Many executives think they’ve made it once they become CEO for a private equity portfolio company. About half are wrong: A Bain & Company analysis found PE firms ultimately replace nearly 50 percent of them.
What does it take to succeed? We asked 25 leaders at premier PE firms, including Bain Capital, The Carlyle Group and KKR, as well as 15 successful portfolio company CEOs. Their responses revealed six common myths that often plague new portfolio company CEOs — and how to overcome them.
Myth #1: Once you’ve seen one PE firm, you’ve seen them all
PE firms vary significantly in their operations and expectations, but many new CEOs mistakenly assume they all conform to a stereotypical profile. From communications cadence to the primacy of the playbook, it’s essential to proactively clarify your sponsor’s protocols.
Even more important: discerning the variance within firms stemming from the personal styles and motivations of deal team members. For example, an investor aiming for a promotion – or a comfortable retirement – may want to sell your company more quickly than their colleagues. As one CEO said, success involves not just maximizing enterprise value, but deftly juggling the agendas of the people in the room with a “massive amount of money” at stake.
To avoid crossed purposes, a CEO’s first job is gleaning key team data, including: Who has decision-making authority? Who handles the day-to-day? How many deals and exits has each person had? How are they compensated? What’s the pecking order?
Myth #2: A win is a win
CEOs who fail often have crisp definitions of success in their minds—they just don’t happen to be their investors’ definitions. Several PE leaders told us that it’s disappointingly common for CEOs to charge ahead without fully grasping why they invested.
To make wins matter, CEOs need a granular understanding of what the PE investors hope to achieve, and what measuring sticks they will use, including one-, two- and three-year milestones. To get there, some PE firms use strategy off-sites or brainstorming sessions that produce a detailed picture of an ideal exit in the form of a mock banker book, or hypothetical media coverage. If they don’t, the CEO should initiate the effort.
Myth #3: Active investor involvement = I’m failing
Most investors expect to be your first call when bad news occurs — then they want to trouble-shoot, tap networks, and help find solutions.
This level of intimacy can feel intimidating – but it’s not optional. Surprisingly, the best CEOs almost unanimously see it as a positive. One told us he learned more in two years working for PE investors than he did in his previous 19 years as a senior executive.
The challenge for a CEO: Ensure the firm you sign on with is one you want to learn from. Then, check your ego and don’t let their active involvement erode your self-confidence.
Myth #4: Existing team = acceptable team
Ninety-seven percent of our interviewees said “assessing and upgrading the executive team” was the CEO’s top priority in the first six months. Despite that clear mandate, most CEOs drag their feet, then wish they had moved faster.
In our experience, deciding who stays and who goes within three months (versus the typical 12- to 18-month span investors might accept) is ideal. That allows CEOs to capitalize on fresh perspective and accelerate the pace of cultural change.
How to make tough choices quickly and smartly? One-on-one interviews with direct reports that probe how well they (and other senior leaders) perform are essential within the first month – as is the courage to initiate tough-but-necessary conversations.
Myth #5: Get a few quick wins, then you can focus on the long term
The vaunted 100-day milestone means many CEOs start off sprinting. Investors’ advice? Resist the temptation to prove yourself with early points on the board. Quick wins were second-to-last on the priority list; most investors spurned “new sheriff in town” impulses to immediately shutter offices or product lines.
CEOs are more likely to impress PE investors if they realize they’re not solely measured on what they do in the first 100 days; they are measured on how aptly they focus the company on a short list of goals and tactics – and their results at the 12-, 24- and 36-month marks.
Myth #6: Don’t challenge investors until you’ve built a solid relationship with them
The deluge of advice from PE investors can turn new CEOs into order-takers. But investors quickly discount CEOs who fail to challenge them with thoughtful pushback. While CEOs must embrace investor involvement (see #3), those who always concede will be overwhelmed by a dizzying array of pet projects to implement.
While the level of desired independence varies by firm, the best CEOs quickly master the right balance between lapdog and lone wolf. (One investor’s idea of excellence: a CEO who took his advice only 25 percent of the time.)