Few things are debated as much in private equity and direct investment as how to shape the value of portfolio companies during the holding period. New challenges such as digitalisation and ESG requirements have been added in recent years. And the choice of model influences who the “right” candidates are.
In our last post, we looked at the pros and cons of the deal team supporting portfolio companies during the holding period. This is often complemented by senior advisors, who usually come from the relevant industry and sit on advisory boards on the investor’s behalf.
We call it the Industrial Advisor model:
• The deal team looks after the asset during the holding period.
• Former C-level executives act as advisors and/or sit on supervisory bodies.
• The model brings industry knowledge and networks in the relevant sector.
• Advisors have often lived through the typical challenges before, and for specific problems there’s often a specialist in their network who can help.
• The upside: senior advisors often have CEO or C-level experience, see what really matters, can take a top-down view of the portfolio company’s management and open doors to other industry experts.
• But advisors usually work only part-time, and often at particular points in time.
• Advisors tend to focus on the top-down view (as former CEOs and COOs) and are rarely specialists in individual topics; they’re often used to delegating.
• In private equity in particular, as our clients always stress, delegation often isn’t an option.
• Because of their age and generation, advisors are often far removed from digital, e-commerce and AI (even if everyone now knows the right buzzwords).
• The concept struggles with business models subject to sharp shifts in market dynamics, where historical industry knowledge quickly loses its value or consumer behaviour changes strongly (retail, SaaS, fast-moving consumer goods, services).
• Rock-star CEOs often don’t perform as expected in a different environment, or can’t repeat their past successes. They have no magic powers.
So a PE firm needs to think carefully about what kind of advisor it brings on board. We’ve also seen board members who set aside every trapping of power, rolled up their sleeves and worked on site at the portfolio company for weeks until the problem was solved.
Since this model isn’t the last word either, there are others we’ll describe in the coming posts.
