Perhaps the greatest determinant of success in the role of PE CEO is the ability to honestly self-evaluate and approach the opportunity with a cool head. “It always sounds so enticing when someone says we have this company, and we just invested and it’s going to be three years of growth and a great payout—it all sounds great,” says Lenny Castiglione, CEO of PE-owned OB Hospitalist Group. To evaluate the deal, he adds, “You have to take emotion out of it.”
To begin the self-assessment, consider the following questions to help you determine whether running a PE portfolio company should be your next act.
Can you be satisfied executing your sponsor’s strategy?
In most cases, PE investors have an investment thesis that plots the path from point A to point B, and need a good steward to take the company there. “The exit strategy has been baked into the deal,” says Matt Brubaker, CEO of FMG Leading, a strategy and human capital advisory firm, and operating partner at WindRose Health Investors, a New York-based private equity firm. “So you’re not really formulating a strategy, in the traditional sense. If you have a deep appetite to do that, it would be very frustrating.”
He adds that the CEO does have to be strategic about how to get there. But at the end of the day, if your view conflicts with your investor’s view, you’re probably not going to win—and even if you do, it won’t be worth the fight. “If all your energy is spent trying to convince the investor they’re wrong, you just end up out there tilting against the machine, instead of fixing the fundamentals, which is ultimately what they hired you for.” Soon enough, you’ll be gone.
The “my way or the highway” modus operandi won’t be true of every PE company, says Castiglione, whose company was owned by Ares Capital until it was purchased last year by Gryphon Investors. “The smart PE firms realize they have a ton of financial technical expertise, that’s what they know how to do. But they don’t know how to do operations or strategy or human capital,” he says. “The good ones hire CEOs who know how to do that.”
He adds that the key is to know what is expected going in—where their role ends and yours begins—so you can be realistic about what you’ll be satisfied with.
Can you cope with being “micromanaged”?
This depends both on the individual PE firm’s style and your own perspective, as one CEO’s micromanagement is another’s collaboration. In almost all cases, you will have a lot more interaction with your board as a PE CEO than you did with even the most involved public company board. “If you’re super collaborative that can be a lot of fun,” says Brubaker, “but if you’re testy that can be a real challenge.”
Lorelli says the level of micromanagement will depend on the PE firm. “There are all kinds of PE firms. Some are very empowering and some are micromanagers. I personally don’t do well when I’m being micromanaged. If you’re going to make me CEO and you hire me to do the shoveling, then get out of my way and let me finish shoveling.”
At the same time, the PE firm lives and dies by its track record with investors and it has to return that value or it will have a hard time raising the next fund, says Lorelli. A little micromanagement isn’t out of line. “They’re mindful of their scorecard, what their internal rate of return is, because people are going to be looking at them vs. the IRR of other private equity funds,” he says. “At the end of the day, the PE company owns the business and they have more electoral votes than you do. You have to be comfortable sharing your pillow or it won’t be a good marriage.”
Castiglione recommends speaking to at least five CEOs who have worked for the PE firm you’re considering to get a picture of how heavy handed your new partner may be. At the same time, be realistic about the level of communication required. Castiglione holds monthly financial meetings and quarterly board meetings, but he speaks to his PE partners and board weekly. “That’s not just because they demand it, but because they’re capable of giving great advice and input,” he says. It also helps set expectations and ensure his investors won’t be surprised by anything that comes up. “That’s just what you do with good business partners—you engage with them,” he says. “Nobody likes surprises.”
Can you make decisions at warp speed?
This won’t be unfamiliar territory to any CEO, but particularly for PE companies, which have promised a given return on a specific timeline, the wins need to come swiftly. There is precious little time to waste on strategies that aren’t working or people who aren’t working out. Firing fast isn’t easy for anyone. A study of more than 3,000 CEO and C-Suite members by ghSmart and the University of Chicago found that 43 percent of CEO candidates had a repeated pattern of either hiring poorly or not removing underperformers quickly enough.