A Bigger Deal: Independent Chairs In Private Equity

A non-executive or independent chair in a private equity deal has long been considered desirable by investors — and, now, is increasingly deemed essential, with some limited partners going as far as requiring it from private equity funds. As demand for the role heightens, so are expectations of investors and management teams. The right chair critically impacts value creation, which is something our clients are becoming more aware of and engaged around. The result is the most competitive market we have ever seen for chair candidates of PE-backed portfolio companies.

Enduring essentials

As demand for the role grows, so too are the intrinsic attributes expected of successful private equity chairs. Gone are the days of a ‘elder statesman,’ figurehead style chair. These are the days of the strategist, conduit, and steward.

Strategist

Today, an independent chair plays an active role in shaping the strategic direction of a business. They help the executive team thoughtfully prioritize and put the right strategy in place alongside clear objectives that measure delivery. Board meetings should be about focusing on a small number of strategic goals directly linked to value creation. There’s consequently a strong trend towards appointing situationally experienced chairs rather than emphasizing sector expertise. That said, the brief for a chair is different in every portfolio company as it ought to be bespoke to what the management team or company truly needs. The role should be additive and impactful, always.

Conduit

An independent chair also plays a crucial role in interfacing between PE investor(s) and the management team, providing support, guidance, and reassurance to both stakeholders. It is critical for the chair to gain the trust and respect of both parties. Getting this right takes maturity, gravitas, and commitment from the chair. A successful chair is a sparring partner to the CEO, has the confidence of the Board, and serves as a responsible steward on behalf of the Fund, providing bandwidth to both the CEO and investors — with a constant eye on the value creation process.

Steward

As an independent chair, the individual is no longer in the driving seat. A chair is a steward for the business, not a leader, whose top priority is supporting the CEO. Some executives find this transition hard to make. It can also be a lonely and complex role. The chair should provide counsel and encouragement, as well as challenge. If the CEO is successful, all shareholders benefit. The chair must positively impact the management team, provide clear direction and mediation when needed, aligning all shareholders’ interests whilst remaining independent — even in the most nuanced and challenging of situations. A large part of this is defining the strategic priorities with the CEO and wider executive management team. And, from there, setting the Board agenda to encourage honest and open debate that brings out insight from every corner of the Boardroom and ensures well-informed decisions are made.

Bringing it all together, it’s important for a private equity independent chair to:

• Be a strong sounding board and mentor to the CEO and executive management team, offering insight, challenge, and best practice to help drive value creation;
• Ensure that the Company’s strategic goals are clearly linked to aspirational yet achievable financial objectives and targets, ensuring the Company stays on track with delivery of the business plan in a defined time horizon;
• Enable clear dialogue between the Board and the executive team, effectively supported by accurate reporting, analysis, and insight to ensure the right decisions can be made;
• Constantly seek out new opportunities for the Company, leveraging their network where relevant to support business growth, organically and via M&A;
• Facilitate performance evaluation of the Company via effective reporting to the Board and ensuring regular risk and performance reviews of the management team are carried out, supporting the right decisions being made at the right time in pursuit of optimal value creation if needed; and
• Facilitating an exit process from the majority shareholder — something all PE-chairs are likely to need to do during an investment cycle. Here, the role of the chair continues to be pivotal in ensuring all objectives and aspirations are aligned, alongside coordinating activities and resources, helping to manage any disruption, and supporting the CEO in navigating the complexities and demands of running a company whilst also facing the pressure of delivering upon an ultimate exit.

Evolving expectations

With the increasing potential impact of an independent chair on an investment and, in turn, on value creation, the time and commitment required from the role is rising. A chair needs to be accessible and engaged with all levels of the organization, not just with the Board. They must also be able to get to the heart of the business and people’s objectives. A one day per week time commitment is now commonplace. There are characteristics and behaviors investors seek when appointing a chair beyond that, too.

Traditional approach

Historically, there was a strong preference from investors to de-risk both the appointment and the overall investment by appointing a ‘proven PE-chair.’ This meant seeking out individuals with a combination of direct sector expertise and prior PE and successful exit experience. This resulted in an exclusive group of experienced PE-chairs that the next generation have found it hard to break into.

Modern trend

In more recent years, there has been a modern trend towards prioritizing thematic, situational experience. We are seeing companies successfully appoint recent CEOs, or ‘unproven’ chairs, with the right characteristics and mindsets suited to the growing desire for increased engagement, input, and time commitment, especially when operating in a crisis. Many chairs are now only taking on two to three Board roles at any one time to ensure for maximum impact.

Big benefits

An active independent chair, who was more recently an executive, can also de-risk an investment for the PE fund in different ways compared to the more traditional chair.

Flexibility

An engaged, involved chair offers more flexibility and bandwidth in relation to the CEO’s skills and experience. They should be seen as a partner to the CEO — thinking through the role scope and complementary skills needed early on in order to create the right partnership between a CEO and chairman is critical. In an ever-evolving market, where deal volumes surpasses the number of available ‘backable’ CEOs, the right chair can provide valuable flexibility in considering potential CEO candidates and even step-in to run the company for a time, if needed.

Alignment

To maximize the chair’s impact on an investment and management team, PE funds are wise to align with potential chairs as early as possible, ideally pre-investment. There are proven benefits to bringing a chair into a pre-deal situation. It allows the chair and the investment team to get to know one another before co-investing; the chair can be utilized by the Fund to support diligence and sense check; the chair can be intimately involved in the development of the business plan and value creation plan, increasing their sense of ownership for the plan and deal; and it allows time to test and explore agreement on strategy and projections, setting the ultimate relationship up for success. Additionally, a high-potential chair can be seen as an attractive attribute to the management team when meeting potential investors and can actively help the Fund gain access and momentum with the management team.

Attraction

On the whole, we also find independent chairs enjoy and value being involved in potential acquisitions early on. The opportunity to get to know the Fund and the management team and their motivations and expectations for the deal is differentiated pre-deal versus becoming involved further down the line for a chair. Most feel that there are significant benefits to the chair being part of the team from the outset and not perceived as an add-on imposed on the management team. It gives them time to effectively assess the situation. Is it right for them? Do they have the right expertise and skills? And is this a business they want to put their own capital into? Linked to this, the opportunity to shape the deal structure and ongoing strategy is clearly attractive to potential buy-in chairs when co-investing.

In addition, chairs feel the additional insight they gain by working on the deal and having had the opportunity to develop their own diligence questions helps them build the depth of understanding to get the business running post-acquisition and mitigates losing time.

Private equity firms' involvement in value creation has changed dramatically over the years. Today, that includes seriously considering the appointment of a Non-Executive or Independent chair. From providing expert judgment and strategic counsel to adding bandwidth and alignment, the role of the chair is playing a bigger deal in deals than ever before.