False security

13 July 2009

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Despite the current wave of companies in trouble, few are reporting major changes at the top. In fact, many senior execs of private equity-backed companies find themselves in more meetings than ever with their backers and lenders. A lucky few will have their buyout partners appoint interim management to tackle the current malaise, thus allowing the incumbent team to continue to run the business free from the distractions of refinancings and other such discussions. Most, though, will not and are in fact key to such negotiations. Which may be a reason why so many senior members of staff are kept on, even as the businesses they run are stumbling into the ground

Most company executives backed by buyout houses have proved exceptional at operating companies during the boom years. Such managers are often ill-equipped, however, to manage those same businesses in a downturn - when focus shifts from growth to survival (see feature, page 16). So why are they still there?

In these challenging times, backers often spend months trying to negotiate with banks to keep the company afloat. To do this, backers must convince its lenders that the business is sound through a series of management-led reforecastings and stress-tests. It must prove it has the best people for the job in mind. Because bringing in fresh blood halfway through negotiations might increase banks' perception of risk, most private equity firms are keeping incumbent teams on board. For now.

After a buyout house convinces its lenders to reset covenants, the backer may be likely to turn around and replace the financial director and managing director. While this sounds harsh, it is a realistic scenario. It enables the backer to get what he wants to keep the business afloat (waiver) and then pursue value maximisation through fresh blood (management replacement).

Yours sincerely,

Kimberly Romaine

Editor-in-chief, unquote"

Tel: +44 20 7004 7526

kimberly.romaine@incisivemedia.com.