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Private equity buyouts – Cracking the human element.



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“We are buying a life or a proud
tradition, not buildings and
Thus, our work cannot be reduced
to numbers only.”
(An anonymous senior private equity
Managing private
equity buyouts –
Cracking the
human element
A joint research project by University College London
and Mercuri Urval International
“We spend too little time on people issues compared to the amount of time we spend on
(An anonymous senior private equity professional)
Merger and Acquisition (M&A) activity has shot up in recent decades. Next to trade or indus-
try buyers, an increasing share of M&As are conducted by private equity players. Private
equity players tend to outperform trade buyers in M&A activity? Why is this?
Most research into private equity investment to date has focused on nancial performance.
Less is known about the management and human dynamics of the buyout process. In
2011-2012, Mercuri Urval and University College London joined forces to explore whether
buyout management and its human dynamics represent the private equity sector’s
‘magic bullet’ or its ‘Achilles’ heel’.
Our international research project concentrated on the human dynamics in mid-market
private equity buyouts. From this analysis, our aim was to provide best practices and
recommendations on how to optimise performance in private equity buyouts. To reach
these aims, the research project encompassed eight countries – USA, United Kingdom,
Germany, France, Sweden, Denmark, Norway and Finland. Together, Mercuri Urval and
University College London adopted a qualitative research designi, based on a multiple-case
study approach, using interviews, observations and publicly available information as our
sources of data. This totalled a sample of 27 private equity houses, through 33 interviews
with senior professionals (Table 1)ii. The research involved private equity rms representing a
combination of local (29.6%), regional (40.7%), continental (7.4%) and global (22%) players.
Most of these can be classied as top players in their respective country or strategic nicheiii.
Our ndings lead us to conclude that the human element has potential to be a powerful tool
for success for the private equity sector. More often than not, it is its ‘Achilles heel’. On the
following pages, we provide recommendations with respect to the best practices to adopt
to manage the human element with more success.
Managing private equity buyouts
“The Private Equity rm that solves the human puzzle in buyouts will be a front-runner.”
(An anonymous senior private equity professional)
A. Research ndings
1. The human element matters in private equity buyouts: Our analysis shows that the
‘human element’ in mid-market private equity buyouts is critical. Why is this?
The buyout business model is people-dependent, as investments are made in organisa-
tions that, de facto, consist of people. This explains why the human element:
(1) Is an underlying and critical success factor in buyouts
(2) Is the cause of the main mistakes in buyouts
(3) Affects the potential to create value and reach the performance targets sought
(4) Has the potential to be the future source of competitive advantage in the sector.
The signicance of the human element in buyouts has increased over the past years. This
stems from an uncertain and, in many cases, dire macro-economic context, which poses a
greater premium on management and ownership excellence. Also, nancers, investors and
regulators are exerting pressure on private equity players to shift toward value-adding own-
ership. In responding to this call, private equity houses recognise the need to pay attention
to the human element in buyouts.
2. Private equity rms lack focus or ability to prioritise the human element: Despite
the importance of the human element, interviewees acknowledged that most private equity
houses are not currently well-equipped to deal with this challenge. Human issues tend to be
approached with ‘a gut feeling’ and ‘intuition’.
This stands in stark contrast with the sector’s otherwise professional and disciplined
approach to the buyout process, be it with regard to its nancial, strategic or corporate
governance dimensions. Though the human element is identied as being critical, it is not
approached in a ‘disciplined’ way.
3. Understanding the human element in private equity buyouts requires an un-
derstanding both of the people involved and the context they are operating in: All
players included in this study handle the human element in a commendable manner, but
few, if any, seem to ‘capture it all’. The main outcome of our research project has been the
development of a phase-based buyout model that maps the human dynamics by phase.
We found the human element of buyouts as being relevant across multiple contexts and
processes, involving numerous people, and best when endowed with the right attributes
(Fig. 1):
a. Context: The human element of buyouts is shaped by the macro-environment, eco-
nomics and the country in which the buyout takes place. Additionally, the context of
the private equity house as well as the approach of the professionals involved all affect
the execution and human dynamics in the buyout process and the management of the
portfolio rm. Further, buyouts differ depending on the type of target company.
Managing private equity buyouts
Key ndings
b. Processes: Within the buyout process, human elements shape its various phases, be it
the sourcing of deals, the identication of targets for purchase, the ownership period or
exit. In addition to these ‘set’ phases, the parallel processes of networking with stake-
holders and relationship building with management shape the success of buyouts.
c. People: All people matter, whether they are on the side of the private equity organisa-
tion, the portfolio rm or the experts that are brought in as consultants, executives or
Board members throughout the buyout process.
d. Attributes: Not only do people matter, certain human characteristics appear more sig-
nicant than others. The individuals involved need to exhibit the required level of talent
for the job; they need to t their role and organisation; they need to be motivated; and
especially at the higher levels, the chemistry, trust and relationship between key persons
need to match. At their best, organisations – either private equity or targets companies –
exhibit characteristics of ‘world class’ operations. The private equity sector seeks excel-
lent individuals and organisations exhibiting drive and energy, passion, enthusiasm and
engagement as well as the tenacity to face the labour-intensive and demanding years of
private equity ownership.
Managing private equity buyouts
Target type: trade sale / entrepreneurial / secondary purchase / ...
The buyout process
The portfolio rm
Sector and macroeconomics trends
Country characteristics
PE business model / PE house / PE partner
Figure 1. Context affecting human dynamics in buyouts.
The sector has evolved from having a largely nancial focus to encompassing strategic and
ownership capabilities. Now the sector needs to pay more attention to the human element
in buyouts (Fig. 2).
