Division presidents of large, multinational companies aspire to CEO roles. These executives often see private equity as a compelling career path, complete with autonomy, the opportunity to prove their leadership and a chance to create significant value and wealth. Private equity firms are attracted to the leadership, training and track record of these executives, but view them with skepticism. To further explore the concept of first-time CEO readiness in a private equity environment, we spoke with portfolio company CEOs and private equity partners about key success factors. While firms have different strategies and philosophies, we found common ground on four broad themes:
- Doing more with less
- Investing in the right team — early
- Working with the board
- Finding the right CFO
Executives with leadership experience at large companies bring a depth of industry and customer knowledge, leadership training and understanding of core business and branding principles, all of which are transferable to a portfolio company CEO role. Despite these strengths, excelling as the president of a $2 billion division of a public company does not automatically prepare an executive to run a $250 million portfolio company. The CEO has to know how to expand the business, and become the primary business developer. In addition to driving strategic plans, the CEO must motivate the organization to achieve short-term results through balancing disciplined cash management and making progress on the priorities that build long-term value.
Executives from a corporate background also have to adjust to a different pace. A division head focused on achieving 2 -or 3-percent growth while managing costs suddenly faces the expectation that he will double the size of the business in three to five years. Private equity partners also look for tolerance for change, especially experience moving from a “big” environment to a “small” environment, where results have to be achieved without extensive resources.
Success in private equity requires a small, talented and highly focused team supporting the CEO. Building the right team early in the investment lifecycle is a lesson many experienced private equity CEOs said they learned the hard way.
Paul Nardone, an operating partner with Sherbrooke Capital who successfully scaled and sold three private equity portfolio companies, said he learned from experience. “I initially thought too frugally and too narrowly about the kinds of people that I recruited for my management team; I was thinking like a boot-strap entrepreneur, trying to stretch directors into VPs, and I learned a lesson. Some just couldn’t keep pace with the business, and some didn’t meet the requirements of our private equity investor.”
Be aggressive in stepping up the quality of talent in advance of growth, and be willing to over-hire for critical roles based on the intended end game, experienced CEOs recommend. Like the CEO, executives in a portfolio company have to be willing to be “doers” and not just leaders.
How to work with and leverage the board of directors was a universal theme discussed among CEOs and private equity partners. While they may have interacted with boards in prior roles, reporting to and working with a private equity board requires development of an entirely new set of “muscles” for most first-time CEOs. Several financial sponsors said that, either through lack of confidence or over-confidence, first-time CEOs felt the need to bring fully developed plans and presentations to the board — rather than engaging directors on key strategic and operational issues. The best CEOs are comfortable with a give-and-take with the board and investors, and treat them as partners in the business.
A clearly articulated strategic plan helps build and maintain alignment between the CEO and the investors. This plan was described as helping to provide a “True North” for where the CEO and board want to take the business. The cadence and content of communication between a CEO and board varied, but generally speaking in addition to standard weekly calls and quarterly reporting and meetings, several CEOs reported having near-daily conversations with the lead sponsor on topics ranging from M&A, cash flow, business performance and longer-term capital expenditures. Investors expect the CEO to map out a calendar of topics to be reviewed at board meetings, well in advance. These topics should match the cycles of the business .
The portfolio company CFO is a partner to and proxy for the CEO and a bridge from the business to the private equity firm. The CFO has to speak the language of the investors and be aligned completely with the CEO. While the specific capabilities a company needs in its CFO will vary depending on the strengths, weaknesses, size and complexity of the business, a portfolio company CFO has to have exceptional technical finance skills, a willingness to dive into the details and strong communication skills. The CFO is probably the most important position other than the CEO. The CEO needs a CFO who is completely open and transparent and not only understands numbers but can be part of the strategic brain trust.
First-time portfolio company CEOs, particularly those from the corporate world, can get a slower start with their first private equity assignment if they are not aware of and focused on important differences in leadership and communication requirements. Managing in a high-intensity environment requires skills that are not necessarily developed in a corporate setting. First-time CEOs also must get comfortable with the financial sponsor as a partner in the business.
Five things CEOs wished they knew before their first portfolio company role
- Understanding how private equity works. The fundamentals of how a fund raises money, its inner workings and hierarchy, and its politics all can affect how the firm interacts with your business.
- Understanding how the private equity sponsor will interact with the business. Experienced CEOs said working with private equity is much easier when you know the players in the firm and how they interact with the company.
- The depth and quality of people is almost always different. Recognize and address gaps in capabilities and processes early on, based on the strategy and exit plan for the business.
- Managing expectations. Don’t be overly optimistic about the time frame for turning around the business. As one CEO cautioned, “If you say it’s going to take three to five years to turn around the business, and it gets done in three-and-a-half years, you’re a hero. If you say it’s going to take two or three years, and you get it done in three-and-a-half, you’re in trouble.”
- It’s OK to say you don’t have all the answers. Most first-time portfolio company CEOs are reluctant to admit that they don’t have the solution to every problem, but CEOs who have been through the process say they learned to engage the board on the toughest challenges.