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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.

The 5 Keys to a Winning Strategic Plan for Portfolio Company CEOs and their Private Equity Sponsors

Guest Blogger – Eddie Binder

Eddie operates Apex Growth Strategies (www.apexgrowth.com), a consulting firm which provides strategic planning to the portfolio companies of private equity firms. In addition to completing strategic plans for more than 100 companies, he sits on the Board of two PE-owned companies.  He can be reached at ebinder@apexgrowth.com.

Highlights

Real value is created by achieving scalable growth during the hold period – and – building a model such that the next investor can clearly see significant growth during their investment


Understanding your private equity investor is an important key to success … seems obvious enough


To achieve meaningful growth, look five years out and work back to today … working from today forward will yield incremental thinking


Ideas are usually not the problem … determining what will NOT be pursued can create as much value as those strategies you WILL execute


Ensuring the back-end of the business efficiently and effectively scales with the projected growth can be the difference between a good exit and a great one


Concepts for Your Consideration

Strategic planning.  In the case of private equity ownership, I would argue the need for a clear, actionable plan is a key success factor.  At the risk of appearing self-serving, I will offer insights which just might help you think differently about strategic planning in a private equity environment.

As we all know, the typical hold period for a private equity firm is five years; sometimes, it can be shorter or longer, but let’s use five years as our starting point.  When the goal is to more than 2X revenue and grow EBITDA and EBITDA Margin even faster in a five-year period, time matters.  Here’s a simple construct … one year equals 20% of the hold period, two years is 40%, etc.  So, the faster, you can identify and align your organization and Board against the drivers of value creation, the better.  Five years will go by very quickly.  With all of this as context, here are the five keys to a winning strategic plan:

  1. The key to real value creation is building and executing a plan that supports long-term growth. Yes, doubling revenue and EBITDA during the hold period will result in strong returns for all key stakeholders.  However, the truly excellent returns come when the next investor can see their way to doubling the business under their ownership.  The world of private equity means there is going to be an event, but those companies that build their models to achieve both intermediate and longer term objectives realize the greatest returns.
  2. With a wink to all my private equity friends, here is a summary of their outlook for their portfolio companies … “We love your business you have achieved so much there is so much potential ahead we are prepared to invest to support growth over time will you make the month?” Yes, this is purposefully stated in one sentence without punctuation, but there is truth here.  Within private equity ownership, it is important for management teams to deliver immediate-term targets as the foundation for earning the investment and confidence to take on longer term value creating initiatives.  Said differently, the private equity game is always easier played from in front (of budget) than behind.  Yet, the longer term is critical, too. This takes planning that strikes the right balance.
  3. In this macro environment, where many markets are mature and/or feature multiple competitors, delivering in-year targets is no small achievement. However, when it comes to strategic planning, the greatest success comes from putting aside today’s view of the business, envisioning the next management presentations and outlining the story to be told that demonstrates how the past years’ results were generated and scaled and how the path to future growth is clear.  Simply stated, look five years out and work back to today to generate growth and operational strategies that will lead to significant value creation. Working from today forward will yield positive but more incremental approaches and results.
  4. For private equity firms, which invest in companies with solid track records of revenue and EBITDA, generating ideas to drive growth is not usually the problem. With certain analysis and planning exercises, the ideas are most often abundant. The challenge is to size and prioritize those ideas.  Then, decisions to not pursue certain strategies are the hardest yet most important to make. Building the discipline to invest in and execute fewer ideas while saying no to others always leads to better value creation results.
  5. Developing the growth strategies is the fun part of planning. However, if growth gets too far out in front of the company’s ability to effectively support that growth, the business can be compromised.  PE firms have invested in their companies because they have realized strong results by delivering on their customer promise better than the competition. Yet, as the growth strategies generate increased top line, realizing increased scale and therefore leverage throughout the P&L is necessary. Maintaining and enhancing high customer satisfaction as the business grows requires an equally thoughtful approach to scaling the operating infrastructure.  Identifying profit improvement, IT/systems and human resources strategies that build on historical success but recognize the need for new approaches cannot be underestimated.

Summary

The old axiom that quality execution of a mediocre plan beats a superior plan executed poorly is indeed true.  However, the right forward-looking plan, when combined with excellence in execution, is sure to lead to value creation and the results desired by all stakeholders.

