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The Pilot's Log Q&A with the ICAEW
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 Nigel Guy a member of the Corporate Finance Faculty Board at the ICAEW and Director of Private Equity at Gulf Finance, chats with Katherine Steiner-Dicks on the importance of banks being more consistent and transparent with SMEs; the need for turnaround expertise in troubled PE portfolio companies; and the steps private equity managers can take to improve their public identity in the current investment climate.
What key issues are the ICAEW addressing to the private equity industry in the current lending gap?
Banks need to be more consistent and transparent in their relationships with small and medium sized businesses. We even conducted some research which showed major inconsistencies between different banks and even within branches of the same banks. Different lending practices and marked variations between lending decisions were reported between ‘relationship’ managers and head offices within banks. This has led to confusion for small businesses with many avoiding contact with their bank and easily becoming apprehensive when submitting an application for funds. That is why we at the Corporate Finance Faculty at the Institute have been putting on restructuring and turnaround road shows around the country. So far they have taken place in London, Bristol and Birmingham and one is planned for Manchester in September.
Do you believe private equity backed businesses are any safer than others when it comes to keeping to banking covenants?
An impossible question to answer! PE firms monitor portfolio companies’ performance very closely through both direct involvement through board seats and close monitoring of KPI’s and the analysis of financial results and projections. As a result, they are subject to a high standard of governance, oversight and scrutiny. Ultimately for any company whether PE backed or not, covenant compliance is achieved by performing to plan.
Many private equity managers are the best of the best, but may not have the hands-on experience to turn a business around. What are some simple steps they can take to assess where an investment is going wrong?
Seeing where an investment is going wrong and having the hands on experience to turn a business round are two very different skills. A PE manager is paid to identify early on where things are going awry and implement the actions necessary to address the problem. This may include engaging hands on turnaround management skills. It is highly unlikely that a PE manager himself will consider that he has the hands on experience to turn a business round.
Are you finding that many private equity managers are waiting the recession out rather than getting outside help when it comes to debt restructuring and turnarounds?
PE firms have built up their own support structure of trusted advisers. These include industry specialists, NXDs and Chairmen. More and more they are using these agencies to deliver the changes necessary in their portfolio companies. This is particularly true of the mid-market firms. As a result the need for “outside” help in the truest sense may be less.
What are your thoughts for pre-pack administrations versus traditional administrations when it comes to private-equity backed businesses?
Prepacks have a role to play in corporate recovery, but generally speaking, in such situations the role of the PE firm is marginalised as they probably have little value left in the equation.
Recessions are usually busy times for restructurings and turnarounds, but is this the case in this recession when it comes to the private equity community?
The biggest impediment to restructurings is currently the capacity within the banks. They do not seem to have the level of resources to address the issues, particularly in the mid- market.
What steps can private equity firms take to improve their image to the Treasury Select Committee and the greater public even when their portfolio companies are suffering and they need to make tough decisions?
Start to provide expansion capital to replace the debt that is no longer available from the banks and to recapitalise private companies’ balance sheets.
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