Crises like COVID-19 bring with them uncertainty from which new behaviours
will emerge. This has raised a range of questions on which of the
behaviours will be really here to stay and which ones will just be
transient. As a result of the current pandemic, will we stop most business
travel for good? Will employees decide to work from home for most of the
time? Will we dramatically increase purchases online and our use of
telemedicine?
At the start of the pandemic, we had in-depth conversations with three
directors with experience in both private and public boards, in Australia
and overseas. We wanted to better understand the role of private capital in
innovation and growth. During the discussions, some drivers emerged that
pointed towards the value that private capital creates in setting the
strategic direction of the companies invested into.
Private capital directors spend more time on strategy
Part of these findings are not new, as past research has highlighted that
private capital directors spend more time than their public counterparts in
discussions with management regarding strategy topics. Strategy is a very
interactive endeavour in private capital-owned companies. Collaboration per
se tends to be associated with more diverse views and leads to robust
conversation. What is it about this collaboration in private capital-owned
companies that becomes particularly useful now?
There are two aspects of private capital that may seem paradoxical but
actually work very well together, and which public companies often lack. On
one side, in private capital-owned companies there is a clarity of goals and milestones that often does not happen
in other types of ownership. On the other side, there is an agility in adapting to contingencies that allows private
capital companies to adapt to external circumstances much faster than other
entities.
Indeed, for the majority of companies, the start of private capital means
the start of a clear project. Douglas Potter, founder of Boab Capital Group
said that “a private equity investment is almost like a project. You start
this investment relationship with a very, very clear plan. There is a
clearly delineated business plan/investment case that the shareholders, the
management team and the board all sign up to − it's all aligned.” He adds
that private capital companies do not live in an endless continuum of daily
share prices and quarterly reports as public entities do, instead “there's
a Growth and Capex plan which is articulated on day one on what money is
going to be invested at what point in time and in what assets to facilitate
the outcome. And of course, there's a clear line of sight to an exit or end
point.”
Private boards work closely with management
This does not necessarily mean that there are rigidities, or a once a year
strategy review event like in public companies. It’s very much about
continuously checking milestones and adjusting, and continuously
interacting with and reaching out to the network, as pointed out by Simon
Feiglin, Managing Partner at the Riverside Company. Simon also added “an
analogy that I've heard several of my colleagues use which I think is a
good one is, for this to work, we need to be chameleons. So, what does that
mean? It means that there is not a one size fits all solution.”
Directors in a private company can focus the majority of their time on
strategy, building value and resolving issues in order to “take the
business forward” versus in a public company where to meet compliance of a
traded security directors are required to spend significant time on
governance. Often this governance is self-protection because of our current
laws around public disclosure, director liabilities and solvency trading.
Private company directors can therefore support the company in building
value without having to worry about public disclosure, especially in a
competitive situation where it may not be in the best interests of a
company to actually release certain information into the public domain.
Douglas points again towards a mindset that is fundamentally different. The
constant evaluation and the number of times you meet with management is
fundamentally different from public companies. He said that “the level of
shareholder driven critical analysis which gets undertaken in a private
equity structure can be almost continuous with the benefit of being
internal forensically-driven analysis compared to a public company where
general market level analysis relies on broker research reports which are
external and so is unequivocally different. For example, in the private
equity structure, you'll typically never struggle to meet with management
at a number of levels and just not C-suite. In contrast, the traded nature
of a public investment means asymmetrical information must be avoided
across the market concurrently with adherence to continuous disclosure
obligations.
Transparent and regular communication is key
Indeed, the quality and amount of information available to private equity
directors and their access to any level of management place them in a
superior position to add value. Dr Michelle Deaker, Managing Partner of
OneVentures, emphasised that: “In a lot of our companies, we have really
good reach right down many levels of management. Sometimes we actually know
a lot of people in the company. […] And if you have a good, open,
transparent company, you don't mind if your directors are communicating
openly. We see ourselves as operational investors and will even embed
ourselves into our portfolio companies.”
When we spoke with Michelle in April, it was in the midst of the Australian
lockdown, and she confirmed that in private capital companies “we’re in a
lot more regular communication with the CEO. So, we're always on email and
we're always discussing pertinent matters to help our companies reach new
milestones or value inflection points − it’s a very interactive
relationship that you have with the management in a private company world.
Like right now, with all our companies, we’ve worked with management to
build scenario plans, we’re doing weekly calls on the company, to check in
on the business and tracking the key metric[s] (the key performance
indicators of the business) and making sure that there’s not some sort of
deterioration happening. We chair our boards often as well particularly
where we are one of the major shareholders. Holding that CEO-Chair-Board
relationship allows us to influence the direction of the company and
actively support the CEO on his execution. We can also help manage the
other stakeholders around the board room, negotiations with incoming
investors and where required major customer relationships – it gives us the
authority.” The frequent interaction allows for the exchange of ideas and
reprioritisation of focus areas when the need arises, despite earlier
agreements in place. In her view, “it is giving the CEOs a framework but
also the data and information to support the business to make decisions.
That again, adds value for shareholders.”
Time constraints can impede investments
In fairness, being a private capital project also has drawbacks. The
urgency placed on getting returns in a specified timeframe does impede
investments which in turn may go beyond such a timeframe. That is, in some
private capital arrangements there can be a direct investment structure,
like the one that Douglas Potter has put in place at Boab Capital Group. In
fact, the private equity model does put an artificial end to the
investment, despite the same investors potentially coming back on-board
through successive secondary exits. With Boab’s pension direct investing
strategy, Douglas explains that “it is all about setting up a long-term
investment, ultimately with no constraint around the timeframe. And so,
you're looking to build sustained, long-term growth in value.” In the case
of a direct investment approach, there is a partnership between the
institutional investors (e.g. pension funds) and the private equity firm,
established over a longer timeframe potentially up to 20 years or more.
This clearly allows us to take the bumps out of a crisis and smooth them
out over a longer period of time.
The rise and rise of digital
How are digital mediums going to change these director-management
interactions is an open question and something that we are very much keen
to explore further.
Whether you are in a private-owned company or in a public one, no doubt the
amount of online interaction has increased during COVID, and it’s most
probably here to stay to some extent. Travel bans in place, as well as
general concern about the spread of the virus have made millions of people
work from home and rely on broadband and videoconferencing platforms to
keep their work going. Does the increased use of digital mediums impact the
effectiveness of information gathering, and therefore does this impact
strategic conversations and decision making? The pandemic has catapulted
businesses and the population in general into using technology to ensure
businesses can run normally as much as possible. However, every business
has its resources and every industry has specific dynamics that directors
need to take into consideration to make decisions faster and with
confidence. Whether these behaviours are here to stay and might then have
an impact in the long-term if interactions are going to be exclusively held
online, is an open question for private and public businesses alike.
In a time of crisis, when uncertainty is sovereign, balancing strict goals
and milestones with the ability to continuously re-evaluate them is a must
for any company. Private capital-owned companies may be very much at an
advantage here. The discipline and agility imposed are likely to make them
thrive during this crisis and be there at the end. As an evolving (natural)
system, this is something to monitor over time, reflect upon and readjust
when necessary. What directors have learned during the crisis is very much
a topic that is informing our current research to help better prepare them
on the other side.
Massimo Garbuio, PhD, GAICD, is Associate Professor of Entrepreneurship
at the University of Sydney Business School, and Program Director of
the Master of Management CEMS program. His latest book, “Seeds of
Strategic Thinking: The Foundation of Insightful Strategy” is available
on Amazon Kindle.