The Rise of the ‘Non-Control’ PE Fund
The traditional private equity model is one in which the fund takes a control ownership position in the firm. However, there are many factors in today’s marketplace – such as competition for deals – that are compelling many private equity funds to invest in companies in a ‘non-control’ position. This is happening more and more frequently in the middle market in particular.
In many of these non-control investments, one private equity fund leads a deal, and the remainder of the round is filled out by smaller checks (often from even smaller funds). The lead on the deal is in an interesting spot. Being the lead will almost always come with a Board seat, as well as a higher set of expectations from the management of the portfolio company, the LP investors, and from the other funds on the cap table. The tricky part is that the lead has these greater responsibilities and expectations without the full authority to dictate terms. In other words, they can only be an ‘influencer’ to the portfolio company.
This dynamic also affects the decision to bring in consultants. Since many non-control PE funds are on the smaller side (often less than 25 people total with less than half working on deals), these funds tend to be more resource constrained and therefore good candidates for outside assistance and expertise. This being the case, which are the most logical areas of significant need?
Four Areas of Significant Need for Non-Control PE Funds
Given the increasing number of these types of funds, it is important for service providers, like E78 Partners, to understand how these non-control entities view engaging outsourced consulting expertise, and when they are most likely to need assistance.
While the non-control PE sponsor is not dictating terms or activity, there are certain phases of the investment in which the sponsor holds a higher degree of influence and power over the decisions that take place at the portfolio company. We will explore four windows of opportunity during which a non-control PE firm and their target could typically benefit from professional consulting resources:
- During the Diligence Period while the fund is evaluating the portfolio company for a purchase decision. Small funds tend to be resource constrained, so the ability to unload some key points of diligence can be welcome. Areas that could be of interest are understanding reporting systems and capabilities, technology, and processes/procedures of the firm. The specific market, product, revenue, growth opportunities, etc. are areas that most sponsors generally prefer to handle directly.
- Simultaneous Events. During this period, something else significant is transpiring at the company or fund. It could be that the company is integrating a tuck-in acquisition, or perhaps the fund is working on another transaction or liquidity event simultaneously. The flurry of financial, operational, and technological work to be done at the same time oftentimes require surge resources to meet critical deadlines.
- A Strategic Hire is Needed – Now. The fund knows that they need to hire a new CEO, CFO, CTO, COO, or other key leader, but they need someone strong in place immediately while they take the time to search for the best long-term resource. Using Interim or Consulting Executives are a proven and popular way to successfully round out the executive team for the future. See my previous post that delves more deeply into this topic.
- The 100 Day Plan. There is a crucial period when the fund takes possession of the asset. Virtually every fund has a ‘100 Day Plan’, and it is during this time that much of the hands-on work actually takes place. A great deal of effort will be spent in those first 100 days, which can be a particularly challenging and painful period for smaller sponsors. Ensuring that the Plan is being correctly executed is a significant use of time and resources, time that key members of the fund would generally prefer to use finding new deals or seeking additional capital.
E78 Partners understands and recognizes the needs of PE Sponsors and their portfolio companies during and shortly after transactions. Non-control transactions bring their own set of unique challenges, and all stakeholders could benefit from leveraging outside resources to help drive successful outcomes.