What happens when a private equity deal takes an unexpected turn or, in some cases, goes belly-up? There is no shortage of case studies on the financial implications for fund managers and the impact of a few bad apples on fund returns.
What happens when a private equity deal takes an unexpected turn or, in some cases, goes belly-up?
There is no shortage of case studies on the financial implications for fund managers and the impact of a few bad apples on fund returns.
However, it's not just the financial implications that matter; it's the impact on the team who invest so much time and energy to make the deal happen.
Of course, some deals can fail due to unforeseen and unprecedented events, such as a pandemic or geopolitical unrest. In those cases, deal teams are unlikely to be held personally accountable.
However, outside of those unforeseeable Black Swan events, if a deal has taken a wrong turn, deal team members can find themselves uncomfortably in the spotlight, with their work scrutinized and all their decisions questioned in each case, with the pros and cons that come with 20/20 hindsight.
Some of the more common tripwires that can haunt deal teams include:
- where the risks were not adequately flagged to the IC;
- where something critical has been missed in diligence;
- if the deal team failed to refer back to institutional learnings from previous transactions in similar sectors / jurisdictions;
- if the DD process itself has been flawed, such as starting with an inadequate scope of work which isn’t built around areas that underpin the investment thesis; and
- the poor execution of value creation plans, commonly resulting from unstructured transition process from deal teams to portfolio managers.
It is increasingly recognized that having a form of contemporaneous record of key decisions – and why they were made – is not such a bad idea.
As one fund manager put it, “the ability to prove that risks were flagged, assessed, and discussed at the time the decisions were made can be critical.”
When decisions are taken in a collaborative way, where risks and mitigants are shared more broadly and issues discussed at length, accountability shifts towards organizations and away from individuals.
As much as it is the responsibility of deal team members to burn the midnight oil, fund managers are increasingly aware of the need to incorporate the right systems and processes to foster collaboration amongst team members and to ensure that deal team members have access to best-in-class support to help them identify and socialize deal risks.
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