Serving as the CEO of a private equity-backed company can be a rewarding challenge with significant wealth creation potential. However, many executives underestimate the degree of difficulty of these uniquely demanding roles. As a result, first-time private equity-backed CEOs can be particularly vulnerable to derailment.
Private equity Boards:
- Have minimal patience for learning curves;
- Offer little in the way of onboarding and;
- Demand results quickly.
Although there ample challenges to address, there are seven common risk factors faced by CEOs leading their first private equity-backed company.
Private equity simply moves faster than other asset classes. Period. In spite of believing they move fast, many first-time private equity CEOs are at risk of being caught flat-footed by the break-neck urgency of private equity. Speed of execution is paramount and arguably the most important thing any CEO can contribute to value creation. Maintaining a private equity pace for many years is easier said than done.
Private equity CEOs must quickly assess their inherited management team’s horsepower and act decisively to replace, upgrade, coach or create key positions. In the corporate world, leaders are used to relatively more methodical management of human capital and often benefit from the support of a sophisticated human resources group. CEOs would be wise to make a call on each key management team position within their first 90 days. If a key role requires action, now is the time.
Many corporate leaders view themselves as hands-on only to find out the hard way that their private equity sponsors have a more intense interpretation of this concept. Private equity-CEOs must be quasi-micromanagers who work alongside their teams with sleeves rolled up and with proverbial dirt under the fingernails. CEOs must also have a clear command of the business details…a necessity that will be tested during each monthly operating review and quarterly Board meeting.
Private equity drives rigor and process into everything it touches, including portfolio company governance. Leaders can anticipate lively calls with the Board chairman each week; intensive, on-site monthly operating reviews; and rigorous, quarterly Board meetings. Along the way, CEOs will encounter a variety of other demands from their sponsors that add to the pressure to perform.
MANTLE OF CEO RESPONSIBILITY
Private equity-backed CEOs play a huge role in value creation. They do so without the benefit of a traditional boss or team of peers. Portfolio company CEOs are on an island of accountability and pressure. Even the most rigorous corporate cultures don’t fully prepare a Division President for the transition into the realm of private equity.
True P&L experience is a viable training ground for a private equity CEO. However, these P&L roles benefit from treasury as a shared service. As a result, these leaders often understand how to drive a P&L but can struggle when it comes to the competing dynamics of the balance sheet. First time CEOs also lack experience partnering with a full credit CFO and managing through the many and varied cash flow issues seen in an LBO.
As many know, the Peter Principal states that all leaders will be eventually promoted to the point of incompetency. Many strong corporate leaders simply can’t successfully make the transition into a private equity-backed CEO setting. The degree of difficulty of these assignments is among the most challenging in business. One imperative for any candidate considering the transition in to private equity: be intellectually honest with yourself about the challenge ahead. Many candidates can get caught up in competing for a private equity CEO role and can miss the important step of diligencing their own capabilities against the gravity of the portfolio company challenge
In my experience, first-time private equity CEOs can be just as effective as their more experienced counterparts. However, they face unique challenges that should be openly explored during the search process.