The private-equity market has been white hot, with an unprecedented volume of deals and stratospheric valuations that have transformed PE-run companies into a powerful collective force driving the U.S. economy—about 6.5 percent of GDP in 2020, according to EY. What investors and the CEOs working for them want to do now is extend this phenomenon—and not get burned.
“In many ways, private equity has become an alternate channel to older, publicly held companies and has grown and grown over the years,” said Fred Hassan, a director of Warburg Pincus, former chairman and CEO of Schering-Plough, and a master of the practice of PE. “There’s even a debate whether PE produces better returns, but clearly it strives to be a high performer now with a much greater degree of accountability.”
For example, Kiley Wright-Ford turned the Reputation Institute around over the last three years under PE firm Catalyst Investors, transforming the business model, launching multiple patents, doubling the growth rate, adding many clients and rebranding the company as RepTrack.
Hassan and Wright-Ford recently addressed CEOs from across private equity at Chief Executive’s PE-Backed CEO Summit in New York City, joining other speakers in sharing insights and answering questions about how chiefs can improve the art and science of running a company owned by PE investors.
Here’s some of what they said:
COMPENSATING IN COMPENSATION
The continuing PE boom, a talent crunch at the top, economic stresses and other factors are roiling compensation for CEOs at PE-backed companies. Ryan Harvey, co-managing partner of Meridian Compensation Partners, offered advice for a couple of areas in which the market is changing:
Transition to an IPO: “This is an area that’s gotten a lot of attention in the last couple of years because there’s been such a hot market for IPOs and SPACs. Once a company gets closer to an IPO, they have to think through the governance structure, including stricter compensation-committee rules.
“The biggest design issue is the equity plan. The big change as a public company is that it will start granting equity every year for at least some group of employees. So who will participate in the new plan? When do the grants start? What is the design and size?”
Cash is king: “There had been a willingness for [CEOs of PE-backed concerns] to take less cash. But now the pressure is there where firms are having to pay market-level cash compensation just to get talent in the door, in addition to the equity opportunity.”
LESSONS FROM A DEAN OF VALUE CREATION
Fred Hassan spent most of his career building tremendous value at publicly held pharmaceutical companies including Schering-Plough, Pharmacia and Wyeth, then took his accumulated wisdom into the PE world as a director of Warburg-Pincus, one of the world’s largest PE firms.
In a wide-ranging interview on stage, he delivered gut-level advice to the CEOs and plain talk on the status and future of private equity:
• The CEO’s role: “Get to the hearts and minds [of employees]—that’s ‘heart’ with a capital ‘H.’ Show them you’re an authentic leader, even if they don’t report to you.
“As an insider, your ultimate loyalty is to shareholders: You’re their ambassador to get the most value, and they put their trust in you. That’s the basic duty of loyalty you have, which means that any asset is essentially for sale if someone comes in with the right value for it, because that’s what shareholders would want you to do…
“What is it in the PE context that separates truly great from just good CEOs? In private equity, it’s urgency, decision and action. It’s easy to get caught up in big analyses and strategy sessions and brainstorming sessions, but PE CEOs distinguish themselves by having a sense of urgency and passing it around to people around them.”
• The expectations game: “CEOs by nature tend to be optimists. [But] PE investors most likely have paid a premium to get the assets, and it’s important to manage that very carefully. Be blunt about what the real number looks like, but [say] that you’re stretching for a certain number. Make them understand that with authenticity and trust so that they believe you.
“But explain why there might be a stretch, why there might even be a downside. The probabilities. And give them the ‘why’ so they trust you more. It’s amazing how much can be unleashed if you do the right things in the first and second year as opposed to short-terming it too much…
“And as you explain to [potential buyers] about the journey, tell them the original dream and all the difficult times you’ve encountered [and] about the ‘eureka’ moments. Explain how this [company] will become an even better asset down the road, in theirs or someone else’s hands. That’s how you get the very elegant multiple you’re looking for.”
• The primacy of customers: “How do you keep maximizing value? Have an intense focus on customers, because customer intimacy is the real thing for next-generation CEOs. And remember that customers can change too…
“If you’re a contract-based company, you want customers to become good references for you too. CEOs should take a lot of interest. You want them back, and you want them saying good things to others.
“Relating to CEOs can be a huge help [with customers]. Find ways to be in touch—whatever works.”
• The first 100 days: “Certainly, let investors know you’re in charge; calm things down. But don’t create a sense of false expectations. Listen and learn and understand what the problem is. Spent time with people, and not just with direct reports.
