James Wheeler of PILOTpartners draws breath after a really busy 2011 and not enough time for proper holidays to reflect on the past 12 months in the market and to look ahead to 2012 with a smile on his face...

Pilot's Log does not normally engage in actively promoting its sponsor PILOTpartners, however in 2011 there have been sufficient major issues affecting the market for our services which we would like to share with readers of Pilot's Log.

Most commentators in our markets will preface any crystal ball gazing for 2012 with caveats about Eurozone uncertainty, interest rates, valuation levels and any shifts in banks' lending policies for both good and bad situations in large businesses and SME's. As far as we are concerned there are no shortages of serious talent available to fix underperformance and change. Day rates are stable. No problems delivering strong shortlists very quickly either for UK or international appointments. The story of 2011 for us in a stagnant business environment was about stakeholders being reluctant to commit to necessary management change or high levels of board support - in spite of recognising the urgent need for doing so.

Paradoxically in 2011 the Pilot team was exceptionally busy... often for insufficient reward, but demonstrating that there has been – and will continue to be - a powerful need for specialist executive expertise in all manner of stakeholders' situations. 2012 will probably be much the same...fine by us – provided real action is taken. The early signs are encouraging.

It is interesting to note (and I am happy to disclose) that Pilot's assignment volumes over the past three years has grown each year, albeit by single digit percentages...better than most peoples' stories post Lehmann. Will this minimal growth continue into 2012?

Sector Review 2011

What can we learn from a summary of PILOTpartners' 2011 sector and geographic activity on all mandated assignments ?

Some market pointers

• What can we learn from a summary of PILOTpartners' 2011 sector and geographic activity on all mandated assignments ? More than 50% of international activity was outside Western Europe for the first time, with our main focus on the Far East and the emerging markets. We are convinced that in 2012 the international operations of assets held in the UK and USA will be a very important source of work for PILOTpartners.
  
  Our international partner firms share this view and are geared up for this key market shift. We therefore believe that we are in the strongest possible position to support management change across all borders. Early indicators have uncovered opportunities especially in the Far East, Turkey and the former Soviet bloc. The predominant requirements are for significant improvements in financial management and corporate governance...sometimes these will prove to be tough mandates...
• Usually our clients seek idealistic solutions for interim executives with the perfect blend of country experience, functional expertise and sector know-how. If this can be achieved then everyone is happy superficially. However we usually find that by sensitively over-recruiting for a given position an absence of, for example, knowledge of a specific sector, is really not significant...country knowledge and functional excellence are always the critical issues to address.
• Considerable reduction in investment interest in early stage due diligence mandates in healthcare will continue in 2012.
• Retail / consumer interest has been limited to restructuring and crisis scenarios in the main. It is already clear that this is likely to be a major feature of 2012 activity.
• The leisure / hospitality sector is in disarray. In Q1we are engaged in supporting investors with an interest in acquiring these assets and finding interim & NED management teams. Restaurants, pubs & clubs also fit into this scenario.
• Distressed investors have been keen to pursue businesses with hard assets – hence the uptick in manufacturing & especially companies in specialist hi-tech areas.
• There are early indications of an upturn in activity in the professional services sector (law firms, architects and boutique funds) – again primarily in the distressed arena where the outcome is likely to be a merger to preserve value, client goodwill, WIP etc

Pointers for change by practice area in 2012

Private Equity Practice Michael Gebauer E. m.gebauer@pilotpartners.eu T. +44 (0)783 423 5458 But this will be set against a backdrop of: A paucity of new deals in UK compared to the recent upward trends in Europe and elsewhere; Hiring fewer permanent executives into portfolios as quality levels dry up in favour of top level independents; Difficulties sustaining growth in portfolios engaged in the public sector supply chain. And if this goes on for much longer Michael will need to hire a new partner... We anticipate the 2012 PE marketplace delivering further opportunities in line with the developments we have successfully started in 2011 or earlier: Increases in commercial due diligence and sector advisory, including the hiring of operating partners to support portfolios; Deal origination through both direct intervention, the influence of our Chairman & Non Executive Practice and running sector specific focused events for clients; Turnarounds in international operations of businesses headquartered in UK

Chairman & Non Executive Practice - 'CANE'

John Gerry
E. j.gerry@pilotpartners.eu
T. +44 (0)777 485 0508

In 2011 we invested many man hours talking to busy, successful chairmen and NED's of private equity backed business and AIM companies who need specific support delivering change programmes in their portfolio businesses as well as resolving governance issues. These two facets of the CANE practice have enabled us to improve our capability in two key areas for our clients in 2012:

• Introducing Chairmen to clients for the purpose of deal origination, usually sector specific opportunities, and
• Organising sponsored in-house events with guest speakers and MBI dinners for private equity investors keen on either adding to their sectoral Chairmen databases or wanting to attract sector expertise in anticipation of new sector focused deals.

2011 witnessed a number of boardroom changes for Chairmen and NED's who had passed their sell by dates.... deals done in better years coming home to roost now that market conditions have changed materially, but where boards may not have been agile or alert enough to develop strategies for the rapid shifts in their markets.

Chairmen hired 4-5 years ago for their sector know-how have been found wanting when it comes to resetting strategies and changing management teams set in their ways. CANE has been kept busy...

2012 will see much of the same...

Turnaround & Restructuring Practice

James Wheeler
E. j.wheeler@pilotpartners.eu
T. +44 (0)780 859 0176

My biggest frustration in 2011 was not so much banks' lending policies and unwillingness to crystallise losses – no changes there - but rather seeing their restructuring departments too often appointing the wrong executives, particularly into Chairman, CRO and CFO positions. Being necessarily risk averse it is not surprising that they tend to offer work to those who have done work for them before – 'the people we know'. That's fine as far as it goes, but they have been ignoring – and they publicly admit it – the deal critical, better qualified and customer specific talent which is available in the market. And the losers are the businesses they have lent to, the jobs at risk and of course my blood pressure!

In 2012 wiser heads than mine are saying that the valuation gap between banks' expectations and investors' reality will narrow considerably thus enabling more distressed deals to go through without recourse to internal debt for equity deals which probably merely prolong the agony. Good news for us as this always involves major management change...

More top talent will emerge in the market to take on 'plural appointments' i.e. NED and one-off advisory tasks in the absence of full fat, full time turnarounds.

Every task I take on involves a lot of background work and hours chasing down the right talent available for the specific job...there being only so many hours in the day, I too need to hire a new partner in this practice. Names on a postcard please...

International Markets

The die is now cast...we predict 2012 will see more activity for us outside UK than in it. Most of our clients have investments, subsidiaries/operations and potential new deals in international markets. And the currency, global and political turmoil of 2011 will only exacerbate this.

So it's a good job that at PILOTpartners we are ready for these challenges, both from within our own resources as well as through the expertise of our international partners and associates around the world who report very similar market changes in their patches.

Interestingly in the USA, where of course all good ideas happen sooner (according to Michael), the impact of the branded social networks which had decimated the executive search industry has now come home to roost...although undoubtedly cheaper, the quality of outcome has proved to be shockingly poor. Back to basics then. The power of the strongest human driven networks will out. More good work for us.

Rates & Rewards

Difficult times have a habit of bringing some sense to reward and remuneration...

There had been an inflationary hike in day rates for senior interim executives in the heyday of 2006-2008, largely as a result of silly money being spent by Government on projects which have subsequently been seen as of dubious value and often a waste of public money.

No more...day rates stabilised in 2011 – in reality neither upwards nor downwards, but with many appointments made on the basis of success fees or other milestone payments... in other words performance related value for money, with PILOTpartners only too happy to participate...