The academic interpretation of our research ndings and conclusion: The social
sciences have been debating the signicance of the human side of enterprise since the
19th century. It has been featured in early management theorising and models since the
1930s, and by the 1980s it was recognised as a success factor of the modern (industrial)
organisation. In this respect, the private equity sector seems to have lagged behind to some
extent. Here, the difference between the business models of private equity and industrial
rms needs to be acknowledged. Nevertheless, in the early 21st century, where the ‘human
element’ is increasingly seen as central to organisational success across sectors, it seems
that the private equity sector is gradually catching up.
Managing private equity buyouts
Figure 2. Evolving capabilities in the private equity sector.
Traditional focus Current focus Future focus
Finance Finance
Mercuri Urval’s perspective: In what ways do you want to differentiate
yourself from your competition? Success in Private Equity Buyout is dependent
on people. Their capabilities matter and what is more, the need skills can be
identied, measured and developed.
Managing private equity buyouts
“We are on our way towards
understanding human factors in
Private Equity deals.
We have taken the rst steps,
but we are not there yet.”
(An anonymous senior private equity professional)
Research ndings
1. A young industry reaching maturity:
Though private equity has always existed
in some formiv, its present origins can be
traced to the post-World War II era. The
1980s saw the modern birth of the sector,
which has since spread globally. Despite
different historical paths and degrees of
maturity across countries, the sector is
now well established. It is well understood
by its immediate stakeholders, i.e. the sell-
ers, investors and nancers.
Yet the sector suffers, in part, from a nega-
tive media and societal image. The image
of “leverage-based deals, where all the
juices are squeezed out” was deemed an
ill-t with reality. As a young sector that has
emerged, grown and matured in a short
period of time, has it simply not had time to
explain itself to the wider audiences?
2. Excellent players are expected to
stand out: Reputation is critical in an
industry where stakes are high in terms of
investments and expected returns. The
economic bubble of the early 21st century
drew interest, equity and new entrants
into the sector. Many of these players face
the risk of fading away in an increasingly
competitive and transparent market, while
those with a sound reputation and track
record are expected to stand out.
3. A sector suffering in dire economic
circumstances: The economic situation
since 2008 has taken its toll on the private
equity sector. This affects the buyout pro-
cess in the following ways:
• Thesourcingfornewdealsismorede-
manding and competitive
• Thepurchaseofcompaniesdepends
on nancing that is more difcult to
secure. Also, how to nd targets with
business models that can resist eco-
nomic downturns?
• Securingthedesiredreturnsoninvest-
ment from portfolio rms is more chal-
• Exitingfrom buyoutshasbecomedif-
cult and prolonged
In terms of the human element, this means
that the need for outstanding talent is in-
4. ‘From Excel spread sheets towards
active ownership’: A marked distinction
between the pre-crisis – meaning the pre-
Lehman Brothers – and the post-Lehman
era is made. The private equity ‘playing
eld’ has become more regulated, de-
manding and transparent post-Lehman.
This has long-term implications for private
equity ownership. Previously, private equity
companies focused on the purchase deci-
sion and a ‘nancially orientated’, distant
ownership approach. Now, there is a need
for private equity funds to transform them-
selves into ‘active owners’:
Trends affecting private equity players
“From numbers and Excel spread sheets,
we are transforming into a mode of active
ownership and industry operatorship.”
(An anonymous senior private equity professional)
Though best-in-class private equity houses
are used to operating with an active owner-
ship approach, the sector overall is caught
in a ‘metaphysical’ quest to unveil the
meaning of ‘active ownership’:
• Whatis(active)ownership?
• Howcanonelearnaboutanddevelop
into being an active owner?
• Whatareour‘ethos’andethicalguide-
lines as a sector?
• What is being industrial? And who is
• Howtransparentasanindustryshould
we be?
5. The signicance of ‘best-in-class’
private equity management: Faced with
an increasingly demanding marketplace,
the management of the private equity
house becomes critical. The character-
istics of successful private equity houses
• Of having created ‘a playing space’
through a niche strategy or long-stand-
ing dominance
• Proven ways od dening and imple-
menting the formality and discipline
sought in the buyout process. Some
private equity houses operate us-
ing clearly dened ‘playbooks’ that
are constantly updated and provide
a means of formalising the seniors’
knowledge. Others are more informal in
their approach.
• Organisational excellence. The signi-
cance of the private equity house’s cul-
ture was stressed by professionals from
funds that are ‘aiming high’ and are
‘inspired by the best’. The culture of the
best performing private equity houses
combine focus, seriousness, positivity,
equality and dynamism.
6. Private equity professionals’ excel-
lence: Founding partners and recruited
professionals are each private equity fund’s
strength and differentiator:
“Though we come from an established
house, ultimately winning the deal boils
down to the individuals in the deal. A good
brand opens the door, but it is the individu-
als that make or break the deal.”
(An anonymous senior private equity professional)
The talent in the industry is of the highest
calibre, with top houses boasting demand-
ing recruitment conditions. Capabilities re-
quired in the sector are changing, though.
In line with the trend toward active owner-
ship, recruits are no longer drawn solely
from the nancial sector, but a broader
variety of competences is being brought
into the business:
“The game has shifted from a battle to
save costs towards one of developing
(An anonymous senior private equity professional)
In support of active ownership, a private
equity professional is a business developer.
