IPO and M&A Readiness

The last 12 months have been particularly challenging for private equity. Deal value was down 37% in 2023 and exit value dropped by almost half in that time, all while fundraising continued to decline year-over-year across the industry. While the situation has begun to improve in 2024, private equity continues to sit on more than $3.2 trillion in unsold portfolio assets as a result of this slowdown, making it difficult for funds to generate liquidity and return capital to investors.

This has placed even more importance on diligent governance for PE-backed companies. Now private equity not only needs to run their portfolio companies for longer periods of time than expected, but they also need to create more value and strengthen their exit story in order to capture buyers’ attention.

A strong board of directors is at the core of accomplishing these goals, highlighting the importance of finding smart, capable leaders who have more nuanced, on-the-ground experience than traditional board directors.

This effort on the part of private company boards mirrors recent moves by their public counterparts, embracing board diversity in order to capture a more inclusive perspective and improve business results in an ever-changing marketplace. More diverse boards have proven more effective at navigating an uncertain economic and geopolitical climate at some of the country’s largest companies. PE firms can follow this lead by:

Taking board composition seriously

Typically, the board of directors at an investor-backed private company consists of the founder, investor representatives, and sometimes a few trusted advisors. But, in a reduced exit environment like we are seeing today, effective board composition calls for a more thoughtful approach, targeting experienced leaders who have been through the process and know how to effectively position a company for sale.

Start recruiting early: When preparing for an exit, it is crucial to begin recruiting board members early in the process, ideally 18-24 months in advance. This timeline allows for careful sourcing and vetting of experienced directors who can contribute significantly to the company’s public strategy and governance. Early recruitment ensures that these board members are fully integrated and aligned with the company’s vision and goals long before any exit takes place, providing ample time for them to understand the company’s operations, culture, and market position. An early timeline can also help the company assemble and present a strong governance structure before an eventual exit, bolstering credibility and investor confidence when the time comes.

Embrace board diversity: At the board of directors level, diversity means more than personal background and gender, including a diversity of thought, experience, and market outlook. Companies are increasingly recognizing that diversity extends beyond visible demographics to include technical expertise, go-to-market strategies, and past leadership experiences. Board members with varied backgrounds are better equipped to understand and anticipate market trends, manage risks, and connect with a broader range of stakeholders.

Target independent directors: More and more PE firms are appointing independent directors, moving away from relying on Entrepreneurs-in-Residence, investors, and other common director sources. Independent directors and advisory board members can bring new perspectives to the organization and, as outsiders, are often better positioned to challenge existing assumptions and contribute to unbiased decision-making. This independence can both improve the board’s functioning while PE-owned while also enhancing its credibility and accountability ahead of an exit.

Consider term limits: There are good reasons that some PE firms limit board appointments to two-year terms. These shorter, closed-ended appointments ensure that the company and its investors are regularly evaluating and renewing board members, ensuring that the board remains agile and responsive to the evolving needs of the company and its stakeholders. A two-year term also encourages accountability, as board members are aware that their tenure depends on their contributions and alignment with the company’s strategic objectives.

Do your due diligence: Sometimes the individuals who look best on paper are not always the right fit for the needs of an organization. It is important to vet qualities such as the candidate’s soft skills, drive, and desire to make a real change within the organization to ensure you identify board members that are truly going to drive value vs. just build their resumes.

Establishing a strong board strategy

A proactive approach is crucial in board composition, so companies need to actively pursue different perspectives and backgrounds when creating a future-proof board. But, once the board is in place, the real work begins, and a board operations strategy is step one in making sure that work goes as expected for an eventual exit.

First, accept the reality of life for many PE-backed companies. These are not multinational corporations with endless resources and time to pursue every idea under the sun. Instead, the focus should be on prioritizing sustainable growth over chasing every new trend or technology that may not align with the core business objectives. Not every director candidate can tell the difference between long-term strategic efforts and those that turn into distractions for the organization.

Second, balancing growth with profitability is a delicate act but necessary for enduring success. While aggressive expansion can lead to increased market share, it should not come at the expense of financial health. Directors need to be able to develop and support a growth trajectory that is both ambitious and sustainable.

Finding the ‘right’ directors

At the end of the day, PE firms need to evaluate board director candidates just like they would any C-suite or high-level leadership hire. It is not only important to go through the usual due diligence process to understand their background and experiences, but also consider what they might bring to the board that the organization currently lacks. Maybe they have industry specific GTM experience that other directors do not have, or maybe they have worked with more diverse communities in the past and understand how to serve a broader range of customers.

Whatever the case, it is important not to simply pick directors based on the background they have on paper, but really get to know them and how they will approach the job. Do they have the time to commit to the role, given where the company is in its lifecycle? Do they understand and agree with the organization’s long-term goals? Typically, as a company approaches an exit, the time commitment increases exponentially, requiring directors who are prepared for the challenge and able to set aside the required time to make it happen.

Sometimes, candidates like these need to come from outside of the PE firm’s existing networks. They are operators, technical experts, and others who might not already travel in board candidate circles. But, once found and installed, the model board member can be a key difference between a successful exit and continued underperformance or stagnation.

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