Drawbacks of working for a PortCo

I have a final round interview today with a PE backed PortCo. My main concerns would be that it's in a niche industry, and that there doesn't seem to be any equity involved in the compensation package. I also would ideally like to be in my next role for 3+ years, and I'm concerned that without equity, there's a possibility that there's an exit and I would not be kept after the transaction.


But, I'm coming from FDD at an accounting firm, so this does seem that it would be a step up and a good experience to get into the Corporate Development world and to a part of the full M&A process, and to get more experience with actual financial modeling. It also seems like there is a lot of communication and exposure to the PE team which I would assume would be good experience wise as well. It also would be an increase in compensation in terms of base and bonus, even without equity


Are there any definite red flags I should be cautious of, or questions I should make sure to ask within the final interviews today?

 
Most Helpful

I think this is a question that's highly personal to you.

It sounds like you want to develop the M&A skillset more.  Perhaps you may also want to get into private equity.  And since you mentioned lack of equity, it seems like wealth creation would be helpful here.

First, once you get the offer, negotiate for participation into the option pool.  You will have the best chance then to get it because once you have the offer in writing, they're already set on hiring you.  To better contextualize the value of any equity grant, figure out what the total equity invested by the PE firm was.  If it was $100M, assume they will double their investment so equity value at exit would be $200M.  Then work backwards to figure out how much an equity grant would be worth.

Second, I'd ask yourself what kind of M&A strategy is this.  There are certain, tried & true PE roll-up investments (e.g., HVAC roll-ups, tire distributors, lawncare, testing inspection & compliance (TICC), food ingredient manufacturers).  You can find M&A decks online from investment banks on these investment themes because there's such a large, fragmented market where PE funds are continuously running the same strategy.  If the PortCo resides in one of those sectors, you can expect a ton of M&A work.  If it resides out of those sectors, you might only see one or two acquisitions which might be larger, more transformative.  The watch-out here is in either case, understand how involved the PE firm will be on M&A activity.  Will they be an outsourced corp dev resource -- meaning you won't get to get involved?  Or are they trying to be more hands-off.

Finally, evaluate the CFO and the systems that you'll be working with.  Is there good financial reporting infrastructure already in place?  Does the CFO seem sharp at trying to evaluate the underlying drivers of the business?  If the M&A skillset / getting closer to PE is your goal, you don't want to be bogged down with financial reporting system implementation work.  Instead you want to hone in strategic, data-driven thinking.

Perhaps a final watch out is there can be a lot of drama within management teams and investor base.  I'd look for a cohesive management team (CEO and CFO seem to like each other).  And I'd be cautious if the equity includes a significant minority investor (e.g., PE fund that asked founding family to roll in equity into new deal, founding family is used to running the business one way, PE fund thinks differently, a lot of drawn out discussions on simple decisions because of differences in philosophy).

 

I appreciate the response. From a dealflow standpoint, I do know there will be multiple roll up acquisitions per year so there will be many reps. It's in the Waste Management industry, and I believe they were saying there's multiple acquisitions in the pipeline at the moment. Definitely will use today to get more color on my responsibility and involvement, but it sounds like my involvement will be driving the deals, performing due diligence, and creating pro formas. 

 

I do think this role is a step up from FDD. I spend substantial time rolling up this particular vertical. You will certainly get a lot of reps and those reps will probably be similar in many ways but each have their own wrinkle. The real juice on the tuck-ins is made on the integration, so I would want to know what the integration team looks like and what your role would be there as well. 

The company should have an incentive plan for you to participate in, even if it is only modest.

 

Sounds like the role is a Corp Fin / FP&A type position? What level of seniority? If more senior (ie, #2 to the CFO), I'm surprised they didn't throw you any options. Even if you did have equity though, there is no guarantee you will be kept around post-exit. It's more of an incentive to keep you working towards that exit though. 

The PE firm will definitely influence the cadence and tone of the work, and would want to know how they operate (hands on / off, frequency of meetings, are they constantly looking for analyses from your team). More importantly though, your manager will define your experience so try to make sure he/she is someone you can learn from and trust. If you're interested in corp dev specifically, would also suss out how much of the role is reporting vs. M&A, what the M&A track record has been like, what the expectation is going forward, and what role you will get to specifically play as often times PE firms will run with deal execution and the portco only deals with integration. 

 

Not reporting right to the CFO, but the VP of FP&A right below the CFO. It's displayed as an M&A and FP&A role, but will be 90%-95% M&A related. I've already interviewed with the PE contacts as well and they seem to have a good culture, no red flags from our conversation.  The title is basically a senior analyst so, I will bring up the equity conversation if it comes to it, either for now or in the future.

 

You should definitely ask, but it'll likely be an uphill battle given you're pretty junior. If you get anything, it's likely to be a token amount. But you could also play it off as you'd like your incentives to be aligned, and it's not about the amount as much as it's about being aligned with the senior team and PE owner as you help them create value via M&A.

 

Some questions to ask:

What’s current pipeline, remaining equity and debt capacity for deals, current leverage and covenant levels?
Your role defined in the M&A process- are you opining on the definitive docs or just plugging in numbers to a simple screening model?
Any bd pitching experience in the role?
Key metrics for your bonus - some roll ups have insane bd outreach metrics like cold calls per week etc. (basically appointment setting)
Average size deal historically and required budget acquisition numbers to hit bonus

Mr 305
 

Also get in writing your participation expectation in the budget process. The budget process, approval, and submission to BoD and Lenders is a soul sucking exercise from which there is no reprieve from. In this case it’s taking away from deal reps. You want to see the model and process to speak to it in future roles, but try to avoid.
Also keep a thumb drive or Dropbox of deal templates

Mr 305
 

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