Perfect partners? What finance should know about private equity
Healthy partnerships between PE investors and businesses nurture solid growth, better governance and a bright future, says RMB Corvest ED Martin Coetzee.
Q. Tell us about your background and career to date
"I’m Pretoria ‘born and bred’, having gone to school at Afrikaanse Hoër Seunskool (AKA Affies) before going on to study at the University of Pretoria. I am a qualified chartered accountant and did my articles at KPMG Pretoria. In 1995, I moved to Johannesburg having joined the Industrial Development Corporation (IDC) where I spent five years doing development and project finance with the objective to promote economic growth and industrial development– focusing on debt-type of funding transactions. Thereafter I had a brief stint at Nedbank Private Equity before joining RMB Corvest. Today I’m coming up on 18 years at RMB Corvest. My title is executive director (ED), working closely with Mike Donaldson (CEO). It’s a small team – 12 of us overseeing a substantial and diverse investment portfolio. We’re a close team and enjoy strong relationships and partnerships with all of the businesses in the RMB Corvest fold."
Q. Tell us about the importance of partnerships in private equity (PE)
"Partnership in this instances covers a broad range of relationships. Naturally, we partner with the business in which we invest, and there are various stakeholders in a business. In addition to the management teams of these firms, we also have partnerships with established BEE companies, with private investors, and with banks."
"The whole PE business revolves around people, and managing these different relationships and the expectations that come with that. We believe that we do this well because the partnership concept is so important to us."
"We have decades long relationships with many of the banks and private investors that we work with. We’ve done a fair number of deals with them, earned their trust, and they keep working with us or bringing us transactions to fund on their behalf."
Q. What is the nature of your partnerships then with target businesses or those you’ve already bought into?
"Typically we don't get operationally involved in the underlying businesses. Rather, we believe that it is more important for us to identify the right management team and partner with them. We trust them to run the business, while we get involved more on the strategic side at a board level. That's one of the reasons why RMB Corvest can run such a significantly sized portfolio with a relatively small team. It’s a different style of private equity, compared to some of our competitors in the market – one that is very focused on partnership, rather than meddling on an operational level."
"We do roll up our sleeves, so to speak, and will participate in robust debate about decisions and strategy at the board level, but ultimately we allow our owner-managed businesses to make decisions. It’s also why we do not buy 100 percent of businesses. We are mostly a minority shareholder with the management team holding a significant portion of the shares. Since the management team has skin in the game, they think differently to a manager who is an employee. In this way, we are all invested – going in the same direction towards common goals – and we know that what is good for management is good for us."
Q. How do you keep businesses on track post-acquisition, and what early warning signs do you look for to avoid problems?
"Before we buy in, we'll work through the strategy with the entrepreneur and management team. Usually they have an idea of where they want to go, but we are able to formalise this and advise on how to push those plans to achieve even greater successes. Then post-acquisition, we monitor their progress against that plan. This creates healthy pressure and incentive, and keeps the management team focused on what they want to achieve. It’s important to keep checking in with yourselves and with your PE investors, asking: Am I on track? If not, why not?"
"Where these goals are not being met, that’s an early warning sign. Moreover, where senior debt obligations are being missed, covenants breached, or if growth (in your preferred metric) isn’t being achieved, we would want to know in order to mitigate this. The CFO is often the key person for flagging these issues with us."
Q. Tell us more about your relationship with CFOs.
"We work extremely closely with the CFOs in all our businesses. The CFO is the person who ultimately quantifies whether you are on track with the investment case or not. They know if earnings, growth, or cashflow isn't where it should be."
"Again, we don't meddle, but there is an open line of communication, and as mainly chartered accountants ourselves we enjoy a natural affinity with the CFOs. We expect them to be on top of their numbers, and we support them accordingly – both formally (in board meetings) and informally. We spend a lot of time with two people in the business, the CEO and the CFO, and act as a sounding board for their ideas and concerns. We bounce ideas off each other, and we can ‘cross-pollinate’ our learnings from the whole portfolio."
Q. What extra value does RMB Corvest offer?
"We understand the entrepreneurial environment in which these businesses operate. We have a long history of working with entrepreneurs and owner-managers at the level before they become larger and more intricate. We understand the mindset and what they need. We assist wherever we can without micromanaging. From our side, we know that even though we are invested in a media company or a manufacturing concern, we are not media or manufacturing experts. Rather, we bring a wealth of experience in all types of business to the table, and offer strategic insight and guidance."
"Then while we are mindful of the need not to overregulate, the PE relationship by its very nature introduces a level of maturity, rigour, and sophistication to the reporting of a typical entrepreneurial venture. Regular board meetings create a culture of reporting discipline. We've seen numerous examples over the years in how this can transform a business. In time the business grows significantly, and if and when you are ready to either list it or sell it to trade player or another private equity firm, the reporting is in great shape to enable this."
"Additionally, if the business wants to grow through acquisition, we are able to offer the funding for this. With entrepreneurs and private equity, we've got the money and they've got the ideas. That makes for a great marriage between us."