“Patterns will start to emerge. Also, survey people: How do they see the world? Can they win? Is it safe to speak up? Simple questions. It’s surprising what you’ll learn. For instance, if people are afraid to speak up, how are you going to win as a company?
“Share the information with those who are watching you, especially the board. When they bring CEOs in, board members often have their own solutions in mind. Many of them are ex-CEOs and think they can solve the problem very quickly. Show them the true picture.”
HARNESS THE POWER OF PRICING
Many CEOs held the line on prices during the low-inflation environment that prevailed. But in today’s inflationary times, they need to learn—or relearn—how best to boost prices.
Brad Soper, a partner in the consulting firm Simon-Kucher & Partners, shared pointers for today’s new era of pricing:
• Get what you deserve: CEOs grew accustomed to throwing in goodies—improved customer service, IP in products and so on—for nothing. “There’s a lot that you and your companies do every day to deliver better value, but when you think about the trade-off, the value capture, the money you keep at the end of the day—is that balance right?”
• Harvest what you post: Even when they increase prices, Soper said, “companies aren’t very good at getting” the hikes. Surveys have shown two-thirds “don’t even achieve half of the price increase they went after. They might not have lost volume, but in a world of inflation of four to five percent, you have to shoot for [price increases] of eight to ten percent if you really need three percent.”
• Make pricing a priority: “You can actually get ahead of this. Prepare, communicate price increases and monitor them in the background. Provide incentives to go after them… If it isn’t the topic of regular executive meetings, and a standalone topic, you’re not focusing on the right things.”
• Try these tactics: Target certain “customer groups and product categories” first. Start “inserting annual price escalators, or adjust prices in new contracts.” And “create a shiny new object, sunset the old one and force migration to the new one.”
MANNA PRO: FEEDING SUCCESS
Manna Pro makes food and treats for animals ranging from dogs and cats to backyard chickens, and its sales exploded during the pandemic under the ownership of PE giant Carlyle Group, which purchased Manna Pro in turn from PE leader Morgan Stanley Capital Partners in late 2020.
John Howe, CEO of the St. Louis-based outfit with about $70 million in annual EBITDA, explained his seven-pronged program for success:
• Root your culture in values: Also, “connect those values to the company’s greater mission and vision,” he said. “And connect those tasks you’re doing every day in a way that’s consistent.” Manna Pro’s culture, Howe said, “is the primary reason PE firms want to partner with us.”
• Emphasize urgency and value creation: “Time is of the essence in a PE-backed environment. You need to constantly prioritize and push hard to make big opportunities happen as soon as possible. Make it part of your culture.”
• Align PE and the company: “What’s good for the PE group must also be good for employees in the company. At the beginning of the relationship, codify [alignment] in various agreements.”
• Make more people owners: Expanding stock options “can be very effective to drive alignment and enterprisewide thinking,” Howe said. “It gets people focused on the goal at hand.”
• Collaborate on the vision: Get employees on the same page with management about “how the company gets from where they are to an aspirational vision of three to five years from now,” he said. “There should be clarity around these initiatives.”
• Encourage owners to embrace the culture: “Demystify” PE owners and employees to one another. “Maybe the PE team even can be a culture carrier in its own right and with the same words that the leadership team tries to communicate,” Howe said.
TALENT ON TOP
Ted Bililies, chief talent officer of AlixPartners, urged PE CEOs to keep talent at the top of their management agenda. “Growth is No. 1 for you, but talent is No. 2, No. 3 and No. 4,’ he said. “To grow, you need talent.” His advice:
Prioritize culture: “I remember when PE was just financial transactions; then operational improvements; now, it’s how we harness the human capital to create value, and that becomes the value-creation lever…
“It’s on the CEO’s shoulders that you need to connect what the employee does and how they connect to a greater purpose and mission. [Because] connecting a job or a business to a higher mission is now table stakes…”
Appeal to younger generations: Millennials and Gen Z members comprise 46 percent of the U.S. working population, and “they’re not going to respond to traditional leadership styles,” Bililies said. “They want an emphasis on diversity and inclusiveness. They want to know that CEOs and leaders are paying attention to ESG issues.”
Consider a style shift: “As organizations become flatter, and the command-and-control CEO is yesterday’s news, they need to be able to persuade and make their case with a growing number of stakeholder groups. And do that with an abundance of feedback.”