The arrival of a private equity fund as a shareholder is a stimulating event for a company, but it also brings its share of changes to which the management team will have to adapt. Private equity investors are numerous, and their culture, focus, investment horizon, investment strategy and way of working with management can vary. Nevertheless, they are essential and active partners of the management team. The preference of investment funds is to support a high-performance and efficient management team and not to get involved in operational matters. However, when a company is underperforming, experiencing difficulties or going through a crucial phase, investors will be keen to be more present and active in order to preserve and grow their investment. Moreover, controlling majority shareholders are naturally more active and decisive than minority shareholders, who are more likely to exert influence and make suggestions.
The integration of a private equity fund into a company’s capital ushers in a new phase of development and transformation. Managers need to be aware of the changes and expectations that come with this temporary financial partnership.
Here are ten key points for management teams to prepare for:
1. Define a clear roadmap and KPIs to drive performance
Private equity investors operate with a limited time horizon and precise objectives. They base their decisions on a detailed business plan. This financial model is an essential tool for simulating the evolution of financial performance, anticipating cash flows and exploring various exit scenarios. This enables them to calculate potential internal rates of return (IRR) and expected investment multiples. They will adjust this model over the course of their participation. As a result, investors will be discussing a detailed roadmap with management, translating financial objectives into concrete measures. They will want to establish a culture of performance measurement. This will include the precise definition of key performance indicators (KPIs) that will be regularly assessed. This approach ensures continuous monitoring of KPIs, enabling any deviation from expectations to be quickly identified, and prompting management to take corrective action if necessary.
2. Improving EBITDA to increase enterprise value
Private equity investors’ returns are directly linked to the company’s valuation at exit. A more profitable business means greater enterprise value. In fact, the value of a company at a given point in time can be determined using a multiple of EBITDA. If EBITDA increases, so does the company’s value. Investors are therefore keeping a close eye on the company’s ability to improve its results over time. Managers must act on two levers: increase revenues and boost profitability, which means optimizing margins. Investors are therefore encouraging sales development plans and cost-cutting initiatives. However, their primary concern is to ensure that the company is able to positively increase its EBITDA.
3. Cash optimization to maximize returns
“Cash is King” for investors. In fact, the more cash a company generates, the more it will be able to repay its financial debt, increase its cash balance or distribute dividends. This will have the effect of reducing the company’s net debt, thereby optimizing the shareholders’ proceeds on exit and their return on investment. In addition, a good level of cash generation is essential if the company is under LBO to repay the debt contracted at the time of the operation, including interest. Last but not least, optimizing cash flow will enable the company to finance the expenses necessary for its development without additional external financing, and to build up a war chest to stand firm in the event of a downturn in its business. Investors will be paying close attention to cost trends, investments and working capital management.
4. Accelerating Strategic Transformations
Private equity investors are often a catalyst for the company. They have ambitious goals, take management’s promises seriously, and want to make sure the plan is carried out and the results are there. They will therefore encourage the rapid implementation of the changes and transformations necessary for the company’s success and the achievement of its objectives. In addition, they can help and offer support in implementing these transformations. M&A and buildup is probably their favorite transformation, and the one most in line with their area of expertise. They will also encourage the implementation of the necessary reorganizations and structural changes: recruitment of key people, reorganization and strengthening of the management team, digital transformation, sometimes CSR transformation. Finally, they can also promote the company’s international development and organic expansion.
5. Structuring governance and shared decision-making
When a private equity fund acquires a stake in a company, its corporate governance is structured and formalized. Board of Directors with shareholder representatives, control mechanisms, particular attention to compliance and regulations, implementation of reporting systems, monitoring of remuneration and hiring and dismissal of key personnel, and of course strategic decisions that are binding on the company. If the fund has a majority stake, it will normally control the company (if it has the majority of voting rights) and have the final say on decisions. If it is a minority shareholder, it will use influence over the company as possible. The fund’s prerogatives will depend on the shareholder agreement negotiated during the deal. Whatever the case may be, managers have to reckon with investors and accept their influence in strategic decisions.
