Management advisory is the providing of advice to the Chief Executive Officer (CEO) and their senior management team as to the financial and commercial aspects of a private equity portfolio company transaction. It particularly focuses on providing support on the terms of the new management equity incentive plan (‘MIP”) and rollover/investment into the equity of the new entity. These are the key incentives to retain and motivate management after the transaction.

Firms, such as Jamieson, that provide this advice in many ways serve as the “investment banker/compensation consultant” to the CEO in the same way that the selling sponsor has its investment banker and other advisors on the transaction. The management advisory firm should be able to provide independent advice free of any conflicts with the sponsors. However, it is important to recognize that the management advisory firm does not interfere with the sponsor’s process of selecting the ultimate buyer or the acceptable price or terms for the transaction.

Management Advisory Firm Role

Instead, the use of the management advisory firm permits the CEO, the Chief Financial Officer (CFO)  and other executives of the portfolio company to primarily focus on running and selling the company and not to be preoccupied with concern as to their own compensatory matters. The management advisory firm provides market analysis, modelling of bid proposals as to MIP’s, preparation and review of term sheets, and, if requested, negotiation on behalf of the CEO and management team of the key provisions of the MIP. The firms typically have a proprietary database of MIP related terms that is able to benchmark the MIP proposals against the wider market. Since the management advisory firm does not practice law, it can discuss issues directly with potential buyers, while working alongside the lawyers and tax advisors for the management team. The management advisory firm is generally retained at the same time as management lawyers are obtained and shortly after the company/sponsor retains investment bankers and company lawyers for the transaction.

Management advisory has become a growing presence in private company transactions in the United States in recent years and has been a standard part of private equity portfolio company transactions in the United Kingdom and Western Europe for many years. Management advisory firms in the United States are generally registered with FINRA, the SEC and SIPC since the sale of securities may be involved.

Key Services

Key services performed by the management advisory firm include:

• helping set the expectations of the CEO and management team against market practices and benchmarked precedent transactions based on its proprietary database
• ensuring that the team is sufficiently educated on the key terms and how they are typically addressed in the market and what the specific conditions may be in the particular structure
• helping to reach agreement on the terms of rollover and future MIP via a sufficiently detailed term sheet that is ideally circulated and discussed during the second round of the bid process so that there is no delay in delivering the management team once the sponsor selects the buyer
• avoiding some of the potential tension between the CEO and the buyers by serving as a knowledgeable and market experienced negotiator with the potential buyers and as a sounding board for the CEO and senior management
• providing the CEO with projected return of the MIP and rollover returns under different go forward structures and business plan assumptions
• explaining, if relevant, to the management team the difference between public company compensation and private equity portfolio company compensation structures
• educating the management team on the term of the new MIP, including, if required, individualized communication packs to ensure all participants are aligned and recognize the value proposition in the equity program
• helping the CEO to allocate the MIP pool amongst the management team based on market norms, proprietary benchmarked data and projected returns
• providing support and confirmation of fund flows from the sell side transaction and otherwise support closing from a management perspective
• supporting the lawyers and tax advisors reviewing the documentation to ensure that the term sheet is properly reflected in the plan, grants and governance documents for the new entity
• helping with the design of alternative equity arrangements for those management members not participating in the MIP

The above is just a summary of the services of the management advisory firm as the involvement varies deal by deal. For example, the type of assistance and the timing will vary between a public to private process and a bid process of an existing portfolio company, just as it will between a founder-controlled company, one that is sponsor controlled and one that is a carve out from a public company.

Proper Education and Representation

The main goal of the management advisory firm is to ensure that the team is properly educated on the key terms of their equity programs and has proper representation in the context of the transaction rather than just being “sold” along with the assets. Even the most experienced management teams only go through a very limited number of transactions over their career and ensuring that the proper equity incentives are implemented is essential. Teams have significant financial and emotional capital tied to these outcomes and the highly concentrated nature of that exposure requires experienced advisors committed to only them to help them through transformational corporate events.

In the last several years, this practice has become more common in United States portfolio company transactions and we expect the practice to grow as more management teams and sponsors recognize the benefit of it.

Jamieson Corporate Finance US, LLC is an SEC-registered broker-dealer, member of FINRA (www.finra.org) and member of SIPC (www.sipc.org). This article is for information purposes only and is not to be construed as a solicitation to invest in any securities. Jamieson Corporate Finance helped create the management advisory business and its affiliates have offices in New York, San Francisco, London, Frankfurt, Madrid, Milan and Stockholm.

For further information, please contact Mike Sirkin at msirkin@jamiesoncf.com or Mark Wasserberger at mwasserberger@jamiesoncf.com.