This role requires:
• Financialexcellence
• Strategicacumen
• Intelligence,humourandsociability
• Analyticalskills
• Astructured,fact-basedapproach
• Excellenceinprojectmanagementand
coordination rather than general man-
In dening the characteristics of success-
ful private equity professionals, people-
related skills rose to the top. Successful
professionals combine:
• Flexibilityandtheabilitytotakerisks
• Ahard-workingnature
• Apassionforthebusiness
• Interaction, coaching and networking
Managing private equity buyouts 7
Managing private equity buyouts
The academic partner’s interpretation
of the research ndings and conclu-
sion: The external and internal contexts
in which buyouts take place are central
to dening the human element in mid-
market private equity buyouts. Thus, we
note the increasing signicance of peo-
ple excellence, not only on the portfolio
rm’s side, but also on the private equity
organisation’s side. Private equity houses
are professionally-run service organisa-
tions with an exceptionally high calibre of
talent that is hard-working, passionate and
driven. Whereas many multinational corpo-
rations currently seem to lament the lack
of ‘employee engagement’, private equity
organisations seem to ‘tick’ with enthusi-
asm and drive. Now, what is it that organi-
sations across sectors can learn from their
private equity peers? And how can private
equity companies further include human
elements into their own way of working?
“It has been a costly process to nd out the
signicance of the human side in private
equity buyouts.”
(An anonymous senior private equity professional)
Research ndings
In summary the buyout process consists
of four intertwined stages, combined with
ongoing networking and relationship build-
ing (see Fig. 3):
• Phase I (FIND): Finding potential tar-
gets through sourcing and deal identi-
• Phase II (BUY): Having identied a po-
tential target, proceeding to thorough
analyses, discussions, valuation, mod-
elling and negotiations in support of the
nal purchase decision.
• Phase III (OWN): Planning and execut-
ing ownership of the portfolio compa-
• Phase IV (SELL): Planning and execut-
ing the selling of the portfolio company
to the next owner.
• All phases (NETWORKING and
tionship management on an ongoing
basis to support present and future
Human dynamics in the buyout process
Mercuri Urval’s business perspective: Talent is at a premium, whilst company
strategy and nancing are critical, without the right talent in the right roles deals do
now work.
Managing private equity buyouts
1. Active sourcing is at the heart of the
‘nd’ phase:
Creating increased value through company
purchases is at the heart of the private
equity business model. To this end, buying
‘right’ is critical. Thus, the sourcing (phase
I) and buying (phase II) phases need to be
professionally executed (Fig. 4). The indus-
try takes its time in this buyout ‘front-end’. It
can last from months to a decade.
The ofcial investigation, or ‘buy’ phase,
is preceded by years of relationship build-
ing with potential targets (Fig. 3). Private
equity houses adopt a proactive approach
to sourcing targets. This serves several
• Potentialleads can be identied early
on and, if possible, before the competi-
• A relationship with the selling side,
be it with owners or management,
can be established. This early relation-
ship building helps both sides decide
whether the partnership has the poten-
tial to succeed. Relationship building is
a long-term endeavour: it takes years to
develop a relationship based on trust.
The stronger the relationship, the more
likely it is that the private equity fund
secures the deal and further, succeeds
in the ownership phase.
• Agoodrelationshipprovidesaccessto
competitive intelligence on the target’s
Networking with owners / future owners / advisors / stakeholders
Relationship-building with management
Due diligence, analysis, valuation, modelling
Criteria of purchase
Planning & executing ownership
Planning & executing exit
Figure 3. Phase-based overview of the buyout process.
Managing private equity buyouts
2. Analysis, decision-making and re-
lationship-building at the heart of the
‘buy’ phase.
People-related purchase criteria:
Though private equity houses analyse tar-
get companies in meticulous detail, the
question is, should exact purchase criteria
be adhered to? While such criteria are pub-
lished for the purposes of external com-
munications and positioning, in practice,
criteria shift from case to case and sector
to sector. Moreover, each partner operates
with different criteria in mind. Private equity
professionals seek ‘unique and excellent’
Typical purchase criteria revolve around
sector and company-related opportunities
as well as identifying the risks and the value
added that the private equity house can
provide. In addition to these strategic and
nancial considerations, people-related
purchase criteria relate to
a. Seeking high quality management
teams. These ‘good’ to ‘great’ man-
agement teams are ingrained with am-
bition, vision, drive and pro-activeness.
These characteristics are critical under
private equity ownership, given the high
ambition levels involved.
b. The relationship between the target’s
management and the private equity
house representatives needs to exhibit
chemistry and good rapport, a high de-
gree of trust and an alignment of inter-
ests and plans. This is critical, given that
the ownership era is largely dependent
on the relationship between the owner
and management. The seeds of this
relationship are ideally sown early in the
pre-deal era.
c. The signicance of corporate culture
depends on the type of purchase and
strategy for the deal. For some private
equity houses, great companies come
out of great cultures; here, culture is a
purchase criteria. Deals go astray or
are not invested in if the target does not
display the desired culture. Conversely,
private equity companies see that com-
panies lacking in cultural excellence
can be good investments too. Bankrupt
or distressed companies are an exam-
ple where a poor, sluggish and, in part,
unethical culture might have prevailed
prior to the purchase. Investments in
traditional, slower and more hierarchi-
cal sectors might focus on companies
with potential – though clearly less
‘driven’ cultures.
Networking & relationship-building with owners
Relationship-building with management
Figure 4. Human dynamics in the ‘nd’ phase.
(1) Strategic niche of PE supports
targeted relationship building & deal
(2) PE house’s sourcing strategy,
organization & resources
(3) Finding unique companies tting
the PE’s criteria
Proactive sourcing:
(1) To identify leads early on
(2) To develop a long-term relationship with targets
(3) To test alignment with targets
(4) To provide access to informal competitive intelligence
Managing private equity buyouts
Minute attention to non-human due
diligence: Once a private equity house
has set its sights on a potential target, it
conducts rounds of analysis culminating
in ofcial due diligence. There is a pro-
nounced emphasis on due diligence in the
sector, given the signicance of the ‘right’
purchase to the success of the invest-
ment. Commercial, strategic, legal and
environmental due diligence analysis is part
of the industry standard. Much is nancially
invested in this pre-deal analysis. Whereas
early analysis might be conducted in-
house, ofcial due diligence is outsourced
to external consulting rms. Many have
quasi-permanent relationships with these
consulting suppliers. The focus is on the
nancial and strategic soundness of the
deal, while the analysis of the manage-
ment and organisation remains on shakier
1. The affective side of negotiations: As
the negotiations proceed and the closing of
the deal becomes imminent, there is a shift
in management’s allegiance. They start to
think about ‘what’s in it’ for them. All the
while, it is critical that management keeps
its focus on the business. At this stage the
incentive programme for management is
nalised. This is an opportunity for both
sides to gauge ‘what’s the money behind
the talk?’
