LBO Firms Look To Former Executives For Value –

With deal sourcing as competitive as ever, a growing number of private equity firms have allied themselves with former executives in order to benefit from their contacts, industry knowledge and operating experience. The executive pool for this type of relationship is expanding as well, with so many CEOs being uprooted or retiring because of the economic downturn.

While acquirers traditionally look at a target’s incumbent management team, then plan to change or augment the team after the firm purchases the company, firms like Wind Point Partners do the opposite, locating the CEO first, then going on the prowl for companies. “Executives are not [typically] picked beforehand, but [we] pick our executives first, then go looking for a company,” said Rich Kracum, a managing director for Wind Point, speaking on a panel at last month’s Buyouts Symposium in New York.

Merril Halpern, chairman and CEO of Charterhouse Group, echoed that sentiment, saying his strategy is “starting with the executive, preferably, then looking for a company.”

Of course, the strategy differs on a case-by-case basis. Mark Williamson, a managing director at Fremont Partners, works with two different, yet equally effective, strategies.

“First, working with someone who is actually looking to go in and run the company has worked for us in the past,” Williamson said. “We did this with Dick Hoffman, former CEO at Continental Can, and with his CFO Larry Caldwell. After an extensive review of the packaging industry, we acquired Kerr Group and later added Suncoast (both of these companies had been publicly traded). The incumbent leadership team at Kerr had not performed well and was looking to move on. Hence, new senior management was needed in order to make the deal work.

“Having a team ready, we were uniquely positioned to do the deal,” Williamson continued. “The incumbent mid-level management team was very glad to welcome new strong leadership.” (Williamson added that Kerr’s EBITDA has gone from $8 million to well over $30 million.)

Another strategy is to “work with people who may not be looking to run a company but are interested in helping us to find a business in which they can invest and play a value-added board role,” said Williamson. “At the front end, these people can provide insights into an industry and give traction to the deal sourcing process. Once an investment is made they can help to build value in the business through an active advisory role.”

Jack Anton, former CEO of Carlin Foods and Ghiradelli Chocolate, worked with Fremont in actively seeking opportunities in the food industry. Even before “both of these companies went through successful LBOs under Jack’s leadership, and [since] Jack is a strong operator who understood how LBOs work,” Williamson was confident that their combined strengths could help both parties succeed.

According to Williamson, when Fremont acquired Specialty Brands, Inc., a manufacturer and marketer of frozen snack and appetizer products, Anton assisted in performing due diligence, and he is currently working in the role of value-added board member, spending maybe a day or two a week with the company.

Charterhouse also looks to use an executive’s expertise in a given sector. “Our partners on the investment teams are continually seeking to find Charterhouse entrepreneurs’ – individuals who have sold their businesses or have merged them and are looking for a new business opportunity,” said Halpern. “If they have a special strategy, perhaps a sector they have in mind, we work with them in a hybrid due diligence effort.”

He added that after acquiring the company, the entrepreneur could take on either the CEO role or a chairman/outside director role.

Executive: The Key to a Successful Transition

Finding an executive who can integrate himself with an existing management team – without ruffling any feathers – is a tricky proposition. Yet there seems to be some rules that firms can follow when seeking an executive who can “play well with others.”

According to Williamson, “Someone who has the energy, drive, and hunger to take the business to the next level” is key. We tend to look for someone seasoned enough to have extensive experience and a strong track record. We like people who have had experience in large company environments, where they have acquired good traditional business disciplines, but people who also have an entrepreneurial orientation. The combination of the two can be very powerful.”

Yet, Halpern said, “The entrepreneur takes on several responsibilities: sourcing investment opportunities, engaging in due diligence, and finally, taking on a management position. The executive is as important as the business. The management side of the equation is so critical that we are constantly seeking imaginative, driven managers to partner up with in deal making.”

Regarding the subject of gender, Halpern said, “One of our CEO entrepreneurs is a woman, and we are interested in finding other females with CEO experience. The primary criteria for success as an entrepreneur are discipline, creativity, and integrity.”

Experience is also a factor. “We typically seek former executives 45-57 years of age, with less than 10 years at the senior level,” said Kracum. “We like to find [people] with fire in the belly.”

Charterhouse considers itself “very sensitive to the management equation,” and Halpern could not recall a recent case where “we were unable to integrate a Charterhouse entrepreneur with an acquired business. We think the manner in which we engage with entrepreneurs will continue to work for us. [American] business management has become more entrepreneurial and less bureaucratic, especially in the middle market.”

One thing that all panelists agreed with is the importance of management-especially in a tough economy. “Management is the key ingredient for us in any investment and we are very focused on developing a true partnership with our management teams,” said Williamson. “For us, it is important to have the right management team in place at the time we make an investment.”