6. Exit Planning and Value Creation
The private equity fund is a time-limited partner who will develop a more or less clear exit strategy to maximize return on investment. It has an exit horizon of a few years: 3, 5, 7, 10 years, depending on the fund. In any case, if a fund has the opportunity to exit quickly at an attractive investment multiple, it will not be opposed. When it comes to investing, a fund will have its eye on the exit, and will work with management to envision that exit. Firstly, to optimize the company’s value: by improving its financial results, achieving operational milestones, structuring and professionalizing the organization in order to “prepare the bride” for a successful sale of its shares. It will also consider possible exit scenarios: sale to another fund, IPO, sale to a strategic player.
7. Strengthening the financial function
Private equity funds are financial players, and the professionals who make them up are mostly financiers. Their clients are also financial institutions or individuals who have entrusted them with money to earn a return. They therefore favor rigorous financial management. They insist on the need to have a solid finance function in place, with qualified and reliable professionals (especially the CFO). Management must ensure that accounting is sound, financial reporting provides regular quality information, management control is in place to optimize costs, and financial IT systems are reliable and optimized for greater efficiency. The funds are attentive to all the key financial aspects of the company: financing, cost optimization, budgeting, major financial operations and transactions.
8. Continuous Information Sharing and Transparent Communication
Open and transparent communication is at the heart of any partnership with a private equity fund. First of all, investors are analytical players who need information to understand, analyze and make decisions. This starts with the due diligence process prior to investment. They also understand the importance of maintaining regular dialogue with management. Structured board meetings provide a framework for discussing financial performance, operational objectives and challenges. However, informal exchanges are also encouraged to quickly address issues in real time and promote rapid decision-making. Openness is valued, even in the face of difficulties, because it enables us to work together more effectively to find appropriate solutions. Conversely, a lack of communication or the withholding of important information can lead to conflicts between investors and management.
9. Alignment of interests with the Management Package
Private equity funds see the management team as partners. And they want management to be committed, motivated and focused on maximizing shareholder value. To achieve this, private equity funds often deploy a mechanism known as a “management package”. This package is not simply a set of financial incentives such as stock options or performance bonuses. It is also designed to ensure that executives have a “skin in the game”, i.e. a direct personal and financial investment in the company. By offering managers the opportunity to co-invest in the company on preferential terms, the Management Package ensures that they have a genuine financial incentive to optimize the company’s performance. This co-investment creates mutual accountability and aligns management objectives more closely with those of investors. So management doesn’t just manage: it also plays an active part in the company’s success or failure, both financially and operationally. This strategy reinforces a culture of responsibility and commitment, where management and investors are co-investors in achieving the company’s long-term goals.
10. Development of company culture and employee engagement
The arrival of a private equity fund can shake up a company and its employees. It stimulates the company and fosters a culture of performance, but can also create apprehension in teams. The fund invests on the basis of an often ambitious roadmap, putting the company under stress. So it’s vital that the company’s culture not only motivates and engages employees, but also fosters the behaviors that will help the company achieve its objectives. Regular communication with all employees, listening to their aspirations and needs, and developing a strong, committed corporate culture are therefore essential tasks for managers if they want the company to succeed.
In conclusion, the arrival of a private equity fund as a shareholder in a company marks the beginning of a new era, full of both opportunities and challenges. This partnership is not just an infusion of capital, but a profound change that requires strategic, operational and cultural adjustment. From clearly defined roadmaps and KPIs, to cash and EBITDA optimization, accelerated strategic transformations and more structured governance, executives must be ready to embrace a culture of performance, rigor and transparency.
This collaboration goes beyond a simple financial transaction; it represents a reciprocal commitment to creating value, not only for shareholders but also for the company as a whole and its employees. Open communication, alignment of interests through the Management Package, and the development of a strong, committed corporate culture are key to successfully navigating this new stage.
Founder of WINGMIND, David Chouraqui serves as an advisor and coach for leaders and management teams. His areas of expertise include HR audits, leadership assessments, and change management.