle, a seasoned and plural Chair at numerous PE backed companies including Efficio, Lawyers On Demand and Isio, built the skills required as a Chair through a variety of roles as an Executive. “I was Group CEO twice, which essentially entailed being Exec Chair of a group of businesses. Through this experience, you build a set of Chair skills versus being a mono-line CEO. Personally, the one constant was that I spent a significant amount of time mentoring highly skilled senior executives.”

However, in our experience, there are important differences in how well PE firms have thought about what they are looking for from a Chair, and this tends to impact how they ultimately appoint a Chair to the business. When the fund has invested in a business and has committed to appointing a Chair but hasn’t given it much thought, it is no surprise that we see a gravitation towards more experienced and proven Chairs, and in many cases, towards those they have worked with previously. This is perceived as less risky as the incoming appointment understands the way that PE houses operate and will advise and work with the management team accordingly. In this situation, the reluctance to appoint ‘unproven’ Chairs to their portfolio companies has historically resulted in an ‘exclusive club’ that the next generation of PE Chairs found it hard to break into. This barrier to entry has led to numerous examples of high potential, first-time Chairs becoming frustrated with the lack of opportunities, or struggling to compete against their proven and experienced counterparts.

Conversely, when the investor has defined what they want from their incoming Chair, they appear to be more open to appointing based on a range of factors to complement and enhance the future value of the team, versus relying on ‘badges on the chest’ or number of previous PE-backed appointments.

Where a company has invested in an asset with a good management team, but lacks experience dealing with PE and outside their core domain, they should recognise the skills gap and consider bringing this into the wider team. This is where the Chair appointment can enhance and plug the gaps (function, situational etc) in the management team alongside coaching, mentoring and developing that team leads to a more open view of what and where the Chair could come from. In essence, this is about creating and building a complementary team due to a defined brief and as a result, a well-rounded team is constructed.

As an Investment Director at ECI, Michael Butler’s views on what he looks for in a Chair can vary. “It’s about looking at the skills and expertise in the exec team, plus us as the investor, and then asking the question: ‘what are we missing?’ Additionally, the energy and commitment of a Chair is important, so as an investor you feel like they are focused and on call.”

What is changing?

There has been a recent trend towards investors considering, and in some cases actively embracing, the opportunity to appoint a first-time Chair. While this may not be a suitable option for every scenario where much depends on the skills and experience of the existing team, it is an interesting trend to discuss. This is focused on getting the complementarity right and it opens up the current talent pool.

There is a lot to be said for Chairs who have prior experience of PE, so we are far from suggesting investors should chase the new Chair for the sake of it. However, the issue with the traditional approach was the lack of new talent emerging and, over time, the ‘proven’ Chairs maxing out their capacity and spreading themselves thinly with four, or even five, board roles. That might have been manageable when the time commitment of the Chair was one to two days around the board meeting, but increasingly this is no longer the case and thus, a perfect storm was brewing well before COVID burst onto the scene. On the one hand, experienced PE Chairs often have three or four commitments and, on the other, investors and management teams’ expectations were quite rightly increasing with regards to engagement and time commitment. According to drxDATA, first-time Chair appointments have nearly doubled in the last three years, demonstrating the momentum of this trend.

In addition, many private equity firms are beginning to recognise that what they define as ‘PE experience’ is not just having experience with homogenous investors, but rather extends to having a certain mindset and behavioural traits that they deem to be essential to operating successfully in these ownership structures. Ultimately, what many firms are looking for is a personality; as Michael Butler points out: “Chemistry and trust is key.”

Tim Eyles, a recent first-time PE Chair of Celsus, and Chair of Pacific Asset Management, expresses: “One main driver of my role is being around people you like and where you can make a powerful difference. As a Chair you have to be selective where you are going to place your bets, so a focus on ensuring that mindset and behavioural traits are aligned together is absolutely key.”

To evaluate these traits, we have developed our proprietary assessment tool called PACE. Developed in collaboration with leading occupational psychologists, the PACE (Pragmatism, Agility, Curiosity, Execution) model of development is Drax and drxDATA’s method of evaluating the behavioural traits of successful leaders and predicting their ability to operate in a private capital environment. You can read more about PACE and how we are looking to predict the value of leaders here. Get in touch with Samuel Robberts, Director and Head of drxDATA, if you wish to learn more.

