Is private equity a force for good?
Richard Metcalfe, Partner, Mazars
We need to look at the context of private equity before we determine whether
it is a force for good.
It’s been part of a culture of financing businesses for many, many decades
now. I think today, though, it’s in the headlines because some of our larger
institutions and high street businesses are seen as targets for private equity
So a lot of people out there are asking: where have these private equity
firms come from? How are they financed? How are they intending to take the
businesses over? Yet many, many businesses in the UK are absolutely dependent on
forms of private equity and venture capital for growth.
In any situation you can look at it both ways. Yes, there are going to be
instances where you have inefficient businesses, where private equity firms
would come in to take the opportunity to drive efficiencies and that could mean
selling off non-core assets. It could mean making people redundant to get those
efficiencies and get the return that they are looking for.
On the other side of that, it is clearly important for private equity firms
to also derive value from the business and to make the businesses grow. From
that perspective there are many private equity examples you could use where the
number of employees has actually increased by virtue of the fact that the
businesses have grown over time.
How does an FD’s role in a private equity backed business differ to that
in a public company?
John Cole, partner, Ernst & Young
There is a difference on a whole series of things. On communication, company
FDs clearly have to get a result, do the analysts presentation and it’s a pretty
With a private equity company, the owners are on the board with you and they
are very sharp, very bright guys and you really have to be on top of the detail.
The other aspect often about private equity boards is that they are quite
small. They don’t have a lot of non-execs and they don’t have a lot of execs, so
the FD then becomes the greater focal point for a whole range of areas.
He is the man in the room with the non-execs, representing their interests
and that puts a lot of pressure on them. Often they come from a controlling
background for large corporates and therefore are not used to the focus on cash.
The priority is to ensure that you hit the cash flow targets. A lot of
financial controllers don’t have that experience about managing the working
capital and tweaking that to ensure that you always hit the quarterly reporting
So there is a lot more pressure on a private equity-backed FD – more than
they might have imagined from outside. In many ways it is a much more lonely
position. You often don’t have the huge infrastructure that public companies
How does governance differ?
Ian Leaman, founder director, Buckingham Corporate Finance
The private equity issue became politicised around a change in prime minister
and a particular agenda from the unions.
This led to a dumbed-down debate – a red top debate. It’s a debate with
misinformation and ill-informed comment fuelled for a political end.
But from a CFO/FD perspective, the label of corporate governance really sets
the scene. Any lending that a bank does to a private equity-backed business is
stress-tested before it’s made.
The banks are also much more sophisticated than they were before the current
wave of economic growth in their lending. The role of the FD here is to be right
on top of all the good quality, high integrity financial reporting on a very
timely basis, measuring the performance of the business almost real time.
I would characterise the mindset of the FD of a private equity-backed
business not as an employee, not as a FD, but actually as a business partner, a
business partner of his investors. That really is a different mindset from the
position, which an FD would occupy in either a listed company or a non-private
equity backed private business.
There are a couple of areas where that distinction really shows. In a listed
company you would probably have a full-time professional or outside agency doing
the investor relations role.
That is very squarely in the lap of the FD in a private equity-backed
business, a key part of the model in private equity is the alignment of
shareholder and management interests.
That alignment is very good most of the way through the process, but diverges
at two key points – negotiations of management terms on entry and on
negotiations of cutting up the cake on exit. And the FD’s role is particularly
acute at those points.
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