How an expert advisor can help you achieve great outcomes for all parties in a private equity deal.
The COVID-19 crisis has not put any dampener on the strong flow of private-equity-backed deals. A McKinsey Global Market Report has highlighted the fact that private equities’ net asset value has grown by seven times since 2002 and twice as quickly as global public equities. The report also concludes that private equity fundraising has grown by 18% annually since 2015. When the global economy recovers, private equity money won’t be far behind for further deal opportunities. There might even be some bargains to make the most of.
The divisional and group CFO Gary McGaghey explains that as we approach a new ‘normal’ on the business scene, it’s important that CEOs and CFOs understand the full context of private equity buyouts, especially when it comes to entering a private equity buyer’s buying funnel. Gary McGaghey is the CFO of the €1.3bn end-to-end marketing production and business services group Williams Lea Tag, where he oversees the company’s implementation of commercial plans (especially cash generation) and investment decisions.
Striking the Right Deal
The philosophy of private equity investments is to both generate and reward growth. Therefore, private equity deals should offer great outcomes for all parties. So, striking the right deals with strong management incentives is important. As deals become bigger and more complex, sometimes involving repeat buyouts of a company, there is now much more demand for specialist support from independent advisors.
Some private equity investors are well-versed in the management of the deal process. These investors often source management support quickly by offering excellent terms. Although these terms may need less commercial intervention, they will still need thorough assessment and must be communicated clearly to the team.
How an Independent Advisor Can Help
Although many private equity deals offer ideal opportunities for investors, often because of the nature of the process or the asset itself, some new funds that enter the market aren’t used to cutting attractive management deals. A management team may sign up to terms and structures that materially disadvantage them and damage their relationship with their new investor post-acquisition. This can jeopardise the original motivation for the deal.
Gary McGaghey explains that 10-20% of deals are egregious and need careful review. It’s important to look out for ‘hidden’ elements, such as management targets that are impossible to reach with the given post-acquisition business strategy. An independent advisor can help a management team understand how their position would change in a range of scenarios and what the funds could be like to deal with throughout the investment journey.
The mergers and acquisitions market sees new entrants each year, including private equity funds from other jurisdictions, family offices, long hold funds, infra funds, and strategics. Many of these entrants have little experience in completing these kinds of deals. A specialist advisor can be invaluable to highlight future roadblocks, teach management teams about the elements they should and shouldn’t accept, and show them how to uphold sensitivity when negotiating with counterparties.
Hiring an Independent Advisor
Even if a company is at the end of the process, an advisor can uncover vital insights that the management team needs to understand. That said, the earlier a company gets an advisor involved, the better. An independent advisor can scrutinise and negotiate a deal to benefit a private equity fund. When there is more equity in the hands of managers and all parties listen and respond fairly to proposals on the management plan, a company can strengthen engagement and motivation to reach its potential post-acquisition. An independent advisor can help all stakeholders align their interests and benefit from a private equity deal.
What’s more, management teams don’t directly pay for an independent advisor. Instead, it is a cost of the transaction teamed with advisory, finance, and diligence fees that are funded as part of the overall deal.
About Gary McGaghey
Gary McGaghey has achieved optimal outcomes for a number of private equity, privately owned, and listed companies across a range of sectors, including beverage, FMCG, media, and pharmacy industries. Now, as the CFO of Williams Lea Tag, he has hired and cultivated an expert finance team for the company. The team works under his careful management to achieve transformation for the company.
Gary McGaghey holds a Bachelor of Commerce degree from the University of Natal and a postgraduate Bachelor of Commerce degree with honours from the University of South Africa. He is also a chartered accountant in South Africa and a chartered management accountant in the UK. On top of this, he has completed a Non-Director Executive Diploma through the Financial Times.