A helping hand

Corporate Financier, February 2006

First, private equity firms did it. Now, corporate finance firms are lining up to establish formal advisory boards. Tim Chapman asks what they can offer

Advisory boards seem to be the new big thing for corporate finance firms - everyone's at least considered getting one, though opinions vary as to what they're actually for.

A few firms have followed the lead of private equity groups in establishing formal boards of advisors, typically made up of experienced industry executives, often seasoned with a sprinkling of politicians and bankers. Other are currently pondering whether to rationalise their current networks of useful contacts into a more formal arrangement.

But do boards add any extra value, whether in opening doors, providing oversight, or lending a little practical nous to the deal-doers? And what exactly do they do anyway?

While the firms themselves often prefer to maintain confidentiality on exactly how their advisors help them, those who do have boards say they are of real value.

A change in culture
The leader in the field is PricewaterhouseCoopers, which established its Corporate Finance Advisory Board in late 2001. The motivation for that was threefold, says head of corporate finance Graeme Pike: improving the quality of idea generation; the quality of pitching for work; and leveraging contacts within targeted industry sectors.

The net aim is to help the team win more work. "It's all about opening doors that wouldn't otherwise be open to us, and helping us convert leads into mandates," Pike notes.

The board is currently nine-strong, and has been chaired since its inception by Roger Freeman, a former PwC partner and Conservative MP who now also sits in the House of Lords. Apart from Freeman, the advisors are mostly industry specialists with decades of experience. Each contributes the equivalent of one or two days a month to PwC, around 80 per cent of which is spent working directly with an individual partner or partner group covering their specialist sector. The advisors also meet as a board three times a year. Freeman, as chair, says he spends a third of his time with PwC but is constantly on call.

The advisors' work falls into three main areas, Pike says: "One is regular review of leads and ideas – they will contribute into the origination of ideas for transactions. Second, they will help us when we rehearse a pitch proposal - they will act as the client in a dress rehearsal and challenge the effectiveness of the pitch and suggest changes to it. And sometimes they take part in the actual pitch as well."

The benefits of the board's advice goes beyond helping on individual transactions, Freeman notes. "They're advising on presentation skills and content, trying to raise the horizons of individual partners and staff, and providing general advice and mentoring advice on how individual businesses are going," he says.

The advisors are typically a generation older than the partners. Working with people with deep experience of running businesses can also help the corporate finance partners develop self-confidence and improve their personal skills, Freeman suggests. "In a competitive business, what we're trying to do is encourage a change in culture. To win business you need more than a brilliantly written analysis, you need a willingness to develop relationships with individuals. I regard these as cultural matters, which people who come from financial services or accountancy firms need to learn."

Advisors typically stay on the board for up to three years, often leaving to become a director of a portfolio company. "I think the shelf life of an advisory board member is somewhere between one and three years – it keeps things fresh," Pike says.

So what qualities make for a good advisor? Obviously, experience in a sector, of running a business at senior executive level, and being well known and respected across that field. A high profile in a particular geographic region can also be useful.

There's also the less definable qualities. "We're looking for a willingness to work with younger people and provide mentoring – that's a unique interest and skill," says Freeman. "We're also looking for time availability – it's not a question of saying we need you in three months time, often we need you tomorrow."

The formal board structure emphasises the mutual commitment between the firm and its advisors, Pike says. "It creates discipline around the timeframe for generating ideas. If they've got an affinity for the organisation, they're more likely to come up with ideas and be supportive on a regular basis."

In-house expertise
PwC is the only one of the Big Four to establish a formal advisory board, but some of its competitors may yet follow. Ernst & Young is currently considering appointing a formal M&A advisory board. "The advantage of an advisory board is it's not just advice – it does extend and formalise your reach and sales force," says John Cole, partner in the firm's transaction advisory services group.

The firm currently relies on its contacts established through previous transactions, or through its ongoing executive and non-executive development programmes. "If we've got an opportunity in widgets, we look around to see if anyone in any of these programmes has widget experience," Cole says.