2. Intuitive hunches and collective be-
lief drive decision-making: The process
of deciding to make a purchase consists of
a series of iterative rounds from identica-
tion through interest, discussions, analysis,
formal due diligence, valuation, modelling
and negotiations to deal closing.
From a human perspective, the investor’s
‘rst hunch’ or ‘rst kick’ from a company
is critical. The ‘rst hunch’ occurs early on
in the sourcing process, when skimming
through numerous potential deals. The
Figure 5. Human dynamics in the ‘buy’ phase.
Networking with owners / future owners / advisors / stakeholders
Relationship-building with management
Criteria of purchase
Due diligence, analysis, valuation, modelling
(1) Excellent management
(2) Buy-in, alignment & chemistry with
(3) Geared culture
Affective side of negotiations:
on whose side is management?
(1) Meticulous detail in due diligence analyses
(2) How about the human elements?
(1) From “hunch” to “rst kick”
to conviction to purchase
(2) Finding collective belief in
Emotions & moods in target
Managing private equity buyouts
‘rst kick’ occurs when meeting manage-
ment. Such socio-emotional and partly in-
tuitive decision-making attests to any deals
non-rational, non-linear and non-nancial
sides. The involved professionals also need
to ‘click’ with the potential target, that is to
feel an emotional bond and attachment to-
wards it, an intuitive sense of value-creation
Further, as professional service organisa-
tions are often organised as partnerships,
there is a need to nd a ‘collective belief’ in
the purchase among the owner-partners in
the investment committee.
The strategic signicance of relation-
ship building with management: The
early meetings with management are a
‘mutual match-making process’, where
both sides are making a decision about
the other. It is in the private equity com-
pany’s interest that good chemistry and
strong bonds are developed upfront. The
signicance of personalities is highlighted
– private equity funds consider carefully
which professionals they allocate to each
deal. Ideally, there is a t between the part-
ner involved and the selling side’s owner
and management. Early meetings are also
characterised as a ‘trust-building process’;
there is a need to establish trust with man-
agement. The role of the rst meetings is
critical especially in auctions, where the
two sides have few possibilities to meet.
Private equity houses make an effort to
present themselves as an attractive option.
Further, the pre-deal meetings are an op-
portunity to establish terms of cooperation
and to nd alignment.
3. Human dynamics in the ownership
It is difcult, if not impossible, to pin-point
the moment when the ownership phase
The sector identies its key stakeholders
a. The portfolio rm’s owner, CEO, CFO
and possibly its management team
b The board, the chairman of the board
and the owners of the target company
c. The private equity house as the majority
owner, this includes the partner and the
deal and value creation teams
d. External stakeholders who are men-
tioned relate to banks as the deal’s
nancial backers, future owners, sup-
pliers and customers, and the tax and
regulatory environment
The term ‘employee’ did not surface in the
interviews,apart from those in France and
the U.S. The ‘human element’ in private
equity buyouts at this phase, appears thus
to largely revolve around the owners and
the CEO.
Figure 6. Human dynamics in the ‘own’ phase.
Networking with future owners / advisors / stakeholders
Relationship-building with management
Planning & executing ownership
(1) Hierarchically focused view of stakeholders;
(2) Active ownership model:
 •Thestrategic‘triangle’
 •Thecentralroleoftheboard,thepartnerandtheCEO
(3) Management is often “a resource to be changed”
(4) Target rms change to become more focused
(5) Does learning occur across the targets
Managing private equity buyouts
An active ownership approach: As the
majority owner, the private equity rm’s
primary means of inuencing the portfolio
rm is through the Board of Directors. This
is paralleled by a private equity partner
engagement in support of the CEO. Thus,
ownership rests on a ‘triangle’ (see Fig. 7),
consisting of:
(1) The Board of Directors1
(2) The portfolio company’s CEO, and pos-
sibly the CFO and management team
(3) The private equity house as the majority
owner, i.e. the responsible partner and
support teams
Strategic plans, goals and key initiatives are
at the heart of the private equity company’s
ownership agenda.
Human dynamics related to the Board
of Directors: There is some debate as to
whether an internal or external Chairman of
the Board should be used. In both cases,
the relationship between the Chairman and
the CEO is critical. At its best, the board:
• Setshighexpectations
• Challengesmanagement
• Remainscritical,albeitencouraging
• Isabletoprioritiseandseethebigpic-
• Providesideas
• Involvesallitsmembers
• Is forward-looking rather than back-
The role of external board members in add-
ing sector-specic and function-specic
expertise is emphasised. The question
is: How to nd external board members?
Some private equity houses use elaborate
processes, or board members might also
be reused across cases. Yet, questions
were raised:
• Doexternalboardmembershavesuf-
cient time allocated to board work?
• Are external members sufciently lis-
tened to, or does the private equity
house ‘run the show’? Alternatively,
are external board members too loud in
their views?
1 By board, we r efer to the Board of Direc tors.
Portfolio company’s
CEO, CFO and
management team
plans & goals
PE house as
majority owner:
partner &
portfolio team(s)
Ongoing interaction
The board follows up progress,
challenges and supports
where possible
Management is in control and delivers
How is the relationship?
How is the relationship?
