Division presidents of large, multinational companies almost unanimously aspire
to CEO roles. These executives often see private equity as a compelling career
path, complete with autonomy, the opportunity to prove their leadership and a chance
to create significant value and wealth. Private equity firms are attracted to the
leadership, training and track record of these executives, but typically view untested
CEOs with skepticism. How, then, do we match up the “supply” with the
“demand” for this talent, and more specifically, how can the “readiness” of portfolio
company CEO candidates be determined?
To further explore the concept of first-time CEO readiness in a private equity
environment, we spoke with experienced portfolio company CEOs and private
equity partners about the key success factors. While firms have different
strategies and philosophies about what works and what doesn’t, we found common
ground on several broad themes:
Doing more with less
Investing in the right team — early
Working with the board
Finding the right CFO
Doing more with less
Executives with leadership experience at large
companies can be attractive candidates for private
equity because of the depth of their industry
and customer knowledge, leadership training and
understanding of core business and branding
principles, all of which are transferable to a portfolio
company CEO role. Despite these apparent strengths,
excelling as the president of a $2 billion division
of a public company does not automatically prepare
an executive for the range of financial, business
and talent issues inherent in running a $250 million
portfolio company.
“The CEO has to be the visionary, the one who has
the vision for how to expand the business, and
is the primary business developer for the company,
capabilities not all division leaders have had to
develop,” said David Moross, chairman and CEO of
Falconhead Capital. In addition to driving the strategic
plans for the business, the CEO must motivate
the organization to achieve short-term results. The
CEO needs to wear bifocals, striking the right
balance between disciplined cash management to
meet today’s goals and making progress on
the priorities that will build long-term value for the
business, said Bill Toler, former CEO of AdvancePierre
Foods. “You have to make Friday’s payroll while
you’re reinventing the future.”
Executives from a corporate background also have to
adjust to a different pace and set of expectations
than they may have been used to in previous leadership
roles. The division head who had to focus on achieving
2 percent or 3 percent growth while managing costs
in his last role suddenly faces the expectation that he
will double the size of the business in three to five
years. Achieving those objectives requires a sense of
urgency and entrepreneurship and the ability to
simultaneously juggle a diverse set of priorities.
“There are four or five important initiatives in play at
once. It’s not only a question of making the budget;
it’s making a key acquisition happen, making strategic
decisions to change the trajectory of the business,
hiring key people in critical new development areas,
and rebuilding the organization and the culture
to be more effective. It is a very different rhythm of life
than making sure you deliver the numbers to
the CEO’s office of a big public company,” said
Tim Palmer, managing director of Charlesbank
Capital Partners.
Given the risks of hiring a first-time portfolio company
CEO and the urgency in getting the company
quickly on track, what gives investors confidence that
a candidate can make the transition?
In addition to an impressive track record of driving
growth, private equity partners say they look for
tolerance for change, especially experience moving
from a “big” environment to a “small” environment,
where results had to be achieved without extensive
resources. Autonomy in previous business settings,
including broad functional responsibility, as well as a
willingness to take risks throughout his or her career
also are indicators of the ability to transition.
Another valued trait is the confidence to run the
business as if it is his or her own company, said Keith
Miller, a partner with Goode Partners. “The CEO
needs to understand that he’s here to run the business
as though it’s his own. We’re here as guardrails.
We have no interest in running the company, but
want to provide the necessary resources where
they may be lacking, even if that means helping to
identify deficiencies.”
Investing in the right team — early
Success in private equity requires a small, talented
and highly focused team supporting the CEO,
and building the right team early in the investment
lifecycle is a lesson many experienced private equity
CEOs said they learned after under-hiring for
a fast-growth company.
“The depth and quality of people, processes and
systems is always different when you move
to a smaller private equity company from a bigger
corporate environment. Understanding that and
making the changes necessary to elevate talent and
processes is critical to long-term success,” said
Toler. AdvancePierre, for example, was formed through
a roll-up of several smaller companies; legacy
executives who might thrive in a stand-alone business
may not have the skills to manage it as it grows
rapidly by acquisition. “The processes, people and
skills that made each of these small companies
very successful aren’t the ones that will enable a
$2 billion company to operate effectively.”
Paul Nardone, an operating partner with Sherbrooke
Capital who successfully scaled and sold three private
equity portfolio companies to strategic buyers, said he
learned from experience to prioritize hiring executives
sophisticated enough to manage a rapidly growing
business. “I initially thought too frugally and too
narrowly about the kinds of people that I recruited for
my management team; I was thinking like a boot-strap
entrepreneur, trying to stretch directors into VPs, and I
learned a lesson. Some just couldn’t keep pace with
the business, and some didn’t meet the requirements
of our private equity investor,” he said. “You certainly
have to think big and think aggressively when a private
equity group is involved in your business, because
that’s what they want you to do, and you need people
who can be successful in each stage of the business.”
Be aggressive in stepping up the quality of talent in
advance of growth, and be willing to over-hire for
critical roles based on the intended end game for the
investment, experienced CEOs recommend. “We have
a strategic and tactical plan for every one of our
portfolio companies that gets developed while we’re
going through the due diligence process. We have
an operating-centric approach at the partner level, so
the plan is developed by the actual partners who
will work directly with the entrepreneur or family in whose business we are investing. That plan is
critical for determining whether the company has the
people necessary to tactically carry out the strategy,”
said Keith Miller.
