Over the last couple years, private equity has been a force in magazine M&A, securing an imposing presence opposite strategic buyers. And helping lead the charge is an increasing number of executives who are shedding their operating roles as CEOs of magazine publishers to partner with private equity firms to seek out and assemble platform companies through acquisitions. But what characteristics convince private equity firms;famously disciplined in their investment strategies; that an individual can manage the high-octane business of leveraged build-ups?
While most PE firms don’t have a formal checklist of skills and experience they’re looking for in a backable CEO, there are benchmarks that need to be met before a partnership is struck. This is especially important in these heady days of private equity-backed deals, where executives are especially interested in jumping on board of what’s generally described as a low risk, high reward arrangement. And the opportunity is certainly there. John Suhler, president and co-chief executive at Veronis Suhler Stevenson, remarked at the DeSilva + Phillips Media Dealmakers Summit in February that PE firms have pushed their way into the media M&A market in a big way. "Private equity is involved enough where it’s typical in an auction where six out of the eight players are private-equity backed," he said.
Frontenac Company, a Chicago-based, mid-market private equity firm has a deliberate approach they’ve coined "CEO1st Investing," which emphasizes a search for the right partner before a company or market is targeted. Walter Florence, managing director at Frontenac, says, "We have a background of betting on people, as opposed to betting on science, technology or engineering."
The initial meeting can be set up in a variety of ways. Often, an executive is out searching for a firm on his own. These tend to be individuals who have interacted with private equity in the past or are savvy enough to understand how it works. Clay Hall, for example, had met with two-dozen private equity firms before partnering with Frontenac, says Florence. "He was looking for a firm that would support his search and provide counsel, and also resources to evaluate acquisition candidates," he says.
Other introductions can be made through headhunters or directly through the private equity firm’s own search efforts. Depending on the opportunity, firms tend to find an executive, then match him with an opportunity that fits with a mutually created investment thesis.
Once Frontenac finds an executive to partner with, it will develop an investment thesis that both sides sign off on. "Typically for us it could be an incumbent or brand new management teams," says Florence.
Because Frontenac’s success is dependent more on how the business is managed post closing rather than on value at acquisition, Florence notes it comes down to execution. "We back executives that tend to be in their late 40s or 50s. They’re a classic case of been there, done that," he says.
For Florence, the executive must have created value in the past;typically at a larger company, ideally with additional similar experience in a small entrepreneurial setting. "They have to understand the process and systems and the importance of managing cash, especially in a resource-constrained environment," he says.
Top Line? Bottom Line? Both?
"Private equity looks for a standard track record, but it needs to be a confirmable one," says Gerald Hobbs, operating partner at Boston Ventures. "You look to see that a person has that in terms of operating, growing, acquiring, divesting, integrating, and transforming companies."
But in a world of limited-term investments, where the cash-out horizon is anywhere from three to seven years, should an individual have more experience in top-line growth or a specialty in bottom-line, cost management? Hobbs stresses both. "We focus on the full person. I don’t want to imply that top line is not key, but I think you have to do it all. You have to be able to fund top-line growth through cost reductions."
Jim TenBroek, managing director at Wind Point Partners, looks at it in terms of matching the executive to the situation. "We will see a situation where what’s needed is to grow the top line," he says. "And if the executive we’re working with has great experience in cost-cutting, we wouldn’t invest in it. But the next one that comes around might fit. The art of what we do is fitting the executive to the situation.
Skin in the Game
The sources interviewed for this story say they do not have a minimum investment contribution requirement from the executive. But some firms, says Hobbs, do require a percentage of net worth. At the very least, the executive’s equity investment should be "meaningful" or "to the best of their ability."
Much, of course, depends on the individual’s personal situation;some are just coming out of a sale, where compensation is known or can be guessed at;but most contributions come down to a meeting of the minds.
The big guys, says Hobbs, tend to be more demanding of the equity an executive partner needs to put in. "That has changed dramatically in the last couple years," he says. "They’re paying very large prices and they’re looking for people to put meaningful skin in the game."
Wind Point’s TenBroek adds that the executive’s equity contribution can be a million dollars and up.
Peggy Koenig, managing partner at ABRY Partners, says that individuals are, at the very least, expected to put their money where their mouths are. "Our goal is to be mutually aligned and nothing speaks louder than you putting your capital alongside our capital," she says.
That capital alignment is critical not just in the sense that an individual will be motivated to put their own money to work. The new CEO must also understand his or her role with the firm’s capital. "An important criteria for us is that the individual understands he or she has a significant responsibility as the steward of our capital," says Koenig. "When you make an investment, it’s all about the return. We’re very careful to make a five-year business plan hand-in-hand with the executive. If that plan does not come to fruition the individual must understand that they’re the one steering the ship and their fortune rises and falls with the ship."