PE house as sparring partner
Figure 7. Roles and interactions within the strategic ownership ‘triangle’.
Managing private equity buyouts
Human dynamics related to the partner
role: The partner in charge has a central
role vis-à-vis the success of the buyout.
The studied private equity companies al-
locate different amounts of time for senior
partners to devote to portfolio rms; it de-
pends on each partner’s portfolio company
workload. In the sample, the ratio ranged
from 1-2 to 9-10 portfolio companies per
partner. In the former, an active ownership
model is implemented, whereas in the
latter, the private equity operates mainly
through the board, taking a more distant
and passive stance to ownership.
When private equity houses are active
owners, there is much interaction between
them as the majority owner and the CEO.
The relationship between the partner and
the CEO is then ideally characterised by:
• Mutualtrust
• Thinkingalike
• Anongoingexchangeofinformation
• Informality,opennessanddirectness
• Avoidingpoliticsorhidinginformation
• Movingfast
Given the CEO’s solitary position, he or
she might turn to the partner for sparring
support. The relationship thus easily veers
towards a ‘buddy’ relationship. This might
deter the partner from making difcult
decisions regarding the portfolio rm. For
example, how easy is it then to change the
CEO or management? Furthermore, the
partner’s emotional attachment to a target
might deter him or her from exiting. The
partner needs to tread a careful balance in
this respect.
Human dynamics related to the CEO:
The CEO of the portfolio company is per-
haps in the most critical role to ensure that,
operationally and managerially, the invest-
ment delivers.
The role of a CEO is in itself a challenging
one. In the context of working for a pri-
vate equity-backed portfolio company, this
challenge is coupled with having to meet
the needs of a demanding owner. There
is more pressure and a greater focus on
reporting, as progress is closely monitored.
The CEOs need to understand the private
equity owner’s agenda, i.e. that private
equity companies need to realise the in-
vestment at high value. All the same, not
all CEOs enjoy having an active owner who
seeks close involvement.
What makes a successful CEO of a pri-
vate equity-backed rm? The best CEO
combines (1) the ability to deal with the
demanding private equity-owner and (2)
the ability to lead the portfolio rm through
the set strategic agenda. With respect to
the former, the best CEO:
• Isanopenandtransparentcommuni-
cator; hidden agendas, politics or the
protection of one’s turf are alarming
• Knowstheorganisationanditsperfor-
mance inside out
• Is a exible, solutions-oriented prob-
• Isstrong-mindedenoughtobeableto
face the owner’s demanding questions
Within the portfolio rm, the CEO is moreo-
• Atransformationalleader
• Ambitious
• Abletobethespokesmaninfrontofthe
owner and the board.
Notwithstanding this, the CEO’s role in pri-
vate equity-backed rms is hard work. The
CEO needs to be in good health and have
a supportive work/life balance. Health or
family issues might explain a deteriorating
Managing private equity buyouts
The need for a competent CFO: The
CFO in private equity-backed companies is
‘instrumental’. For some respondents, the
CFO is more important than the CEO. Fi-
nancing banks require portfolio companies
to have highly competent CFOs. This is the
position that is most often replaced, or an
additional CFO position is created to sup-
port the existing more accounting-geared
nance role in smaller to medium-sized
companies. Attracting a qualied CFO
to a small-sized rm can prove difcult.
Given the nancial orientation of the private
equity world, the CFO role in private equity-
backed rms is culturally different from
a CFO role in other types of companies.
CFOs in private equity-backed rms need
strength of character to be able to cooper-
ate with the CEO.
Learning across portfolio rms: Pri-
vate equity houses differ with respect to
their attitudes to working across portfolio
companies. The seemingly more advanced
private equity houses have adopted a ma-
ture approach to learning across portfolio
companies – services are jointly sourced
and best practices from within and beyond
the industry are shared across the portfolio
Human dynamics in the ‘sell’ phase
– planning and executing exit: Exit is
considered a key success factor in buy-
outs: how to ensure the right exit value and
timing, so that value is also secured for the
next owner? Private equity professionals
differ with regard to when exit is consid-
ered. For some, this is an ongoing concern;
others consider good purchases to be
‘sellable’ at the right time.
From a human dynamics perspective, the
issue revolves around the loyalty of man-
agement and the ability of the responsible
partner to ‘let go’ of the portfolio rm (Fig.
8). In terms of management loyalty, the
questions are: Whose side will manage-
ment be on during the sales process? Will
they stay on the seller’s side or move onto
the buyer’s side? There is a risk if man-
agement has its own agenda and starts
manipulating the sale. Having completed
the exit, do private equity houses conduct
post-investment learning sessions?
Figure 8. Human dynamics in the ‘sell’ phase.
Networking with future owners / advisors / stakeholders
Relationship-building with management
Planning & executing exit
(2) Keeping rm’s long-term value creation potential in mind
(3) What is management team’s motivation & interest at exit?
Managing private equity buyouts
The academic partner’s interpretation
of the research ndings and conclu-
sion: The private equity owners’ excellence
resides in ownership that is temporary,
high-ambition, corporate governance-
driven and active. The private equity com-
panies’ excellence at sourcing, relationship
management and professionalism with re-
gard to corporate governance and active
ownership needs to be highlighted. Yet
the lack of attention to the organisation at
large, be that to non-nancial metrics or
members outside the management team,
deserves mention. Many interviewees la-
mented the resulting “lacking a clear view
of the organisation” they were investing in.
While private equity owners are at their best
excellent business strategists, the busi-
ness model relies heavily on the upper part
of the organisation, with all the risks that
this choice entails.
“The quality of people is possibly the big-
gest determinant of value creation.”
(An anonymous senior private equity professional)
The interviewees dene the private equity
buyout business as a ‘people business’.
