Private Equity & Corporate Governance: a company perspective

The entry of a private equity provider in a company raises a wide variety of corporate governance challenges throughout all phases of the investment lifecycle: 
How to determine an appropriate valuation? How to choose the right partner? How to divide decision rights across shareholders, board of directors and management? How to involve private equity representatives on the board of directors? How to interact and report to the private equity provider?   
This publication aims to raise awareness of these challenges and develop clear insights on how private equity funds and investee companies might solve them. 

Contents

This booklet proposes our overarching perspective on how private equity providers and portfolio companies may develop a constructive working relationship throughout all phases of the investment lifecycle as well as across all actors of the corporate governance tripod. Building on in-depth interviews with 34 entrepreneurs, investors and experts as well as an extensive literature review, we introduce two main premises.

Our first premise is that each company brings together the often competing interests of shareholders, managers, directors and other stakeholders. By developing a corporate governance model, the company creates a (formal) set of structures, procedures and attitudes aimed at balancing these interests, solving potential conflicting interests and effectively monitoring and directing the company.

Our second premise is that the entry of private equity in a portfolio company inherently affects this historically-developed corporate governance model by influencing the status quo among portfolio company shareholders, directors and managers. As a result, it requires private equity and portfolio company actors to strike a new balance effectively reflecting the interests of all parties in function of the company’s new ownership structure. Our research suggests that when a portfolio company and private equity actors do not succeed in developing such a new corporate governance model, they may endanger future collaboration. In particular, this booklet explains throughout its four chapters how to develop a new model and how it may stimulate effective collaboration. In particular, it demands actors…

1. to be aware of the potential changes and challenges to the corporate governance model as well as a solid preparation before taking contact or the entry of private equity (Chapter 1)
2. to search for a partner matching their needs, and subsequently develop a collectively supported corporate governance model as formally written down in the shareholder agreement (Chapter 2);
3. to use this new corporate governance model to stimulate effective decision-making and an optimal execution of board roles during the investment phase (Chapter 3);
4. to use the effective working relationships as induced by the corporate governance model to determine a mutually satisfactory exit valuation and exit scenario. Moreover, to build on the corporate governance model to develop the next chapter in the company’s life (Chapter 4).

Acknowledgements

GUBERNA would, first of all, like to express its sincere gratitude to the 34 entrepreneurs, investors and experts who participated in this project as well as the partners of the GUBERNA’ centre for Growth Companies being: EY, SRIW, Sowalfin, UWE, ING, GIMV and Agentschap Ondernemen. A special word of gratitude to EY for designing this publication. Thanks to their support, this endeavour has been successfully concluded.