About Eddie Binder

Eddie operates Apex Growth Strategies (www.apexgrowth.com), a consulting firm which provides strategic planning to the portfolio companies of private equity firms. In addition to completing strategic plans for more than 100 companies, he sits on the Board of two PE-owned companies.  Eddie can be reached at ebinder@apexgrowth.com

How to Match a CEO with a Private Equity Firm’s Approach

linkedin-groupHIGHLIGHTS

CEOs and Private Equity Firms each come in unlimited varieties.


Matching a CEO’s strengths with a particular private equity firm’s approach is critical for a winning outcome.


Our model can help.


pe-ceo-analysis

PRIVATE EQUITY GOVERNANCE MODELS

If you’ve met one private equity firm, you’ve met one.  In spite of many high-level similarities each fund is different and nuanced.  Further, each individual deal’s governance is often unique based on the particular style of a Board Chairman and/or the strategic challenges facing the portfolio company.

One way to think about a private equity firm’s approach is to understand where a fund/deal sits on a pair of spectrums:

  1. How empowering v. directive is the Board?
  2. How investor-oriented v. operationally-oriented is the fund’s approach?

The above are NOT binary.  Each fund and each deal can sit on an unlimited number of data points along each spectrum.

Empowering v. Directive

All funds have elements of both.  However, funds tends to skew one way or the other and at varying degrees.  Empowering funds tend to believe the CEO can lead the deal with the Board’s support and involvement.  Directive funds tend to determine strategy and then put the CEO on a relatively narrow path of execution.

Operationally-oriented v. Investor-oriented

Operationally oriented funds tend to govern with executive Chairs and push their own best practices into portfolio companies.  Investment-oriented funds tend to rely on the CEO for best practices developed during his/her career.

FOUR PRIVATE EQUITY CEO ARCHETYPES

All of the following CEO archetypes are equally talented leaders but their skill sets and styles are directionally different.  CEOs must determine what/who they really are at their core.  This exercise in intellectual honesty is critical to determining a good fit.

The Alpha CEO

Best fit for hands off, investor-oriented, empowering funds.  This type of leader would feel suffocated by a relatively more intrusive fund.

  • Strategy/Execution Bias: Roughly 50/50
  • Need for autonomy: High

The Collaborative CEO

Best for a highly-engaged, empowering fund.  This type of leader is fully capable but welcomes, and even seeks out, the wisdom and partnership of the Board in running the company.

  • Strategy/Execution Bias: Roughly 50/50
  • Need for autonomy: Moderate

The Super President

Best for a highly engaged, directive, operationally-oriented, hands-on, intrusive fund.  This type of leader is largely recruited to execute a Board’s investment this while being closely monitored and pushed along the way.

  • Strategy/Execution Bias: 15% Strategy / 85% Execution
  • Need for autonomy: Low

The Strategic COO

Best for a highly engaged, directive, investor-oriented, hands-on, intrusive fund.  This type of leader is more strategic than a Super President but her/his primary focus and ability is still execution.

  • Strategy/Execution Bias: 25% Strategy / 75% Execution
  • Need for autonomy: Low

CONCLUSION

Know thyself. CEOs must set aside their egos, look in the mirror and understand who and what they are at their core.  An Alpha CEO would be a disaster for an intrusive, operationally-oriented fund.  Similarly, a Super President would find themselves over their skis in the wrong deal.  However, with proper alignment, each CEO archetype, if talented enough, can drive a winning outcome in a 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.

 

 

The Key to Private Equity CEO Speed

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HIGHLIGHTS

Speed of execution is arguably the most-prized CEO trait in the eyes of private equity firms.


Too many private equity CEOs don’t move quickly enough.


A dose of self-awareness and a simple formula for pace.


SPEED OF EXECUTION

All CEOs believe they move fast and yet many are caught flat-footed when joining a PE-backed company due to the breakneck pace of most sponsors. In my experience, there are two primary reasons why CEOs don’t move as quickly as they should.