They unequivocally recognise the signi-
cance of the human element, which they
largely equate with the quality of the man-
agement team.
Despite the signicance attached to man-
agement, we nd that the practice of man-
agement assessments is at best patchy,
though it is showing signs of improvement.
We note a trend towards assessing the
capability and dynamics of the whole man-
agement team, instead of just assessing
the CEO.
From the studied sample of private equity
houses, we found that:
1. Category 1: Management assess-
ments are always conducted (33%)v
2. Category 2: Management assess-
ments are at times conducted (38%)
3. Category 3: Management assess-
ments are conducted informally (21%)
4. Category 4: No practice of manage-
ment assessment (8%)
Within these four categories, private equity
rms differ with respect to:
How is management assessed?
Mercuri Urval’s business perspective: How do you clarify the critical factors
for success and failure for the CEO and CFO roles? More than track record and
capability, understanding the likely dynamics between key leaders in a deal is
critical to ensuring success.
Managing private equity buyouts
• Thesignicance attachedto manage-
ment assessments
• Theimpactthatassessmentsbear on
the purchase decision
• Theconsistencyandformalityofman-
agement assessments
• Theattitudetowardsmanagementas-
• The breadth of internal and external
involvement in this exercise
• Thestance towardsconvincingtarget
rm management
• Thetimingofassessments
Category 1: 33% of private equity houses
recognise the signicance of management
assessments. This exercise is seen as a
‘must-do’ exercise. It is even raised as a
‘differentiator’ from their more nancially
orientated competitors.
The assessment affects the decision to in-
vest. Private equity houses in this category
mostly rely on an external consultant, some
having worked with the same consult-
ant for years. The assessment approach
often relies on a method the private equity
house has developed in-house or with the
consultant. Target rm management has
little choice other than to agree to being as-
sessed. The private equity houses adopt a
constructive stance; they explain the need
for the assessment to the management
Category 2: 38% are unsure whether “to
conduct or not to conduct management
assessments”. As there is no policy, the
use of management assessments comes
to depend on the partner and the purchase
type. For example, in exclusive deals man-
agement assessments are more prevalent.
A number of informal approaches to man-
agement assessment are in use. These
range from:
• Spendingtimewithmanagementpre-
• Checking the management’s back-
ground and references
• Usingananalysisapproachdeveloped
• Several private equity representatives
meeting target rm’s management
The use of one’s own judgement was em-
“We use our judgement.”
“We get a sense of them.”
“We use our experience of seeing and
working with management teams.”
(Various anonymous senior private equity
All agreed, however, that there was a need
to do more as regards management as-
Managing private equity buyouts
Category 3: 21% state that the signi-
cance and the need to conduct manage-
ment assessments is debated. No conclu-
sion has been reached. The conduct of
assessments remains sporadic. Private
equity houses in this category have re-
verted to their own in-house, informal ap-
proaches to assessment including:
• Checkingreferencesandbackgrounds
• Socialising
• Usingtheirownprolingtool
• Usingtheirownjudgementandimpres-
sions: “we need a good feeling”, “we
set our rst impression in the manage-
ment presentation”, “we trust our feel-
• Discussionsattheinvestmentcommit-
• Several representatives of the private
equity house join the negotiations as
• The involved pre-deal strategy and
nance consultants’ views are heard
Thus, there are efforts to triangulate views.
The interviewees agreed that they could do
better, though.
Category 4: 8% do not recognise the
signicance of management assessment,
but in addition, there is little formality or
consistency in the approach. As a result,
these organisations largely trust their own
experience, intuition or networks and come
to make their decisions:
“based on the little information available.
We have little contact, we get a sense, im-
pressions, and we check their reputation”.
(An anonymous senior private equity professional)
Categories 2, 3 and 4 are similar; most
management assessments are formed on
the basis of one’s own judgement and
intuition along with background checks.
This means that only a third (Category I with
33%) of the sector has, at best, reasoned
its stance, attitude, strategy and approach
Consistency & depth of the assessment
Signicance of assessing management
High signicance.
High consistency
& depth
Zero to low signicance.
Zero to low consistency
& depth
Signicance questioned.
Informal approaches
and ‘own judgement’.
Signicance debated.
Volatility in
consistency &
Reliance on ‘own judgement’,
‘intuition’, ‘experience’ and checking backgrounds.
Formality and
maturity in approach
Figure 9. Categories as regards the use of management assessments.
Managing private equity buyouts
to management assessments. The major-
ity (67%) of the industry is thus not making
effective use of this strategy and is thus
making decisions on management on a
seemingly ad hoc basis.
The academic partner’s interpretation
of the research ndings and conclu-
sion: While the private equity business
model relies heavily on management, it
appears that few private equity houses ac-
tually thoroughly analyse this talent. All the
same, excellent management and driven
cultures are part of the purchase criteria
and are found to impact value creation.
This paucity of attention is surprising in a
sector that is otherwise disciplined, for-
mal and professional. Scant attention to
assessing managerial talent results in a
potential talent and capability risk within the
portfolio rm.
“Management teams make the difference
between good and bad investments.”
(An anonymous senior private equity professional)
We identied two schools of thought re-
garding whether management is to be
replaced or not. 62% of private equity com-
panies are keen to replace management,
when and where required:
“Management is considered a resource to
be replaced”.
In this category, 30%-75% of the manage-
ment team is changed: two thirds of CFOs
are changed, or a new CFO is added to the
existing structure and between one third
and two thirds of CEOs are changed in the
rst years. Nevertheless, it was acknowl-
edged that:
“This is not an easy call to make”.
Reasons for management changes relate
• Plannedchanges,astheownerretires
• Under-performance
• Alackofmotivationandcapability–“it’s
too tough”
• Changesintherm’sstageofdevelop-
ment; it is rare to nd the same manage-
ment team steering the rm across sub-
sequent stages in the rm’s lifecycle.
