Private equity is a business of relationships. Building a network of advisors can help grow businesses while unlocking opportunities with outsized returns. Relationships are highly instrumental to a firm’s management strategy and growth after a deal has closed. The best path to post-transaction value are strategic relationships with advisors who know the deal history and industry, and who have an interest in seeing the investment succeed.
Advisors can serve a number of purposes as a temporary expert who provides a firm with strategic insight. As a long-term partner, they can help the PE firm during the investment process and even after closing with the ongoing management of portfolio companies. When relationships are cultivated in the right way, strategic advisors can even turn into board of director candidates post-close.
Lay the foundation of portfolio growth during due diligence
What many managers don’t realize is that identifying future board members should begin well before a deal ever closes. It can start with the advisors they worked with along the way.
During due diligence, PE firms construct growth plans, confirm assumptions, mitigate risks, and anticipate management transition plans. But when they speak with deal advisors, their view can sometimes be too narrow. Deal teams too often see them as a means to an end — as a way to get the expert advice they need to close a deal, and that’s it. By simply realigning their thinking, PE firms can use the same due diligence advisor information to provide value after the deal closes and leverage that relationship into a board position.
The rise of the river guide
At Apex Leaders, we call this class of diligence partners river guides. They are seasoned industry executives who help PE firms navigate industry roadblocks, attend management meetings, and advise on terms of the deal. They offer guidance through closing with quick, strategic decisions.
Deal managers, however, need to keep in mind that river guides can add value well beyond their early engagement with the PE firm. Investors should cultivate these advisor relationships because river guides frequently become the best board candidates and can help answer questions as they consider future add-ons as well as other portfolio advancement strategies.
If a firm waits to find board members until the deal closes, they will likely delay value creation at their portfolio company as new candidates will most likely not have context on terms of the deal, the company, or its position in the industry. Developing potential board relationships earlier in the diligence process will help the firm succeed post-transaction.
Advisors with first-hand knowledge
For a growing number of deals, river guides have been involved in the deal process since the beginning. They know what’s been tested, considered and rejected. They have history with the deal team and have established trust.
While there are many ways a river guide can provide long-term value, a diligence-advisor-turned-board-member brings a lot to the table on day one:
They are well acquainted with the context of deal negotiation and final terms
They understand management strengths and weaknesses
They know the greatest growth opportunities within the industry
They’re familiar with risks involved and the plan for mitigating these risks
Additionally, these advisors may have conducted on-site visits of the target company during due diligence — something other board members may not have been able to do. As board members, your advisors might be able to unlock new opportunities for cost savings and growth sooner, thus empowering the rest of the board to make better decisions at the outset of the holding period.
Simply put, river guides have the ability to open doors that others don’t. They have intimate knowledge of the portfolio company acquired during the diligence phase. And they can transfer that knowledge to the rest of the board, accelerating their learning curve and creating value for the portco sooner.
Experience as an edge
In some cases, PE firms with the right board members queued up during due diligence gain an edge over the competition. As the saying goes, there is no substitute for experience. Their lineup of future board members demonstrates the candidates’ abilities to contribute significantly post-transaction.
In this competitive market where company valuations continue to rise quickly, it can be difficult for PE to get the ROI they’re looking for once the deal has closed. Having advisors-turned-board-members on your team can make a world of difference.