  1. Fear of Failure – All CEOs deal with fear of failure.  Some leverage it to their advantage by using it as a source of motivation.  However, many CEOs use fear of failure as a reason to postpone important initiatives and to generally procrastinate more than they should.  CEOs shouldembrace the fear as part of relentless exeuction against the investment thesis.
  2. Need for Too Much Data – Many CEOs need too much information before making a decision.  These data-centric leaders will seek 90-95% of the available information before making a call.  This mode is indicative of the slow lane and private equity runs on the autobahn. Decisive leadership is key in private equity.  And while data and analysis matter, the best CEOs operate with +/-80% of the information and replace the remaining 20% with judgment, instinct and experience.  Waiting for 90/95+% of the information will undermine a decisive culture and contribute to a relatively sluggish management team dynamic.  Moreover, the incremental 10-15% (above 80%) comes that much more slowly resulting in exponentially slower execution compared to best-in-class leaders.  Hold periods are finite.  4-5 years.  Urgency is a premium.

A RECIPE FOR SPEED

The best private equity CEOs move at a top-of-market pace by using the 80% guideline while employing three key complementary perspectives:

  1. Be open to and proactively seek counsel from the Board.  Many CEOs lack the self-esteem and relative vulnerability to admit they need help to be at their best.  Great CEOs understand the power of the ‘wisdom of the team’ and leverage their Boards accordingly.
  2. Embrace a “fail fast” culture.  Occasional failure is inevitable for a portfolio company CEO.  The key is to fail fast, recognize mistakes quickly, course correct and keep driving forward at light speed.  CEOs would be wise to mitigate their fear of failure by embracing the power of failing fast.  Embrace micro failures to avoid macro failure!
  3. CEOs need to insure the their speed strengthens the company’s culture.  Some urgent CEOs move at a blind pace without the realization of the cultural damage they may be inflicting on a portfolio company’s culture.  Over time, this behavior will almost certainly lead to the CEO’s derailment.

CONCLUSION

Speed kills for private equity CEOs.  The presence of speed can kill the competition and deliver a winning outcome for all stakeholders.  The absence of speed can kill a deal’s momentum, suppress returns and result in a CEO’s dismissal.  Whatever a CEO’s approach, each should adopt a model or mantra that fuels incredile pace as part of a winning, comprehensive leadership approach.

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.

Why Private Equity CEOs Roles are Tougher than Public CEO Assignments

HIGHLIGHTS

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.

Board Composition

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.

Chairman

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.

Focus

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.

Ownership Mentality

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.

Scoreboard

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.

Leverage

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.

CEO Compensation

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.

CONCLUSION

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.

The #1 Factor that Makes Private Equity CEO Roles so Difficult

HIGHLIGHTS

CEO roles of private equity-backed companies are arguably the most challenging jobs in business.


There are many factors contributing to the degree of difficulty including the compounding effects of leverage, urgency, M&A, rigorous Boards, etc.


However, one element is more responsible than any other for the degree of difficulty:  intense, relentless pressure.


OVERVIEW

CEO roles in private equity-backed, middle market portfolio companies involve greater rigor, urgency and expectations compared to general management and CEO roles across other asset classes.  Private equity firms and their portfolio company leaders face greater demands from investors, and multiples remain historically high.  These realities place unprecedented value on a CEOs ability to execute at the highest level.  Millions of investment dollars are at stake and incremental multiples of invested capital (MOIC) will be gained or lost on a deal based upon the quality of the management team, and most importantly, the CEO.

The degree of difficulty for PE-backed CEOs is compounded by: leveraged balance sheets, M&A integration; extreme urgency; limited resources; demands for breakneck execution; finite hold periods.  The net effect is that there are two realities that fundamentally make private equity CEO roles uniquely challenging – pressure and solitude.

PRESSURE

The pressure felt by private equity-backed CEOs is unique because of its daunting combination of intensity and relentlessness. Hard-core accountability is a must.  Tens, and even hundreds of millions of investor dollars rest on a portfolio company CEO’s performance. As a result the CEO also feels the weight, focus and pressure and expectations of the private equity GPs and LPs.  Private equity investors are among the most ambitious leaders in business and their lofty expectations include exceptional portfolio company CEO performance.

The pressure in private equity is not only intense, it is relentless.  The private equity CEO manages through an endless, rigorous gauntlet of weekly Board calls, monthly operating reviews, quarterly Board meetings, annual budgeting processes, cash flow challenges, covenant issues, etc. In short, portfolio company CEO assignments are 4-5 years of the most pressure packed time of a leader’s careers…no breaks, no down time.  Relentless and intense.  This environment can test the most ambitious leaders.

