Private Equity (PE) firms can be a bit like parents – they want to have a say in everything, and that includes placing a non-executive director (NED) on the board.
But why do they like NEDs so much, you ask?
Well, for starters, PE firms operate in a world of uncertainty, and if things go south, they risk losing everything. So, having a NED on board helps them feel more secure as they can (some may say) influence the executive management and approve or veto changes made to the original business plan. Think of it like a security blanket, but for grown-ups.
But, that’s not all.
PE firms also seek representation on the board to achieve their desired return on investment within a specific timeframe. They target an internal rate of return (IRR) on their funds of around 20 to 30% (or more), which is a “buy low, grow fast, sell high” strategy.
To achieve this, they need a chair or an independent NED with relevant sector knowledge and experience. In fact, many PE firms will only invest in a company if they can find a compatible independent chair or NED who will invest alongside them. (Lucky then for the 1000s of PE/VC firms that Virtualnonexecs has over £200m of investing funds attached to our NED members!)
Now, here’s where it gets interesting. Non-executives are like superheroes for PE firms. With their technical, commercial, and leadership skills, hard-earned in the industry over multiple market cycles, they fill any gaps in the board’s capabilities. They can also act as an independent bridge between management and the investors, translating and navigating the unfamiliar world of private equity for management and filtering any PE firm’s demands that may be unnecessary and a distraction to management. It’s like having a mediator, but without the courtroom drama.
Moreover, a board comprising executives, non-executives, and private equity directors can be a dream team. There is a strong sense of personal ownership and shared expectations of risk-return and the timeline of the investment.
It sounds a little cliche’d but Non-executives provide “fresh eyes”. With their long and wide experiences, non-executives can also provide the executive team with timely coaching and mentoring. It’s like having a mentor, but without the awkward icebreakers.
In essence, they bring independence, hard-earned business acumen, and sector experience to act as a bridge between executives and investors, and constructively influence decision-making to help reach the target equity value over the time frame that frames the investment and deliver the desired return on investment.
So, if you’re a PE firm, it’s like having your very own superhero team-up to help you achieve your investment goals.
And who wouldn’t want a superhero in their boardroom?