Last week we kicked off our special series examining the differences between lending to middle market companies and those backed by private equity sponsors [link]. We discussed how these companies often are founded by visionaries with great creativity, but lack the management skills to execute the business plan to its full potential.
Let’s turn to how private equity sponsors can help accomplish these goals. The first thing these firms look for is a partner. “There’s a common myth that we buy companies to take them over and manage them,” one managing partner of a New England middle market firm told us. “We buy them so that the management team can manage them.”
He went on. “What we do is give the team the tools to grow. For example, many of these businesses don’t have the access to capital they need to finance their growth. In many cases, they don’t even have the experience or sophistication at the financial management level to know what’s available out there. We can help with that.”
Our own experience as a lender reinforces this point. CFOs of smaller companies tend to be more in the mold of treasurers or controllers. But given the increased demands of a PE-owned company taking on leverage, the skill sets required for the position are more akin to public companies. Knowing this, debt providers make credit decisions based on the strength of financial management. A weak presentation by a CFO at a lender meeting can do more damage to credibility than one by the CEO.
Another theme is distribution. How do you get your product to market?