PE PRESSURE IS DIFFERENT

It is important to recognize that most business leaders are accustomed to some degree of pressure.  However, pressure is a relative term and it can be argued that private equity CEOs are under more pressure than their peers in other asset classes.


Most CEOs believe they are comfortable with pressure only to be caught flat-footed by the intensity and relentlessness of the private equity crucible.



CEO PERFORMANCE IMPLICATIONS

Intense pressure brings out the best in some leaders.  However, private equity pressure will cause a lesser CEO to second-guess themselves, lose confidence and therefore increase their risk of derailment. Intense pressure impedes action, limits execution and amplifies unhealthy levels of fear of failure.

SOLITUDE

Effects of private equity pressure are felt with even more intensity because of the relatively lonely existence of a portfolio company CEO.

SUMMARY

Private equity CEO roles can be professionally and financially rewarding beyond the realm of other asset classes.  However, the rewards are usually reserved for those who can manage, and thrive within, the relentless and intense pressure of PE.

THE IDEAL PROFILE FOR DEALING WITH PRIVATE EQUITY PRESSURE

The best private equity CEOs have personal and professional standards that are equal to, or even above, the extremely high levels of their Board’s expectations.  These leaders place as much, or more, pressure on themselves when compared to the intense pressure of private equity.  CEOs should very carefully (and intellectually honestly) evaluate their tolerance for a high-stakes, high pressure environment before accepting a portfolio company leadership role.

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.

 

 

 

 

 

 

 

 

 

7 Criteria for CEOs to Diligence a PE-Backed Opportunity

OVERVIEW

A portfolio company CEO’s fit with a deal is obviously critical.  However, CEO candidates can fail to fully assess their fit with a particular opportunity. Thoughtful, intellectually-honest analysis can benefit both the CEO the sponsor by helping to avoid a derailment down the road.  Stay tuned for more detailed, follow-up posts exploring each for the following criteria more deeply.

Recommended items include:

1. Fit with the private equity firm’s governance approach.  Many sponsors seem similar on the surface.  Further analysis reveals that all private equity firms are very different – particularly in how they engage with, and govern, the CEO.   CEOs must understand if the sponsor in question is more-or-less operational and hands-on, or, more-or-less a strategic investment partner.  A majority of firms sit in the former camp which means many CEOs will have company in running the business.  This involvement can be in the form of welcome support or burdensome control.  Be certain your style is a fit with the sponsor’s approach.

2. Stage of the investment in the hold period.  Although hold periods can last as long as 10 years, private equity firms would prefer to transact in 4-5 years, or less.  This relatively shorter timeline fuels a stronger IRR metric at exit.  Portfolio company CEO roles are always high pressure, but the pressure increases as the hold period matures.

3. Most pressing strategic challenges AND how they line with your capabilities.  CEOs should keep their ambition in check and insure their core competencies fit well with the objectives of the business.  A CEO’s ability to execute quickly will determine her/his success or failure.  Many candidates are over-confident and/or underestimate the gravity of the challenge.  Intellectual honesty is critical when evaluating a CEO role.

4. Purchase multiple.  If a CEO is joining a healthy, growing company then the sponsor most likely paid a full price for the asset.  They may have even knowingly overpaid given the competitive deal dynamics and pressure to deploy capital.  As a result, CEOs are expected to accelerate that company’s growth rate in order to yield a discounted purchase multiple (on a backward looking basis).  Going forward, there is risk of some level of multiple contraction as interest rates are expected to rise.

5. Viability of the investment thesis at current state.  CEO candidates would be wise to create their own value-creation models and share them with the sponsor.  Alignment of “what success looks like” is critical before a CEO and sponsor sign on the dotted line

6. Reason for the CEO search.  A CEO search for a private equity-backed company usually means one of two things: a.) succession planning for a founder replacement; or b.) unplanned replacement of an ineffective CEO (founder or otherwise).  Each scenario has unique challenges and candidates should think carefully about the genesis of the CEO search to understand the undercurrents at play in a given private equity portfolio company.

7. Estimated cash proceeds at exit.  Many CEO candidates focus on the option grant percentage.  While this number has meaning, it is secondary to the estimated cash proceeds at exit.  Candidates should focus on the amount and viability of wealth creation and not the percentage of ownership.  It’s better to get 2.5% of a winning deal than 4% of a dog.  For later -stage hold periods, synthetic equity packages (such as a sale bonus) may be employed by the sponsor.

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.