Ben Breier never expected to be running a company backed by private equity. In 2014, he became CEO of public company Kindred Healthcare just as it was completing a $1.8 billion hostile takeover of home health provider Gentiva. He helmed a successful merger that included finding $100 million in synergies while retaining 99 percent of the Gentiva team, then went on to deliver year-over-year growth and a spot on Fortune’s list of “Most Admired Companies” every year. Yet, the stock price remained volatile, slumping from a high of $25 in 2014 to around $11 by mid-2016.
“After the Gentiva deal, we were suffering from several years’ worth of reimbursement and regulatory changes in other parts of the business,” says Breier. “That had done some real damage to our earnings and had driven leverage higher than what we expected or wanted. Our balance sheet needed to be reworked.”
Enter private equity. Approached by a PE firm in 2016, Kindred’s board opted to initiate a competitive bid process. The result was a complex hybrid deal in which TPG Capital, Welsh, Carson, Anderson & Stowe and insurance company Humana teamed up to buy Kindred, breaking it up into two companies, one spun off and owned by Humana and the other owned by the private equity firms and run by Breier. It took nearly 18 months to hammer out, but the deal to take Kindred private was finally done in December of last year. “I like to say it was partly inspiration, partly desperation and a lot of perspiration until we finally got there,” says Breier.
While due diligence was thorough and Kindred’s shareholders agreed the $810 million deal seemed right, Breier, as a public company CEO who had never led a PE portfolio company, had his own trepidation about the new structure. “You have people putting in a significant amount of capital and they have a determination around wanting to get returns on that invested capital. I’m not sure it’s better or worse, but it’s different.” He knows the pressure to deliver will be considerable and, with a new kind of owner, the future unknown. “It’s the proverbial devil you don’t know,” he says.
A Short Shelf Life
Breier’s concerns aren’t exactly unfounded. Turnover among private equity CEOs is notoriously high. According to AlixPartners’ 2017 Annual Private Equity Survey, 73 percent of CEOs are replaced during the investment lifecycle and 58 percent are gone within two years. Even CEOs brought in by the PE firm don’t have an especially long shelf life. “The hard fact is that, half the time, when we do change the CEO, nine months later that person is not standing,” says Mike Lorelli, operating partner for mid-level private equity firm Falconhead Capital. “Those statistics frighten off some people, but that’s probably a good thing because the people who are scared off are probably not right for the job.”
“I’m not sure it’s better or worse, but it’s different.It’s the proverbial devil you don’t know.”
Ben Breier, CEO Kindred Healthcare
In an effort to figure out what makes a successful PE CEO candidate, search firm Russell Reynolds analyzed 75 PE buyouts to identify the characteristics shared by both the most successful and the least successful CEOs. For starters, while industry experience was key, PE experience mattered a lot less than one might think: of the top 25, only one CEO had led a portfolio company before. “So you look at background and you can see from the data that the successful ones have a long track record in the industry. They’ve had P&L in the industry. They’re more focused on high-growth and less on cost takeout,” says Mark Adams, a consultant who works with Russell Reynolds’ board & CEO advisory group, as well as the private equity and global insurance practices.
But while there are some hard commonalities, a lot of the differentiators relate to style—good communication and collaborative skills, an “even-keeled demeanor,” the tendency to be “humble” and the ability to empower others. Lorelli, who has run four PE portfolio companies, adds that there is a big demand for leaders with traditional CEO backgrounds “because they know when it’s done right, when it’s done with precision, when it’s done to huge scale.”