Industry insight: Creating ‘Executive-First’ Investment Partnerships
By Mitch Davidson, managing director and co-founder, Post Capital Partners

Everyone knows that if you combine a good company, talented management and an aligned, supportive ownership group you have a strong likelihood of making a successful investment. The question is: How can private equity sponsors best create these partnerships with skilled managers? And how can they work together across the full investment cycle – from deal sourcing, through due diligence and negotiations, to day-to-day management and, eventually, to a successful exit?

Talented and driven executives are usually looking for a combination of three things: first, to create the kind of wealth that comes from equity ownership; second, to receive recognition for their success; and third, the opportunity to pursue their entrepreneurial aspirations and professional vision.

Despite achieving impressive operating success, many talented senior managers – particularly in small-cap and middle market companies – have not had the opportunity to create significant personal wealth or to pursue their entrepreneurial instincts. Locked into a salary-plus-bonus structure, often with no, or minimal, equity, they can do well but not create the long-term wealth they desire. That means there is a largely untapped pool of executives who are driven to be owners who have the skills and capabilities, but not necessarily the opportunity, to devise and execute a visionary investment strategy.

But how can an investment firm identify these executives, qualify them as candidates, and put their industry expertise, key relationships and operational skill to work in sourcing, evaluating and managing new portfolio companies? Our answer is to implement an “Executive-First” strategy in which we first partner with a talented executive or team and then work together to identify and evaluate investment opportunities.

Our recruitment process is rigorous. Candidates – typically introduced to us through investment bankers, lawyers, accountants, and our own personal and professional networks – are added to our proprietary database of nearly 1,000 executives. (Over 170 candidates were added in 2012.) We are looking for executives with deep industry experience, successful track records and direct P&L responsibility. Functionally, they may have been CEOs, Presidents or COOs of a private or public company, including operating divisions of larger companies, or entrepreneurs.

Candidates will need to successfully manage in-person interviews as well as thorough background checks. But what will really make them stand out in the crowd and mark them as a fit for our “Executive-First” approach is a compelling investment thesis that draws on their own experience in their industry and can be implemented successfully in partnership with us.

The key to the success of the “Executive-First” model is a highly interactive relationship based on mutual respect, reciprocal commitment and alignment of interests, where each partner is investing time, energy and expertise toward a common goal…identifying, evaluating, acquiring and improving a business. The executive partner is deeply involved at every stage of the transaction, from sourcing to closing.

Sourcing a transaction is a collaborative effort that draws on the executive partner’s operating experience and, in particular, the strength of his investment thesis, as well as on our firm’s expertise in transaction execution and our relationships in the deal sourcing community. Post-closing, executive’s role is to put his investment thesis to work by developing and implementing a compelling growth strategy. As active owners, we are helpful in providing strategic assistance, customer and supplier introductions, evaluating and executing add-on acquisitions and in supporting the corporate finance function – but day-to-day operations of the company are the executive’s to run.

This process allows us, as a sponsor, to more effectively identify opportunities, make better investment decisions and place talented, experienced managers in companies where they can drive meaningful growth. From the executive’s perspective, he is positioned to fulfill his professional aspirations with an appreciative and supportive financial partner and now has the wealth creation opportunity he was seeking.

An example of a successful executive partner relationship is our partnership with a senior manager in the B2B information and publishing industry who had already achieved substantial operating success at both major corporate and privately held firms without ever having meaningful equity ownership. (We started working with him after the company he was leading as president was very successfully sold.)

After working with this executive to refine his investment thesis, we undertook a proactive search together that identified an attractive B2B information company that focused on a niche in the insurance industry. The target had valuable, but largely under-developed publishing and direct marketing products. Our executive partner became CEO of the company and successfully grew the business. Most importantly, he conceived and implemented a strategy that transitioned the business to more of a value-added, database and marketing services company, which significantly increased the value of the company. We successfully sold the business in just a few years, generating attractive returns for us and our executive partner, who was a significant owner in the business.

This example illustrates the potential of empowering management with the ability to create wealth while pursuing their entrepreneurial vision. If you put people in a position to achieve that – and you have made good choices – then you set them (and your investment) up for success!