CEO Co-Invest? An Analysis for Private Equity Leaders

HIGHLIGHTS

Some private equity funds offer co-investment opportunities to new portfolio company CEOs, other funds require it.

Aligned ownership, figuratively and literally, is key for private equity Boards and CEOs.

CEOs should use co-investment analysis as a proxy for whether or not they should join the company at all.

PRIVATE EQUITY ALIGNMENT

Private equity firms strive for alignment throughout their endeavors.

It’s a long held belief that portfolio company alignment can be achieved through management compensation packages that include an option/equity grant.  This strategy does create a certain level of alignment but at a relatively intellectual level.  Experience tells us that alignment is most powerful when it exists at both an intellectual, and at a deeply-rooted emotional level.

UNDERSTANDING THE PRIVATE EQUITY PERSPECTIVE

Private equity firms put their heart, soul and skin in the game by putting their own capital and the capital of their investors at risk on every deal.  The stakes don’t get much higher. The depth and intensity of a firm’s commitment is unflappable and all consuming.

THE CEO DISCONNECT – FOR THOSE WHO HESITATE TO CO-INVEST

CEOs accept a new position based upon a belief that an opportunity is worth changing the course of their career and often relocating (or spend significant time away from) their families.  So how can a CEO make such a significant professional and personal commitment and yet still hesitate to make the same financial commitment? 

A CEO who does not insist on co-investing may be suffering from a lack of true belief in the opportunity or in their own capabilities. Therefore, those not interested in co-investing may be unwise to accept the role under any circumstances.  Portfolio company CEO roles are difficult as it stands, that difficulty only increases if there is a question mark in about a CEO’s level of commitment and/or belief. CEOs anxious for alignment should insist on having the opportunity to co-invest to help forge a more meaningful partnership with their private equity Boards.  Investing also creates more wealth, taxed at capital gains, for the CEO.

CO-INVESTMENT AMOUNTS & TIMING

Co-investments should be a “personally meaningful” amount.  In general terms, a minimum of $100,000 is customary.  Target amounts between $250,000 and $500,000 are traditional.  Consider that a CEO is expected to deliver a 3X cash on cash return so co-investment can be an excellent wealth creation tool.  PE funds require that the CEO’s investment be made within 90 days of starting employment.

WHAT ABOUT PERSONAL LIQUIDITY CHALLENGES?

Many successful candidates are facing cash flow pressures such as college tuition and other expenses that impact liquidity.  In these and other cases, CEOs should investigate a self-directed IRA.  This tool will enable co-investment check to be written from a roll-over IRA without penalty.

ABOUT ROB HUXTABLE

Rob is a recognized expert on the topic of private equity CEO performance.  He is Founder & Principal of PrivateEquityCEO.com.  He is also Managing Partner of Integis which is the nation’s leading search firm focused exclusively on the private equity-backed, middle market.

Reach Rob here.

Written by Rob Huxtable

Rob is a recognized expert on the topic of private equity CEO performance and recruitment. He is Founder & Principal of PrivateEquityCEO.com. He is also Managing Partner of Integis which is the nation’s leading search firm focused exclusively on the private equity-backed, middle market.

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