Executive-in-Residence Programs – Back in Vogue
By guest blogger Jarrad Zalkin
Vice President
TM Capital Corporation
It’s become abundantly clear over the last few quarters that the private equity sector has faced its share of challenges, particularly in the middle market. Access to leverage is limited, general deal volume is down and deal quality is more irregular than we would all like to see it. While things are definitely on the rebound compared to where we sat one year ago, market conditions are forcing PE firms to reconsider their approach to deal making.
Gone are the days where simple financial engineering could guarantee a healthy return for LPs, and ancient history is the time when PE teams could consistently identify, court and close on quality deals without a unique and differentiable message. As a result, several firms are returning to old strategies to revitalize their pipeline and increase the chance of better returns. One of these strategies is the Executive-in-Residence (EIR) program. For those unfamiliar, the Executive-in-Residence, or CEO-in-Residence, program features PE firms partnering with experienced executives or entrepreneurs to proactively target specific industries, investment themes and business models. It is a strategy pioneered by players like GTCR, but today is being leveraged by numerous PE firms, including Battery Ventures, Navigation Capital, Bunker Hill Capital and LLR Partners.
Partnering with a respected executive affords PE firms several unique benefits. First, these executives bring with them a track record of success, a history of operational expertise. Their experience can help PE partners get comfortable with targets that have some “hair” on them or increase their confidence in a consolidation strategy. Second, these executives have a great understanding of the competitive landscape of the industries they live in, and can immediately introduce a highly qualified list of targets and relationships. This helps with deal volume and deal quality immensely. Third, EIRs can provide an “angle” for PE firms involved in a competitive process. Many targets will get excited about the opportunity to work alongside a storied, industry veteran. Finally, injecting a professional management team into an investment can create real, hard equity value for a PE firm following the close of a transaction. With limited access to debt to ensure rich returns, immediately spicing up the management team offers PE investors an alternative avenue to quickly increase the value of their investment.
EIR programs can also throw up some roadblocks that must be carefully navigated. In an EIR scenario, closing deals with an attractive target where the original management team wants to stay in place can result in some sticky conversations. As a result, EIR programs are almost impossible to execute in minority investments. However, when properly leveraged it is clear the EIR program can offer investors some real value at numerous points in the investment lifecycle.
For any further commentary or questions, please don’t hesitate to contact me at jzalkin@tmcapital.com.