KPMG Corporate Finance has also considered a board, but chief executive Simon Collins says he remains ambivalent about its true value. The main consideration is being very clear about exactly what role you want a board to fulfill, he argues. "Are they door-openers in Whitehall or industry, or are they detached challengers of the management team, almost like non-executive members of a board?" he says. "I've got much more time for an advisory board that is charged to challenge the thinking of the executives."

The firm currently relies on its wealth of in-house expertise and its extensive networks. "We tend to like to have orbiting senior people and experienced hands around to be mentors, coaches and sounding boards," says Collins. "We believe the sector specialism there is a permanent feature of the business, not something that's rented."

Chris Ward, global head of corporate finance at Deloitte, says he also remains dubious about the value of boards. "It's certainly useful to have some external input, but external input we can get in other ways," he says. "We thought about it, particularly when PwC launched theirs, but decided it wasn't for us really." Deloitte uses its own personnel and network of contacts, including its cadre of MBI candidates, to fulfil many of the advisors' roles. "We rehearse pitches, but use internal people who are not from that division," Ward notes. "A firm of our size has so many contacts that it's rare that we want to go and talk to a company where we don't have an existing contact."

Flexibility versus continuity
Where the Big Four lead, the mid-tier inevitably follows. Grant Thornton Corporate Finance is also currently reviewing whether to formalise its arrangements with its advisors. "There are advantages and disadvantages on both sides - flexibility against continuity of the relationship," says managing partner Ian Smart. "The corporate finance firms are tending to a more formalised approach. I think it's seen not only as giving a strong commercial edge, but maybe a governance edge in terms of assessing conflicts and other issues."

Grant Thornton currently calls on a broader, more informal network of contacts for advice on specific transactional opportunities. "It might be someone we've worked with as a significant shareholder or owner of a business that we've worked with on a sale mandate, and informally kept them on the books as a useful contact going forward," Smart says.

These advisors play a vital role in identifying opportunities and winning work. Being able to provide specific background knowledge at the appointment stage is no longer a differentiator but a necessity, Smart notes.

The use of advisors can add value to the client as well as the corporate finance firm itself, Smart says. "If there is a true insight to the business and to a transactional situation, they can add value to the firm's offering, and to the value the firm can justify for providing its services. They can also add value to the ultimate customer in achieving a better price or better protection. The ideal is that there's a win-win coming out of the relationship."

Other firms, such as Clearwater Corporate Finance, choose to work more closely with a smaller number of advisors, but without establishing a formal board. "We use senior industry figures to differentiate our business from the Big Four accountancy firms, to use real people with real industry experience in these roles rather than professional consultants," says managing partner Phil Burns.

On a typical transaction, the advisor is brought in at the very beginning of the project as a joined-up member of the team. "That enables us to hit the ground running in understanding the key drivers in the sector, and helps us position our client on the optimum basis with the likely interested party to acquire the business," Burns says. "They'll probably also have their own network that we can use to get an inside track on the thinking in the buyer's boardroom."

Clearwater retains around a dozen sector specialists, typically seasoned CEOs and chairmen who consult for Clearwater part-time - a prize example being their retail and consumer advisor Jackie Naghten (see below). Firms need to reach a certain size to really get the best value out of advisors, Burns notes: "You've got to have the ability to invest in people like this and give people the breadth of transactions on which to work, unless you're very niche."

Boutique benefits
Some smaller firms argue that advisory boards can help them punch above their weight, however. Livingstone Guarantee, a self-described boutique, maintains a nine-strong Advisory Panel. "That makes a massive difference to our ability to really make a difference going into an industry," says partner Simon Cope-Thompson.

Cope-Thompson, as head of the leisure and retail team, works closely with panel members Barry Morris, former executive director of Marks & Spencer; and Nat Solomon, former chairman of groups including Gala and Crown Leisure. "Nat is extremely well connected in terms of the industry - that helps us in terms of referencing and picking up industry viewpoints on deals or people we're coming across," Cope-Thomson says. "It's about using their knowledge to give us a real insight into sector issues that we couldn't pretend to get to grips with as a corporate financier."