Performance-wise, one change of CEO
can have a positive effect on performance.
However, when the CEO is changed more
than once during a private equity house’s
ownership era, this tends to have negative
performance effects, given the ruptures
Management as a ‘resource to be changed’?
Mercuri Urval’s business perspective: What is the right balance between
objectivity and subjectivity to make the ‘right call’ on key appointments?
What is the best possible approach to assessment in this situation?
Managing private equity buyouts
that the change causes across the organi-
The mistake most commonly lamented
was that of changing management too
late and of not reacting to the rst signs of
discomfort. Private equity professionals
require a ‘social intelligence’ and an ‘early
warning’ mind-set towards management
behaviour. Early warning signs were identi-
ed as:
• Managementlackingdriveandenergy
• Managementnot beingincontroland
unable to make tough calls
• Management being stubborn, not lis-
tening and/or in an explanation mode
• Managementteamdynamicsshowing
signs of suffering
• Management hiding information, e.g.
few people are brought into board
meetings and the owners’ access to
the organisation is obstructed
• Trust between the owners and man-
agement is eroding
38% of professionals consider that:
“We prefer keeping management”.
Sometimes management is not changed
because private equity professionals strug-
gle to identify the root cause of poor rm
performance. Further, there are risks and
costs involved:
• Itcreatesnoiseintheorganisation.
• Ittakestimeforthenewpersontobein
place and functioning effectively.
• Itiscostly–“half a year is lost”.
• Thereistheriskthatthenewmanage-
ment is no better
• Thechangeinitselfcreatesacycleof
fear in the rm (for example in France,
where the workplace is an emotionally-
charged space)
• Itisnoteasy
• Involatilemacro-economictimes,man-
agement change creates additional
• ItisdifcultforanewCEOtoreplacea
The academic partner’s interpretation
of the research ndings and conclu-
sion: As the private equity business model
relies heavily on management, it is man-
agement that bears much of the weight
of buyout success. Has management be-
come the scapegoat, if things are turning
sour? Is it a ‘resource’ to be changed?
What are the ripple effects across the or-
Mercuri Urval’s business perspective: How can you best anticipate,
rather than react to, changes that will need to be made? How could your
diagnostic and due diligence processes be improved? What tangible benets
could be achieved?
Managing private equity buyouts
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Managing private equity buyouts
Location of
Number of
PEs / origin
Number of
Number of PEs
Organization, e.g.
PE (# of interviews)
The US 4 1 1 1 (1)
The UK 2 6 5 (+1) 6 (1)
France 4 4 4 4 (1)
Germany 2 3 3 3 (1)
Sweden 64 ( +1) 43 (1)
1 (2)
Denmark 46 (+1) 5 (+1) 5 (1)
1 (2)
Norway 3 4 3 (+1) 4 (1)
Finland 1 4 2 1 (3)
1 (1)
Overseas 1
inter views
9 = (1)
French VCA (1)
UK Bank (3)
UK Expert (1)
UK Target (1)
1 (1)
1(2*3 = 6)
1 (1)
1 (1)
Tot a l 27
= 43 interviewees:
- 34 PE interviewees
- 9 support
= 31 organizations:
- 27 PEs (3 PEs met
more than once)
- 4 other organizations
= 39 interviews:
- 33 interviews in PEs
- 6 interviews in other
Table 1: Interview sample.
Managing private equity buyouts
i Qualitative r esearch is well suited to the st udy of social phenomena unfoldin g over time, particularly when k now-
ledge concern ing the topic is scan t (see e.g. Glaser & Str auss, 1967; Easte rby-Smith et al., 2 008; Eisenha rdt, 1989;
Yin, 200 9).
ii As we targeted high ly experienced profe ssionals, inter viewees occupied a r ange of senior posit ions including part-
ner, founding partn er, senior par tner, chief executive ofcer, chief nance ofcer, regional h ead, head of buyouts
or chairman of th e board positions in th e studied PE houses. In a ddition to this focal sa mple, we conducted a set of
six ‘suppor t interviews’ in the Lo ndon area with senior re presentatives fr om the banking secto r working in various
roles with pr ivate equity rm buy outs, an executive manage r involved in a professiona l role in buyouts, as well as a
port folio company manager. A senior r epresentative o f a national venture c apital asso ciation was also in terviewed.
This brought t he total interv iew sample to 39 interv iews, with 43 inter viewees, in a total of 31 o rganisations ( Table
iii For a full overview of the research method adopted, including research design, case studies, data collection,
interview s and data analysis, pleas e refer to the project’s nal re port (2012). Given that the f ocus in this research
project was on the private equit y professionals’ views, it is recommended that later research also encompasses
the views of the s ector more broadly, including the view s of portfolio rms , investors and nanciers .
iv S ee Demaria (2010).
v Note to the reader: These percentage results need to be treated with caution given that the studied sample only
included few and selected players per country. The number does not represent an industry average, but rather,
an indication of the behaviour of private equity rms in the studied sample. Given that this study focused on
well-known pr ivate equity players, the ac tual practice of managemen t assessments might be wor se than is here
Managing private equity buyouts
Dr. Satu Teerikangas,
University College London,
In cooperation with Mercuri Urval’s international research team:
Jussi Pokkinen, Pasi Honkalahti & Max Karsten
(Mercuri Urval Finland functioned as the coordinating team),
Chris Villasenor & Darcey Krug (Mercuri Urval USA),
Richard Edmondson & John Greenway (Mercuri Urval UK),
Nathalie Nelis (Mercuri Urval France),
Michael Samtleben & Nadja Langeheine (Mercuri Urval Germany),
Mats Wärnling & Martin Nissler (Mercuri Urval Sweden),
Stig Bo Karlsen & Simon Bach Nielsen (Mercuri Urval Denmark),
Steffen Dyre Hansen, Bjørn Godsveen & Sigurd Beidel (Mercuri Urval Norway)
The research is funded by Mercuri Urval International. The data gathered will be
used by Mercuri Urval and by the researcher for scientic publication.