Why a first-time Chair?

Given the changing pressures on the Chair role and the importance of complementary leaders, we have here outlined five potential benefits to considering a first-time Chair. Although this list isn’t exhaustive, it touches on some key current themes:

1. The executive is motivated to prove themselves in their first role and gain a track record within their portfolio career.

2. They are unlikely to have multiple roles and will therefore have more capacity to support the management team and business, whatever its needs. This will evolve, so is not a fixed benefit as if the individual has ambition and works well in the position then they will likely gain additional appointments, which will fill their time commitments.

3. They are ‘closer’ to executive life and perhaps may seem more relatable to the incumbent team.

4. They have more recent working experience of current themes, challenges and value creation strategies, e.g. digitisation, e-commerce, internationalisation, cyber security, etc.

5. There is a greater opportunity to capture diversity in the appointment.

Mark Humphries, a Chair who has transitioned to a portfolio career in the last few years, discussed the benefits of what a recent executive can bring to both investors and management teams. Whilst there is a slight risk in breaking new talent in these appointments, there are fundamental benefits if the chosen individual has the right style, and approach. Proximity to the opportunities and challenges businesses are facing, can increase their currency. “There seems to be a demand for Non-Executives who can operate at the executive end of things; in particular, those who can lean in and assist where a skill experience is lacking from the management team.”

How do we define the brief for a Chair role?

When considering a Chair for any business, it is imperative to fully understand the dynamics of the existing team and that of the investor. The drxDATA Leadership Success Propensity Model (LSPM) can be used to evaluate a Leadership Team’s constituent parts and help determine how the profile of a successful Chair should look.

We define the role of Chair as majoring on situational experience (understanding of the value creation strategy, capital structure and growth dynamics of the business, etc) with less emphasis on domain. We see the ‘comfort blanket’ of sector (domain) experience being given too much weight, when this expertise should ideally lie with the CEO, and where the Chair adds a new business skill or acumen. Domain expertise can be separately strengthened with the addition of a Non-Executive Director to the board. We may see more of this as businesses are changing their route to market and their business model, but this is a debate for another time.

More significantly, our research demonstrates that the overall profile of the team has a greater effect on value creation than the specific strengths of members of the team. Therefore, it is of more significance to have a balance of experiences across the team, than it is to have a Leadership Team with a particular strength in one area.

In particular, our work suggests that CEOs typically have a high degree of domain experience; the Chair will typically bring the most situational experience; and CFOs will be Functional specialists, with a high degree of Situational experience.

Conclusion

COVID has undoubtedly highlighted instances of experienced Chairs being overstretched with their portfolio and unable to provide the increased amount of support required by their management teams. To balance the equation, it has also highlighted some instances of first-time Chairs not having the experiences to fall back on when faced with some of the challenges 2020 has thrown at businesses. However, when you look at the wider discussion around correctly defining the brief, and when you consider the potential benefits that we have presented, it is not surprising that we have seen an increase in the appointments of first-time Chairs.

There are other factors that can impact Chair appointments, such as timing and capacity, in addition to the chemistry with the CEO, management team and the PE firm. Striking the right balance when liaising with the operator and investor will always be a juggling act, which relies on the subjective relationships and judgement of those involved. Both experienced and new Chairs have this challenge.

In summary, appointing the correct Chair comes down to getting the right complementary skill set and experiences, taking into consideration the wider executive team, the investor, and other board members. Whether in challenged or constant markets, this from our perspective resonates as a key pillar to building the team to go on the journey. Therefore, equipping the business with the correct balance of functional, situational and domain experience will support it to achieve all that it can within the defined investment horizon. Not to be forgotten and key to gluing this together, is the cultural and behavioural alignment, which if achieved, can make for an exciting and impactful team!

If you would like to discuss any of the topics in this article, please do get in touch and I would be delighted to a have a conversation, whether an existing relationship or if we’ve not spoken before.


Euan Corbett

Director, Financial Services
ec@draxexecutive.com

 

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