Why management has the right to independent advice

We are a leading, independent law firm whose success has been founded on advising driven individuals with a stake in their business. This has led us to increasingly advise management teams on sales to buyers backed by private equity buyers including most recently, KKR and Goldman Sachs. We have recently expanded our offering by teaming up with Fides Partners, a leading European law firm, with more than 15 years’ experience of advising management teams, on sales to Blackrock, Blackstone and PAI Partners, to name just a few. This enables us to provide a unique one-stop-shop service to management teams by providing financial advice, alongside the legal and tax advice that you would expect of a law firm. We understand the way in which PE funds think and act but we don’t act for them, thereby maintaining our independence, integrity and perspective.

It may be tempting for sellers to focus solely on obtaining the best price on selling the target and to keep the sales process simple, as they might see it, by preventing another set of advisers joining in the process. Private equity buyers, whilst no doubt recognizing and investing in the strength of the management team, won’t necessarily want independent advisers encouraging management to bend their terms on reinvestment, ratchets and management incentives etc. However, this overlooks the fact that in many cases, management already have significant financial stakes in the target and enlightened sellers and buyers alike will recognize that a well-advised, motivated and focused management team will contribute to a smooth sales process.

The importance to management of receiving independent and “real world”  advice is well illustrated by the topic of management compensation: private equity compensation to management of portfolio companies is very different from that of a listed company or any other privately held company (that is not private equity). Private equity funds are concentrated owners with a limited ownership horizon, spanning over 4-5 years – contrary to other ownership forms. This impacts the compensation granted to management and the governance structure under which management will have to operate. In a private equity transaction, management is rewarded at the same time as the private equity fund – at exit and such compensation will largely be based on total shareholder return. In listed companies, with their ever-changing constituency of shareholders, management are typically rewarded annually and with a greater focus on the same short-term KPI’s that drive share price performance. Private equity will also typically drive a tougher bargain when it comes to the scope of being a good leaver and the consequences of cessation of employment as a bad leaver. Put simply, management in private equity transactions will have more at stake and must therefore be more focused on that exit in a few years’ time.

The foundation for this compensation is based on the terms negotiated on the buyer’s acquisition of the target company. In parallel with having to cope with the demands of managing a successful company, management  are also  required to participate in a time-consuming sales process and to negotiate their  investment terms, the allocation of the future value creation and the future governance of the target , often with various bidders involved in the sales process. Furthermore, contrary to what many managers believe and as explained above the interests of management are not necessarily aligned with those of the seller or the buyer. In addition, we have seen that the complexity of the legal and financial structure of a private equity transaction has increased.

Our assistance to managers provides a balance to management in these life-changing situations. We believe that we correct a market-prevailing asymmetry of skills, resources and experiences that exists between private equity and management teams. As independent advisors to management, we protect and optimize management’s interests and handle the negotiation and implementation of their investment, ensuring that the terms are in line with market practice. A well-advised management team will improve the management return and sets the foundation for a respectful and productive relationship post-sale.

We would be happy to hear from you and discuss the market for management teams. Please reach out to us below.