Having a structured panel rather than a wider informal network is important in increasing trust between partners and advisors, Cope-Thomson says. "Our panel is close to us, they're completely trusted as part of our team," he says. "Our concern with spreading the net wider is really about confidentiality - that's a key part of what we do, and you run the risk of losing control of that if you go to a wider group of people."

The firm is however planning to expand its panel to around 12, to gain greater breadth in sectors such as support services. "For a boutique like us to have the quality of panel memebers we have is a major asset," Cope-Thomson concludes. "It allows us to really provide clients with insight into their industry and their business, and adds a lot of value to our team and to the clients we deal with. It's a key thing in assisting us to develop the business."


Politicians and other animals
For most corporate finance appointments, the emphasis is very much on seasoned industry personalities with solid sectoral experience. But in private equity, appointments often come from the wider world of the great and good, including high-profile politicians.

This can bring unwanted attention to confidentiality-conscious firms – the likes of Private Eye had a field day when outgoing health minister Alan Milburn signed up with Bridgepoint Capital for an advisory seat worth a reported 30,000 a year, while Carlyle Group drew some very dark accusations over the array of former presidents and prime ministers on its now-disbanded advisory boards.

But can such non-industry figures contribute anything to corporate finance? The answer seems to be yes, but with reservations. Independent corporate finance firm Hawkpoint doesn't have an advisory board, but does retain former foreign secretary Douglas Hurd (now in the House of Lords) as an in-house advisor. "We have him because of his connections outside of the mainstream business," says managing partner Paul Baines. "It's a fairly informal relationship. He has an office here and helps us with ad hoc issues."

The precise types of issues he helps with remain confidential. Baines says only he makes a very valuable contribution over and above the full-time industry advisors employed by the firm. "Lord Hurd is an exception because he's not mainstream corporate finance. He's got an extra dimension to add," he notes.

PwC's advisory board has previously included another former minister, Malcolm Rifkind, but head of corporate finance Graeme Pike emphasises that it's still a matter of specific experience. Rifkind's role centred on the defence and transport sectors, both areas where he'd held Cabinet responsibility, as well as public-private partnership work across Europe. "The main focus is industry knowledge and the ability to connect us with other people and the ability to generate ideas – if people have been an expert in their field and are knowledgeable about their sector, they're bound to be able to help us with ideas," Pike says.

"In looking at any potential advisor, the key has got to be to understand the value that can be brought," notes Ian Smart of Grant Thornton Corporate Finance. "If an individual has certain capabilities or contacts that may allow certain situations to be unlocked more easily, if they've got contacts in government or regulatory authorities and bring experience on how apparently problematic issues could be potentially unlocked, I wouldn't discount that."


Articulating the intangibles
The benefits of bringing in an outside advisor are perhaps most obvious in a sector where the average number-crunching professional finds his skills of limited use – such as in the ever-fickle consumer and retail markets.

Clearwater Corporate Finance retains the services of brand consultant Jackie Naghten as a part-time advisor. "She's often described as our secret weapon when we're introducing our services to a client - she just looks at a business in a different way to the men in suits," says managing partner Phil Burns. "It enables our mandate to take on a slightly different direction."

Naghten was recruited through a personal friendship with Clearwater partner Marc Gillespie. "He had the idea that someone like me could add value to what a corporate finance firm can offer," she says. "I have a completely different skillset to the corporate finance people – I bring something that they don't have at all."

A former brand director for Arcadia, Naghten later worked for innovation consultancy ?What-If!, and was called in by Graphite Capital to do due diligence on some fashion-sector transactions. "My observation was that there was a gap in perception," she says. While corporate finance peopel tend to see businesses just in terms of the balance sheet and and other business school measures, there's also less tangible values in terms of the customers it serves and markets it's in. "Articulating that is not what these guys are good at," Naghten adds.

Naghten now spends around half her time with Clearwater, the rest with her own consultancy. "I work with the deal origination team, identifying sectors that could be of interest. I work with them in how we might approach a business and set up, then when we get to pitch to the business, I'm a different bit of the team," she says. "Often the owners like to hear what I think because I talk their language and understand their business. Also, to be honest, I'm female - particularly if you're selling a business that serves women but which is run by men and advised by men, they may not understand the customer at all."