When Owners Roll: Creating Alignment Between Management and PE
The best engine for maximizing value creation is a committed core team bound by the principle that every member is a partner and every partner is treated equally.
This Q&A is sponsored by White Wolf Capital LLC.
This article originally appeared in the November/December 2020 issue of Middle Market Growth. Find it in the MMG archive.
Q. Does your firm have a playbook for aligning management interests with those of investors?
We are flexible as to how our portfolio companies achieve alignment with investors across management ranks; however, every approach shares the same DNA. First, we ensure that there is a clear strategic plan for value creation based on the investment thesis for the original investment.
In the case of founders (sellers) who wish to stay on and help drive growth post acquisition, we look for a substantial commitment via “rolled” equity—somewhere in the 20% to 35% range. We want these highly successful entrepreneurs—now our partners—to understand that their “second bite at the apple,” combined with the proceeds from the original transaction, can generate significantly more personal wealth than what they had hoped to achieve from the original sale.
Upon closing, we work with our partners to refine the strategy and translate it into annual plans with specific operating and financial goals. Managers participate in shaping the annual plan and those with equity clearly have a stake in achieving those plans.
Elie Azar
Title: Founder, CEO and Managing Director
Company: White Wolf Capital LLC
Location: Miami
Expertise: Elie Azar is a seasoned private equity professional, drawing on a career that spans over 20 years of M&A and private equity investing experience. Prior to founding White Wolf in late 2011, Azar worked at Cerberus Capital Management, Ernst & Young and Arthur Andersen.
Q. How do you decide who receives preference when structuring the ownership positions among various kinds of equity holders, such as investors and key managers?
We don’t! We invest in the same security as management (mostly common equity). The reason is rooted in one of our firm’s bedrock values: partnership. We believe that the best engine for maximizing value creation is a committed core team bound by the principle that every member is a partner and every partner is treated equally regardless of the size of their slice of the pie. Every partner has a voice in shaping a common ownership vision and each is motivated to maximize value. All partners are pari passu—side by side—when it comes to distributing rewards. This is in sharp contrast to preferred equity where some owners are at the front of the line.
Q. How do you determine whether or not a member of the management team of a portfolio company receives equity in the deal?
That’s an easy one—we always welcome any manager or key employee to participate alongside us as investors. Having “skin in the game” is arguably the most potent way to drive alignment, focus and motivation. We also set aside a pool of equity for key managers awarded either as inducements to join our teams or as recognition and reward for delivering value.
