Grey-haired industry experts sitting on the investment committees of private equity houses are a thing of the past. As the asset class has evolved, so has the use of these third-party experts.
With the demise of the generalist private equity house, the growth of financial advisers with sector knowledge has meant a decreasing need pre-deal for these industry experts to help originate and/or sit on an investment committee vetoing or approving deals.
Instead, as rollout and buy-and-build strategies become imperative to the growth and added value of portfolio businesses, the role of the experts has taken on a new life more firmly placed in the post-deal phase.
James Stewart, a director at ECI, says: “The use of industry experts post-deal is quite a new phenomenon. I think the two functions, the due diligence pre-deal and the strengthening of the company’s board post-deal, were historically divorced from each other. Now, this is no longer the case.”
But should these advisers be on the payroll or employed purely on an ad hoc basis?
The former model was initially the industry standard set up by 3i. Other houses such as LDC, Duke Street to a certain extent and Terra Firma have followed a similar route.
LDC has recently been hiring people from the big four with operational due diligence expertise who work across the portfolio companies pre and post-deal. 3i has an in-house team of 14 sector specialists who carry out origination, identify new lucrative niches world wide and also advise the boards post-deal.
But some, such as ECI and HgCapital, argue that an individual in-house expert could not have the full gamut of experience across all the sub-sectors within their chosen field. They also argue that industry expertise tends to erode quickly once out of it.
Instead, others prefer to use advisers on an ad hoc basis. These are people whose specialist knowledge most closely matches the asset in question, and who are often employed post deal as non-executive directors or chairmen.
However, Richard Kilner, senior partner and head of sector teams at 3i, argues: “To have a core group of people come out of the industries we are active in is an enormously powerful resource, they can look at up to a hundred opportunities in a year. This is massive exposure.
“They might be losing the day-to-day knowledge of the particular business they were in, but they are gaining a much broader and deeper perspective across Europe,” he says. “The ad hoc model is not only time-consuming but you might not find the right person”.
However, it could just be a size issue, with the use of pay-rolled experts a natural development for volume houses while the ad hoc model remains a natural adjunct for their smaller brethren.