Key Considerations for CEOs Joining a Newly-Backed, Private Equity Portfolio Company

HIGHLIGHTS

All private equity-backed CEO roles are difficult.


However, joining a newly-backed company at acquisition presents a unique challenge for CEOs.


5 Areas of focus can help ensure a win for the CEO and her/his sponsor


OVERVIEW

Accepting a CEO role in the earliest days of a newly-backed, private equity investment has unique challenges.  In order to succeed, these private equity CEOs must perform at an elite level throughout the hold period.  However, early days are particularly critical.

BACKDROP

CEOs must bear in mind the a vast majority of first-time private equity-backed deals are companies that were built from the ground up by a passionate founder.  The task of moving at private equity speed while replacing a founder and professionalizing a portfolio company is an intricate challenge that will test any CEO.

INERTIA

CEOs must take in to account that a new private equity investment will be facing several built-in challenges:

  1. The company will have likely taken its eye off of the ball as the result of going through an exhaustive, roughly 9-month sale process.
  2. Any equity holders in the company will have been enriched in the liquidity event. Even though they will have rolled over a portion of their equity check, their new bank balances may change their psychology in challenging ways.
  3. Upon acquisition, the private equity firm will launch a 100-day plan adding a wave of consultants, initiatives and plans. This burden will fall upon an already distracted business and somewhat fatigued team.
  4. New private equity investments often lack the scalable processes and high horsepower teams needed to drive growth.
  5. The business will be in unchartered territory and moving forward at an accelerating rate. CEO leadership will be at an absolute premium.

KEYS FOR CEOs OF NEWLY BACKED DEALS

CEOs can benefit from moving quickly while paying particular attention to the following:

  1. CEOs must strike a winning cultural balance ASAP. The right approach fully appreciates the hard work and values of the companies past, and, sets a new standard of pace and accountability for the future.
  2. Focus hard on growth right away. Based on today’s overheated multiples, the private equity sponsor will have paid a full-price or even overpaid.  CEOs need to grow the company faster than it was growing prior to the acquisition in order to adjust the purchase multiple in favor of themselves and the investors.
  3. Pay close attention to the team’s psychology and their views of a new boss. CEOs must ensure the entire team is aligned and hungry regardless of any liquidity event.
  4. CEOs should quickly assess the company’s senior talent with an eye toward quickly developing and/or building a high performance team.
  5. CEOs must install the processes and infrastructure to create a true platform that is capable of scale and integrating acquisitions.

SUMMARY

Newly backed companies are a uniquely rewarding and challenging scenario for private equity CEOs.  However, they require special skills, focus and attention in order to set the company on a winning trajectory.  And while the entire hold period is critical, early days are especially important…even more so than a typical private equity-backed deal.

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.