Last month’s inaugural How They Did It podcast featured our interview with Leeward Investments CEO Todd Vingers on his firm’s successful management buyout from its parent company, LMCG. Leeward—a Boston-based US value equity manager with roughly $2.7 billion under management—was the value franchise within LMCG, a subsidiary of City National/RBC before Todd and his partners completed an MBO early last year.
Leeward’s successful MBO is one of a small number in recent years, and a potentially helpful example for others contemplating a similar move. Most would-be MBOs stall out, snagging on one gating issue or another. Often the management leaders don’t have the determination or capability to make it happen, or there isn’t a sufficiently cohesive group to establish a standalone business. Perhaps a price can’t be reached, or the parent is obstinate, or the clients’ business can’t be neatly carved out. There are myriad execution challenges and risks that might be too daunting for either side to accept. A lot has to go right.
So what did we learn from Leeward’s experience? There are a few takeaways worth keeping in mind.
1. It helps to have a willing seller. Threatening to walk out might bring a parent to the negotiating table, but it likely means high risk and scorched earth. The odds of a minimally disruptive negotiation are much higher if both parties see potential merit in a separation. In Leeward’s case, City National/RBC was looking to divest non-strategic assets. In others, there may be room for an ongoing relationship, perhaps managing parent assets or contracting parent resources. Thinking about benefits to the seller can be a good way to grease the wheels.
2. Price setting can take time. Often parties come to the negotiating table with unproductive expectations, and all kinds of biases are at play (self-serving, confirmation, anchoring, recency, etc.). Narrowing the bid/ask spread likely requires a cocktail of negotiation, education and patience (and perhaps, at times, an actual cocktail). We all want to make things happen and move forward, but in this context patience is an advantage. For Leeward, the steady drumbeat of interest combined with its solid investment and business performance allowed it to hang around the hoop until the conditions were right.
3. Perseverance matters. Not only can price setting take time, but there are likely to be myriad obstacles that get in the way. Perhaps a business setback, an uncooperative colleague, or a difficult negotiation. Todd didn’t share any major obstacles beyond price setting, but we’ve seen others run into roadblocks and quit trying and we’ve seen some with the fortitude to push through. Bottom line is if you don’t want it badly enough, you likely won’t get it.
4. Personnel continuity and full functional excellence is key. Whether it’s an MBO, a lift-out or a walk-out, odds of success highly correlate to keeping most or all of the key people and to having highly capable people in key roles. Too often we see investment teams or financial advisors attempt to peel off, with little regard for the other legs of the stool and proper infrastructure. Leeward was smart/lucky/both to have all the right people at their prior firm come along. No doubt this enhanced client confidence in the company’s ability to execute on its own, and getting out of the gate with the client base largely intact undoubtedly keeps them out of the penalty box and bolsters viability.
Every MBO is going to look different, but these are some of the basic principles underneath the successful ones. We’ll have another MBO example to share in the next How They Did It episode in March. In the meantime, let us know what you learned from the Leeward episode, or from your own experiences and observations. If you haven’t yet listened to our conversation with Todd Vingers, you can find it here.