Both private equity-backed and publicly traded CEO roles are challenging – but in different ways.
Public companies place far greater demands on a CEO’s ability to manage investors, to deal with a large Board and set company strategy.
However and by comparison, the intensity of a smaller but hyper-focused, urgent and intensely rigorous Board makes private equity CEO roles more challenging.
PRIVATE EQUITY BOARDS
I’m not suggesting that private equity governance is superior to public company governance. However, I am suggesting that private equity governance is far more rigorous on the CEO.
Private equity Boards are usually no more than 5 to 7 members, none of whom are typically appointed by the CEO. PE Boards include 2-4 members from the private equity firm(s) and 1 to 3 outside Directors.
In a private equity setting the CEO is almost never the Chair. That role typically goes to the lead deal partner, an operating partner or an outside Director. In many cases a private equity Board chair is an Executive Chairman placing even more operating pressure on the CEO. In private equity, the CEO isn’t merely governed by the Board but often “directed” at a certain level. The bottom line is that in private equity, the CEO serves the Board and not the other way around.
Private equity CEOs must focus a majority of their efforts on driving execution. Although they are collaborative with the CEO, company strategy is primarily set or heavily influenced by private equity Boards. This reality places significant pressure on a private equity CEO’s ability to execute. The hands-on pressure to execute is relentless and runs the gamut from growth, to Lean, to M&A integration.
Private equity Boards represent the single majority owners of the company – the fund. Each private equity Board member, particularly those employed by the fund, have significant financial and professional skin in the game. Their personal wealth and ability to raise future funds hinge on portfolio company results. This reality focuses their intention squarely on company and, yes, CEO performance.
EBITDA is the most important measure of private equity CEO performance. Growth also matters. If a private equity CEO goes 6+ quarters with flat EBITDA and revenue performance they will likely be dismissed. Public CEOs operate with a relatively longer leash. Private equity firms need to drive their returns during a finite hold period targeted at 4-5 years in order to maximize their IRR metric.
Private equity Boards typically use twice the leverage of publicly traded companies placing additional cash flow and covenant pressures on the CEO.
Outside Director Compensation
Public Board members are compensated with competitive cash and equity packages. Outside Board Directors in a private equity deal receive modest cash compensation, some equity compensation and are usually required to invest personal funds in the company. This skin in the game helps drives the rigor of private equity Boards.
Public company CEOs often receive equity compensation in the form of annual restricted stock grants. If the company’s shares remain flat over 5 years the CEO will still retain fairly significant equity compensation even if she/he is dismissed. Under the same scenario, the private equity CEO’s equity value would be worth nothing since PE almost exclusively uses options as the equity component.
Public CEO roles are no-doubt challenging. But the vigorous governance of private equity Boards creates a relatively more challenging environment for those CEOs. The greater degree of difficulty in private equity usually comes with greater financial upside for those CEOs who can deliver.
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.