CEOs and finance directors have a one in four chance of losing their jobs following a private equity buyout, according to research released this week. A study produced by advisory firm
The survey of 283 executive and non-executive directors who had completed at least one private equity deal found that financial directors had a 28% chance of being replaced when they became involved in a private equity-backed business, while CEOs had a 24% chance of being replaced.
“The high rate of attrition for finance directors stood out,” said David Ascott, head of private equity at Grant Thornton. “The finance director tends to be in the firing line after a buyout. The FD role changes completely from being a steady custodian of a business to being in the spotlight, dealing with leverage, banking relationships and financial investors scrutinising their work.”
Mid-market private equity firms are increasingly looking to mitigate the risk of chief executives and managing directors failing by carrying out robust management due diligence on them prior to completion.
“Failure tends to occur where the executive team members haven’t fully anticipated the different demands private equity firms will make on them compared to corporate stakeholders,” said Paul Quinn, founder of
In spite of the one in four churn rate, Ascott said that his firm still saw strong interest from potential management buy-in teams. However, executive directors – that is CEOs and FDs – were less willing to work with private equity firms again compared with non-executive directors. The fact that only one in 10 non-executive directors, including chairmen, got the sack following a buyout explained their heightened appetite for a second bite of the cookie.
Buyouts can be incredibly lucrative for management teams – 70% of respondents had their financial expectations either met or exceeded. Indeed, only 18% said returns were “significantly below hopes”.
A key finding was that the UK has now followed the trend of the US in creating private equity “serialists”. Some 41% of those surveyed fell into the category of having completed three or more private equity deals. If a buyout firm has worked with a director successfully before, they are often more comfortable backing them for a second time.
“It’s surprising to see that some directors in the UK have been round the block six or seven times,” said Ascott, “It shows management get a taste for it, get to understand the dynamics of it and then look to get involved again.”
“If an MD or a CEO has participated in a successful private equity deal, they often want to be involved in one again but in a non-executive capacity,” said Quinn. He had seen a number of “serialists” emerge but said they tended to be individuals rather than whole teams, or if it was a whole team, there would be one or two adjustments.
“Sometimes management teams will make changes when they attempt a second private equity deal, as for some individuals motivation diminishes,” he said.