Expertly Put is a series of exclusive conversations with industry experts, designed to help business owners and management teams gain a deeper understanding of the topics that matter most. In this two-part interview, Stuart Fitzgerald sat down with Mark Flood, Director of Renatus to talk Private Equity.

There are two things that Mark Flood loves doing.

Sending me emails on Sunday mornings that I don’t remember subscribing for (pre-GDPR, it goes without saying that I have subsequently opted in) and investing in ambitious Irish companies.

We’re in The Living Room, a well-appointed meeting room in the Renatus office where Mark, Brendan Traynor and their team strategises with portfolio companies and investors. There was a pub in Galway called The Living Room during our college days, but this isn’t the time or the place to get into that.

We’re talking private equity and I begin by asking him why the owner of an established SME would partner with a firm like Renatus.

Mark Flood: Many entrepreneurs only have two assets, their family home and their company. The company might be valuable but it’s highly illiquid. The asset concentration risk can be a barrier to making bold moves. Nobody wants to go home and say they’ve bet the farm and lost, particularly when the fruits of their labour haven’t been enjoyed yet.

Stuart Fitzgerald: They could just sell the business and fix that problem.

MF: True, but what do they do then? That fixes the money problem but if you’ve spent 20-years as a hard driving entrepreneur selling your business might remove your purpose. What’s going to get you out of bed on a Monday morning?

SF: And is a big pay day really the thing that motivates 99% of entrepreneurs?

MF: Exactly. Most Irish business owners only have a utility for first couple of million. The rest is just a game. Private equity allows them to monetise their success, take some chips off the table and keep playing the game they’re best at. The one they love playing. They can de-risk and really go for it. Ultimately it makes sense to have a material part of their portfolio invested in a sector that they know. Partnering with private equity can give them the best of both worlds.

SF: What about MBO transactions? What role does private equity play in unlocking these deals?

MF: Well, the first question is; are the current shareholders willing to sell?

SF: Assuming they are the second question is; how are we going to fund the transaction?

MF: Correct. There will be an element that can be debt funded, potentially using a blend of senior and mezz. Maybe the vendor leaves some loan notes behind. Part of the consideration might be deferred. Problems can arise if the MBO team wants to go on an aggressive growth journey. Debt might constrain their ability to grow.

SF: Why?

MF: Because free-cash-flow is used to service the facility. Taking equity rather than debt, or a sensible blend of both, allows ambitious management teams to invest in what the business needs. That might mean more acquisitions or capital projects. Equally it might mean investing in working capital or completing the org chart.

SF: So, the benefit to an MBO team of partnering with a PE firm is that they will be able to fund the initial purchase of the company and capitalise the business for future growth?

MF: Yes, but you’re getting more than that. There’s a value add that goes with having a partner around the table is that is invested hip-to-hip and can really help to deliver the strategy.

SF: Explain that value add. What should current owners or would-be MBO teams consider before choosing a PE partner?

MF: You’re committing to what could be a 5-to-10-year journey. Let’s be realistic, how many business plans have you ever seen that were delivered to the letter?

SF: None.

MF: There you go. It’s impossible to forecast everything and predict all eventualities. Five-year plans get delayed. There’s a couple of questions you should be asking of your potential equity partner. Will they give you the autonomy you need to adapt and deliver your plan based on the actual trading realities the business faces? Will they help when its needed? Are they really able to help? The only way to really answer those questions is by speaking to people they’ve worked with.

SF: Give me a practical example.

MF: Boojum. In the end it was a fantastic result for all of us but it wasn’t without its challenges.

SF: You mean Covid?

MF: That was certainly one of them. Covid was a period of intense stress where we had to be fully aligned with management. Trust and mutual respect were crucial. The determination to get the business back on an even keel after Covid had to be shared. Otherwise, it might not have worked. You might not get that level of support if your equity partner isn’t truly invested in a medium-term journey. Are they passing through with one eye on flipping the asset and jumping their IRR hurdle or are they committed to building a great business, like Boojum?

SF: Surely those partnerships are a two-way street. I know David Maxwell (Boojum’s CEO). In his case you found a top-class entrepreneur who was able to grow with the business. If the investment thesis is built on your partnership with management, what characteristics do you look for in management teams?

MF: We look for open-mindedness and ambition. If there’s open-mindedness you can work through most challenges. We aren’t massively concerned if there are gaps in the day-1 org chart. You can fill the vacant seats on the bus over time if management is realistic and open-minded about the support they require. Those roles can be filled by developing the existing team, bringing in a top-tier lateral hire, or finding a fractional resource.

SF: The development of the fractional C-suite market is interesting, isn’t it?

MF: Absolutely. We come across loads of experienced executives who have so much to offer but are at a stage of their career where they may not want a full-time gig. Equally, scaling companies might not require a full-time Chief Marketing Officer, or whatever, but do need help on the big picture stuff. It can work really well.

SF: You talk a lot about the partnership with management and management autonomy. How much control does PE typically exert over management teams? How empowered are they to actually run their business?

MF: There’s a common misconception that PE is heavy handed and overly controlling. Most PE firms have a portfolio of 5-15 investment so it’s impractical to think they’ll be all over the day-to-day operations of the business. They simply don’t have the time or the resources. Where PE firms do sometimes exert control is around the boardroom table. They can veto acquisitions, growth projects and other investments that management want to make. Thankfully that hasn’t happened in any of our investments.

SF: How can both sides avoid that happening?

MF: By locking in a sensible business plan at the outset and being realistic about the fluid nature of the business planning process. Basically, you need to make sure management and the equity partner are on the same page from the start. Some firms may not share management’s ambition. You need to flush that out early.

SF: Sounds easy.

MF: It’s not!

In Part 2 of this two-part interview, we discuss the macro-environment as it relates to private equity and getting the timing right, both in terms of raising money and exiting.

Renatus is private equity firm based in Dublin. Founded by Mark Flood and Brendan Traynor, the firm has made ten investments in high-growth, entrepreneur led businesses. In June 2023 they exited their first investment, selling Boojum to the Azzurri Group.

See you soon for Part 2 of this interview.

Expertly Put is a series of exclusive conversations with industry experts, designed to help business owners and management teams gain a deeper understanding of the topics that matter most.