Need To Know

With deal flow way off and the credit markets frozen, some buyout firms have turned their attention to adding independent directors as a way to help their portfolio companies get through the economic downturn.

Samantha Carey, a partner at New York City-based executive search firm CTPartners, told Buyouts that in the last two and a half months, the firm’s private equity team has conducted six searches for independent directors. That marks a dramatic increase from the same time period last year. And anecdotally, she said discussions with most of her other private equity clients involve the possibility of bringing in independent directors.

The predominate motivation, Carey said, is to help portfolio companies survive a much more difficult market than originally anticipated by buyout firms, who are also facing longer holding periods giving moribund exit markets. Recently, for example, a private equity-backed Fortune 100 company hired a CEO from a consumer products company to help it reinvent its brand and better understand how to build relationships with its clients, Carey said.

Carey declined to name names, but CTPartners clients include Fortress Investment Group, Francisco Partners, General Atlantic, Goldman Sachs Special Situations Group, Investcorp, Permira, Silver Lake Partners, TPG, and Symphony Technology Group. She described good candidates as: “People who are heavyweights and have the know-how to help the company navigate those situations that they have never before faced.” Prior to the downturn, buyout firms commonly added a big name in the industry to the board as they neared exit time to give a portfolio company some cache. That’s not enough. Now they need more than name recognition; they need someone who knows what they’re doing and they need them now.

“As a client recently told me, ‘Show ponies are no longer as important, they need real workhorses,’” Carey said.

Potential pitfalls of bringing in an independent director include that the move might send a message of diminished confidence to existing management. There’s also the chance that the director and the portfolio company’s senior management simply won’t get along.

Chris Miller

, a partner with Philadelphia-based law firm Pepper Hamilton LLP, cautions buyout firms to beware of independent directors with big egos. He said: “An independent director who pounds his chest can be a disaster. It’s not so much intimidation of the CEO, but it causes confrontations when you’ve got an independent director more interested in showing everybody how much he knows instead of making the CEO look good.”

The best independent directors are those who can help struggling companies without overshadowing a shell-shocked CEO, according to Miller. Striking that balance will likely be key to the portfolio company’s operational success, as well as the returns on the eventual exit.