When James Baker, US Secretary of State from 1989 to 1992, retired from his advisory role at The Carlyle Group in March 2005, it brought down the curtain on a era during which illustrious names of the political world featured regularly on that firm’s advisory board roster. Other luminaries came and went before him. In October 2003, former President George Bush relinquished his five-year tenure on the Washington DC-based buyout group’s Asia advisory board, then the following May ex-British Prime Minister John Major stepped down as chairman of Carlyle Europe.
Politicians of such influence were of value to Carlyle as it expanded rapidly into international markets. Perhaps most importantly, they could open doors for the firm – providing it with immediate access to movers and shakers in a new territory and no doubt put in a good word or two on the firm’s behalf in the process.
The deployment of these starred advisers was not without controversy though. A number of newspaper reports, together with the 2003 book The Iron Triangle:Inside the Secret World of the Carlyle Group made various insinuations about the nature of the cozy relationship between Carlyle and its frontmen, and their alleged role in some kind of illdefined global conspiracy. Such aspersions may have been too vague to inflict serious damage, but the mere fact they were made was presumably far from helpful to the firm.
Perhaps part of the reason why suspicion can surround private equity management company advisory boards is that it’s difficult to know precisely what their responsibilities entail. While the roles of limited partner advisory board members tend to be carefully defined, because of the dangers of investor representatives compromising their limited liability status, advisers to private equity management companies will not normally have legal responsibility with respect to the fund they are advising.
This means that achieving a definition of the management company advisory board is elusive:it can be more or less anything the GP wants it to be. Broadly speaking, advisers on such boards are hired for their experience, knowledge and influence and for the perception that they can in some way benefit the growth of the business in question.
AND THEN THERE WAS ONE
Fast-forward to the present day, and a board advising on investments in the energy sector is the only formal advisory board Carlyle still operates, according to a spokesperson for the firm. The firm’s European, Canadian, Asian and Japanese boards have all been disbanded. Whether or not the conspiracy theorists successfully landed blows, the official line is that these forums had simply passed their sell-by date.
?They became less and less important,? says the spokesperson. ?When we started expanding internationally and into new sectors, it was important to be in close contact with people who would say ?I’ll just call this friend of mine.? It was equally important to discuss with them what we were focusing on and needed help with. But now the situation has changed because we’ve become established in those markets and industries – and we’ve got our own networks.?
While Carlyle still seeks advice from some of its former board members, this is now done on a much more informal basis – perhaps by simply picking up the phone to certain individuals when their opinion on an issue is desired. The Carlyle spokesperson adds:?Hiring big names and ex-politicians lends credibility to a business at a particular stage of its life cycle. But as firms establish themselves and become known for the deals they have done, they don’t need the support of the big hitters any more.?
This theory of the advisory board being a natural part of a firm’s life cycle appears to be borne out by the experience of some other private equity outfits. For example, Alfa Capital Partners, the Moscow-based private equity and real estate investor, launched an advisory board in January 2005 – partly in response to an increased international mandate. Having initially focused on investment opportunities in Russia and the former Soviet republics, the company – through the $180 million OPIC-sponsored Great Circle Fund – now also seeks out deals in Turkey, the Baltic states and certain parts of the Mediterranean.
One member of the advisory board at Alfa is Hans Albrecht, who as the former co-head of CarlyleEurope, is well placed to see the connection between the present-day Alfaand the fast-expanding Carlyleof years gone by.?They [Alfa] don’t need doors to be opened in Russia because they’re well established there already. One reason they have the board is to improve their international contacts. They have a few former politicians, some well-connected business people and a couple of private equity professionals like me who have been chosen with a view to advising on current market practices,?says Albrecht.
As an aside, Albrecht says NordwindCapital, the Munich-based turnaround investor he founded in February 2004 and which he heads up alongside three other managing directors, does not have an advisory board for the very reason that international expansion – currently at least – is not part of the Nordwind agenda.?We don’t operate anywhere other than German-speaking territories so there’s no need for us to gain introductions to markets we are not well acquainted with,?he says.