ResearchGate has not been able to resolve any citations for this publication.
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Though many studies have examined post-acquisition integration challenges, they have mainly focused on rationalistic explanations for the difficulties encountered in post-acquisition integration. There remains little knowledge of how the 'irrational' features of post-acquisition decision-making may impede organizational integration. This study attempts to bridge that gap by examining post-acquisition decision-making from a sensemaking perspective. The paper presents an in-depth analysis of a merger between a large Finnish furniture manufacturer and three smaller Swedish furniture companies. By focusing on the sensemaking processes surrounding integration issues, we uncover four interrelated tendencies that illuminate why the frequent problem of slow progress during post-acquisition integration occurs: inherent ambiguity concerning integration issues; cultural confusion in social interaction and communication; organizational hypocrisy in integration decision-making; and the politicization of integration issues. Copyright Blackwell Publishers Ltd 2003.
- This paper describes the process of inducting theory using case studies from specifying the research questions to reaching closure. Some features of the process, such as problem definition and construct validation, are similar to hypothesis-testing research. Others, such as within-case analysis and replication logic, are unique to the inductive, case-oriented process. Overall, the process described here is highly iterative and tightly linked to data. This research approach is especially appropriate in new topic areas. The resultant theory is often novel, testable, and empirically valid. Finally, framebreaking insights, the tests of good theory (e.g., parsimony, logical coherence), and convincing grounding in the evidence are the key criteria for evaluating this type of research.
Introduction to Private Equity is a critical yet grounded guide to the private equity industry. Far more than just another introductory guide, the book blends academic rigour with practical experience to provide a critical perspective of the industry from a professional who has worked at many levels within the industry, including insurance, funds of funds, funds and portfolio companies. The book looks at private equity from the point of view of the individual or the business. How is a private business valued? How is the acquisition transaction processed? What are the due diligence issues that should be considered before moving ahead? A valuable insight to a rather opaque market. Introduction to Private Equity covers the private equity industry as a whole, highlighting its historical development in order to put its recent development into perspective. The book covers its organization, governance and function, then details the various segments within the industry, including LBO, Venture Capital, Mezzanine Financing, Growth Capital and beyond. Finally, it offers a framework to anticipate and understand its future developments. It provides a balanced perspective on the current corporate governance challenges which are affecting the industry and draws perspective to understand the evolution of the sector, following one of its major crises.
Leveraged buyouts have been the fastest-growing segment of mergers and acquisitions (M&A), especially since 2001. Behind such a surge is the globalization of private equity (PE)-sponsored leveraged buyouts (LBOs). Historically, LBOs were greeted as the "solution to the agency problem" by academics in the 1980s, and were promoted as the solution to the problem of the otherwise lackluster return to M&As. As more attention has been paid to this question by academic researchers recently, a rather different picture of reality has emerged.
Mergers and acquisitions are complex events in organizational life for which we have incomplete understanding, in part because researchers have tended to consider only partial explanations of them. The authors addressed that problem by developing a conceptual framework that integrates theoretical perspectives from economics, finance, and especially strategy, organization theory, and human resource management to offer a broader process-oriented integrative model. The integrative model explicitly describes how synergy realization is a function of the similarity and complemen tarity of the two merging businesses (combination potential), the extent of interaction and coordination during the organizational integration process, and the lack of employee resistance to the combined entity. The approach differs from traditional methods of studying mergers and acquisitions in three ways: (1) the success of a merger or acquisition is gauged by the degree of synergy realization rather than more removed and potentially ambiguous criteria such as accounting or market returns; (2) the key attribute of combination potential is conceptualized not only in terms of the similarities present across businesses, as in most studies of mergers and acquisitions, but also in terms of the production and marketing complementarities between the two businesses; and (3) the data are derived from a case survey method that combines the richness of in-depth case studies with the breadth and generalizability of large-sample empirical investigations. The framework was tested empirically across a sample of 61 mergers and acquisitions. The extent to which a merger or acquisition resulted in synergistic benefits was related to the strategic potential of the combination, the degree of organizational integration after the deal was completed, and the lack of employee resistance to the integration of the joining firms. Furthermore, the analysis revealed that (1) independent of any similarities across joining firms, the presence of complementary operations increased the probability of acquisition success by boosting synergy realization, (2) organizational integration was the single most important factor in explaining synergy realization, even to the extent that M&As with high combination potential were significantly more successful when coupled with high organizational integration than when integration efforts were less forceful, and (3) mergers and acquisitions that were dependent on gains from combining similar production and marketing operations tended to elicit more resistance from employees than M&As focused on realizing complementary benefits. Overall, the findings provide strong support for an integrative theory of mergers and acquisitions.
The article has three aims. First, it reviews recent research on corporate mergers and acquisitions and their impact on human resource issues. Second, it proposes a framework for classifying mergers and acquisitions. Finally, it provides some research questions for examining merger types, human resource management issues and major outcomes.
This paper describes the process of inducting theory using case studies-from specifying the research questions to reaching closure. Some features of the process, such as problem definition and construct validation, are similar to hypothesis-testing research. Others, such as within-case analysis and replication logic, are unique to the inductive, case-oriented process. Overall, the process described here is highly iterative and tightly linked to data. This research approach is especially appropriate in new topic areas. The resultant theory is often novel, testable, and empirically valid. Finally, framebreaking insights, the tests of good theory (e.g., parsimony, logical coherence), and convincing grounding in the evidence are the key criteria for evaluating this type of research.