Leveraging directors as deal sources: how Challenger Capital Group empowers its board to tee up M & A and private equity opportunities.

• Author: Stephens, Mark W.
• Position: BIG DEAL

WHILE THE ROLE of board members falls under increased responsibility in an era of greater transparency and accountability, it's the role of "active advisor" that financial institutions should seek out and leverage when it comes to deal sourcing, especially for the middle market.

In the highly competitive market of investment banks, private equity groups, venture capital firms, and other funding sources, a distinguished board, well-suited for a particular funding strategy, can differentiate a firm.

From identifying the most appropriate individuals for board seats to cultivating relationships with them, an active advisory board is clearly tied to the leadership and success of a firm.

For Challenger Capital Group, a regional investment bank that merged earlier this year with a private equity firm to bring a combined banking model to the South Central U.S., the corporate board of directors and the advisory board have been instrumental in steering the direction of its deals. So much so that every deal Challenger has completed has directly or indirectly resulted from a referral from a board member.

Relationship-based banking is a philosophy that serves middle-market clients well, and it's important for the board to have first-hand experience in working with these types of companies.

The deliberate selection of the board individuals, the structure of the board, and the identified roles of the members should not only complement the firm's transaction and/or investment sweet spot, but also contribute to and strengthen the firm's strategy.

Consider the following factors to assemble an additional "deal-sourcing" board team for your firm.

An Equity Stake

Structure the board seats as capital investors in the company, rather than investors in a specific transaction. This unique investment opportunity creates greater incentive to see the firm succeed on an ongoing basis and lends itself to more thoughtful advice on transactions and investment decisions. In addition, for board members, their investment speaks volumes for the firm's credibility when speaking of their involvement with the firm, and takes networking to the next level of actual deal sourcing.

Trusted Advisor

A board member's monetary interest in a firm also creates an additional checks-and-balances system when it comes to reviewing prospective deals. If a board member raises a concern on a heads-up basis, this is a sign for the principals to re-evaluate the deal or dig a little deeper to learn...