NOT JUST A LIFESTYLE THING
While itmay hold true for some, the ?life cycle? theory does not appear to be valid in all cases: for some private equity firms, it seems, a formal advisory board need nothave a time limit on its usefulness. Industri Kapital (IK), the European buyout firm with Nordic roots, was formed in 1989 and has had an ?industrialistsonly? industrial advisory board in one form or another since then – though Gerhard de Geer, the firm’s director and head of operations and business control, says it was only five years ago that the roles of the investor advisory board and industrial advisory board were made entirely distinct.
The remitof Industri Kapital’s board is pretty far-reaching:offering advice and strategic oversight to the management company of the firm and its portfolio companies as well as simply being a way of winning friends and influencing people.
The board is comprised of senior industrialists and members of IK portfolio company boards who are not employees of IK itself, as well as the CEOs of former investee firms who have chosen to remain advisers to IK even though their firm is no longer part of the IK stable. It meets twice a year and, on one of these occasions combines with the firm’s annual investor meeting to form what partner and information director Anne Rannaleet describes as a ?total IK networking event.?
De Geer says much time is spent discussing corporate governance issues and the way that portfolio companies are run. But as well as internal issues such as these, the board also covers the big themes of the day.?The last meeting looked at developments in China over the last three years: what you can do there and whatyou can’tetc,?says De Geer.?In the next meeting, we’ll be looking at disruptions to economies from raw material price increases and asking whether it’s a long-term phenomenon or a temporary bubble.?
As the reference to China shows, IK’s board also has some similarities with those of Carlyle and Alfa in seeking fresh international perspectives. Indeed, De Geer says this is characteristic of Nordic private equity firms, as, in his words, there is a tendency for them to consider themselves ?on the fringes of the European map? and hence aware of the need to avoid becoming too insular. Stockholm-based buyoutfirm EQT Partnerssurely boasts one of the largest industrial networks of any private equity firm, numbering over 70 individuals – a network which, however, owes much to the firm’s association with the wealthy and influential Wallenberg family.
KEEP IT INFORMAL
Despite the examples of ?value-add? given above, management company advisory boards are not considered an asset by all private equity firms. Many do not have such boards – in a number of cases choosing to rely instead on loose, informal networks.?We like to have people we can call upon depending on the situation we are facing,?says Neil Scragg, a director and member of the portfolio management team at UK mid-market buyout firm Gresham.?Having a formal body of advisors can restrict your knowledge to the skill set of that group of people rather than what you need at the time.?
Indeed, some private equity professionals have a highly cynical view of advisory boards. Says one head of a leading European midmarket private equity firm:?Some people say to us that advisory boards are in many cases just a sop to investors. The pretense is that these firms have outside corporate governance and external operating expertise, etc., etc. But the advisers don’t really add value, they’re just names on a list that look good when firms are out fundraising.?
The source adds:?We do use advisers on an informal basis, but we would never publicize them because we don’t want them to become a marketing tool.?
The same source raises a question mark over the expense involved. He claims that, in addition to the standard payment of a fee akin to thatnormally expected by a non-executive director, board members may also be paid success fees for deals they have advised on, and perhaps even allocated a small share of the GP’s carried interest. However, taking other conversations into account, the best interpretation seems to be that compensation levels for advisory board members vary greatly – with some even providing the service free of charge on the basis of some perceived mutual benefit.
Whatever the cost, it seems that many private equity firms have found the ability to bend the ear of wizened industry veterans or exploit the leverage of wily politicians a useful rabbit to pull out of the hat on occasions. The advisory board is built on shifting sands: a vital part of a firm’s development that can eventually outlive its raison d’^tre. But it certainly has its uses, and at the very least adds another layer of external oversight to the machinations of a private equity management company and which, at its best, may provide welcome assistance in the execution of best practices.