For his summer holiday reading, Ian Grant packed Roy Jenkins' exhaustive biography of Winston Churchill. At more than 1,000 pages, it provides an in-depth account of one of the 20th century's most enigmatic politicians and strategists. Grant is an unashamed admirer of great leaders, and not only those who have graced the corridors of political power.
Since April 2004 he has been responsible for the overall management of August Equity's investment portfolio. In this capacity, he has developed an uncanny knack for identifying the type of top business people that will make ideal independent chairmen or chief executives of the firm's portfolio companies. Their brief is simple: work with the management teams to ensure investors' funds are managed effectively.
"I am always on the look out for people who have had a successful career in a large, public company and who could enjoy working in a private equity backed organisation," says Grant. The opportunity of being involved in the creation of a deal, coupled with the opportunity to invest directly in it, turns it into a stimulating and potentially financially rewarding exercise for these people.
The leaders appointed by Grant invariably play the role of chairman. That said, there is no uniform profile of what makes a successful chairman of a private equity backed company. But each will always have exceptional business experience and proven people skills that can draw the best out of the management team. This ensures that potential problems can be identified and dealt with early.
"In the mid-market you need to bring in experienced chairmen or chief executives who can work with you and help you regularly review different elements of a business," says Grant.
Grant will usually meet management teams as early as possible during the deal process. "Some management teams struggle to relate to venture capitalists in terms of financial objectives and some are better at change than others. I try to put them at their ease," he says.
The business plan will incorporate a number of key performance indicators that will determine how successful the company is on a regular basis. But it is what happens in the first 100 days of the investment that often sets the tenor for the remainder of a management buyout. The 100-day plan is designed specifically to help management teams focus on their key strategic objectives and how they intend to meet them. These will vary depending on the very different circumstances faced by each business.
"The initial 100 days, in some respects, are more important than the three-year plan because both we and management want to see that the company is now totally focused on its customers and market," says Grant. "The companies we invest in tend to have very good managers. However, in a private equity environment they face new challenges, particularly if the business has now taken on increased debt as part of the transaction. For example, the finance department may need to become more effective at cash control, typically by improving working capital management processes. The team may also have set ambitious growth targets and this may require additional resources and planning devoted to new product development or sales improvements."
The list of experienced appointments made by August Equity is impressive. At software and communications systems company Vivista, where August Equity led a management buy-out in 2003 before negotiating a trade sale two years later, achieving a money multiple of 8.9, they introduced Richard Moon as chairman to oversee the strategic planning of the business. And in January 2006 they invited Charles Auld, previously chief executive of the largest UK private hospital provider General Healthcare, to join the senior management team at Healthcare Homes Group as non-executive chairman.
When August Equity needed to improve the performance of anaesthesia equipment manufacturer InterMed, Grant cast his net wide to find the perfect chief executive. He eventually recruited Simon Armstrong who has worked for various venture capital firms since 1990. Armstrong says he had little hesitation about taking on the role at InterMed after meeting Grant. "Some portfolio directors have not run a business," he says. "Ian has, and he demonstrated he knew what it is like to sit where he wanted me to sit."
Armstrong strongly believes in the importance of the first 100 days as well. "You have to make 80 per cent of the changes in the first three months and set sensible targets," he says. "As a new boy coming into a company, it is also acceptable to ask naïve questions about a business or market in the early days."
When Armstrong became chief executive of InterMed in October 2004 he worked in tandem with Grant, who was then acting as temporary non-executive chairman. "During the first few months I was seeing Ian twice a month and speaking to him on the phone at least once a week," says Armstrong. "If you communicate regularly with all those involved with managing a business they are not surprised by any changes you might make. People are also quicker to buy into what you are trying to do."
When performance is strong, companies may also want to acquire new businesses. Buy-and-build is a strategy that August Equity encourages, to accelerate growth that can add real value to a business. Healthcare Homes is a classic example of a portfolio business that is growing via acquisitions.
The contribution of the portfolio management team is particularly pronounced in the run up to an exit. Alignment of the management team's ambitions and the exit strategy is vital. The chairman can play an important part in leading these discussions. "Senior management can offer useful insight here because they understand their market and often have a valuable perspective," says Grant. "Should we wait another year or sell on expectant growth?" is just one question that Grant will regularly face up to.
When things are not going so well, Grant's involvement will escalate. The question he has to be able to answer is: "Why is a business under-performing?" Is it fundamentally due to the management or is it the company's products or is it a function of the sector as a whole? "What can be unnerving in the private equity sector is when the banks start putting pressure on a company and we have to support management to rectify the situation," he says. "This is why we put early warning devices in place to try and identify problems before they become serious. The banks have financial measures and tests, but we talk to the bank to ensure it understands the issues. Then we can work together."
Grant's time spent helping the management teams, whether times are good or bad, is hugely valuable, but costs relatively little for the portfolio companies, as all interests are aligned towards success. An ongoing monitoring fee is agreed at the time of the deal, while most executives believe the value added by Grant and August Equity exceeds any cost of their involvement.
Building the next generation of business leaders that will be able to contribute to the development of the August Equity portfolio is a relentless exercise. Grant will regularly meet with senior business leaders who are keen to develop their careers into the private equity arena. On a more informal level he hosts regular portfolio seminar days and Deal Club network gatherings where executives and managers from different companies can learn from each other and from outside business experts.
If any company is to build exceptional value in a short period of time, it is important to add value at the top of the management tree, as well as at an operational level. This is what Grant has become expert at delivering. In business, as in politics, strong leaders make the key decisions that will drive successful performance.
Download a complete copy of this issue (where available):