Like the CEO, executives in a portfolio company have
to be willing to be “doers” and not just leaders. “When
you have limited resources, you have to make sure
you’re hiring complementary and supplementary skills
to the team; not duplicative,” said Jane Miller, CEO
of Charter Baking. “You need people to actually roll up
their sleeves and do the work.”
Working with the board
How to work with and leverage the board of directors
was the most universal (and emphatic) theme
discussed among CEOs and private equity partners.
While they may have interacted with boards in
prior roles, reporting to and, more specifically, working
with a private equity board requires the development
of an entirely new set of “muscles” for most
first-time CEOs.
The most obvious new dynamic is that a private equity
company’s board typically consists of financial
sponsors (i.e., owners), and one to three additional
outside directors with relevant operating experience in
the best case scenario. The observation made by
several financial sponsors is that, either through lack
of confidence or over-confidence, first-time CEOs felt
the need to bring fully developed plans and
presentations to the board — rather than engaging
directors on key strategic and operational issues.
The best CEOs are comfortable with a give-and-take
with the board and investors, and treat them as
partners in the business.
“They want to hear about things early, and they want to
hear about them often. That was the key to success
with all of my investors. People really appreciate when
they think you’re getting out way ahead of something
and giving them an opportunity to weigh in,” said
Nardone. “Too many people approach working
with private equity investors as managing information
and want to release information in a polished board
environment. I approached it that way myself the first
time and approached it very differently the next two
times. I just concluded that this is a true partnership
and I’m going to leverage these folks to make all
of our jobs a little bit easier. That has proven to be
much more successful.”
A clearly articulated strategic plan helps build and
maintain alignment between the CEO and the
investors. This plan, alternatively referred to as a
strategic roadmap or value creation plan, was
universally discussed across all of our interviews, and
was described as helping to provide a “True North”
for where the CEO and board want to take the
business. Nardone talked about working with his
board to think ahead and figure out what, specifically,
they want to be able to say in their presentation to
strategic buyers at the end of the investment horizon—and, with that end in mind, develop a roadmap to
get to that desired outcome.
The cadence and content of communication between
a CEO and board varied, but generally speaking in
addition to standard weekly calls and quarterly
reporting and meetings, several CEOs reported having
near-daily conversations with the lead sponsor on
topics ranging from M&A, cash flow, business
performance and longer-term capital expenditures.
“It requires more confidence rather than less to be that
open with the board. You want to engage the board
in strategy, that’s really where the board wants
engagement. You want to engage them in organization
and people. Acquisitions are important for most
of them. My advice is to be transparent, be early and
have an informed point of view about the action
plan,” said Bob Caulk, operating partner and former
CEO of Spectrum Brands.
Investors expect the CEO to map out a calendar of
topics to be reviewed at board meetings, well in advance. These topics should match the cycles of the
business — strategic planning, operating planning,
budget-setting; be mindful of deadlines and anticipate
what the board will want to talk about.
Experienced portfolio company CEOs say first-time
CEOs benefit from having a formal or informal mentor
on the board, especially for the first year or two. The
mentor can be the operating partner or another
director with whom the CEO has some chemistry, but
ideally the individual is someone who has a broad
point of view on the investor side as well as operating
knowledge and skills.
Five things CEOs wished they knew before their first portfolio company role
Understand how private equity works. The fundamentals of
how a fund raises money, its inner workings and hierarchy,
and its politics all can affect how the firm interacts with your
business. Are the partners distracted by other deal activity?
Is there another portfolio company in trouble that might
change the way the firm works with your business? Also,
understand the deal structure and the implications of the
structure. How much has the firm already invested in the
business? How much capital is left for acquisitions or other
capital spending? What’s the approval process for gaining
access to those funds?
Understand how the private equity sponsor will interact
with the business. Experienced CEOs said working with
private equity is much easier when you know the players in
the firm and how they interact with the company: who does
the work inside the firm, who’s paying attention on
conference calls, who to call in advance of a board meeting
and who to follow up with after the meeting.
The depth and quality of people is almost always different.
Recognize and address gaps in capabilities and processes
early on, based on the strategy and exit plan for the
business.
Manage expectations. Don’t be overly optimistic about the
time frame for turning around the business. Expect that not
everything will go as planned. As one CEO cautioned, “If you
say it’s going to take three to five years to turn around the
business, and it gets done in three-and-a-half years, you’re a
hero. If you say it’s going to take two or three years, and you
get it done in three-and-a-half, you’re in trouble.”
It’s OK to say you don’t have all the answers. Most
first-time portfolio company CEOs are reluctant to admit
that they don’t have the solution to every problem, but CEOs
who have been through the process say they learned to
engage the board on the toughest challenges. Seeking
advice and ideas from the board when challenges arise often
can result in surprising and successful solutions.
Finding the right CFO
The portfolio company CFO has an important and
multifaceted role, serving as a partner to and proxy for
the CEO and a bridge from the business to the private
equity firm. The CFO has to speak the language
of the investors and be aligned completely with the
CEO. While the specific capabilities a company needs
in its CFO will vary depending on the strengths,
weaknesses, size and complexity of the business, a
portfolio company CFO has to have exceptional
technical finance skills, a willingness to dive into the
details and strong communication skills.
“You want someone with high intellectual capacity. You
want the kind of CFO who is able to articulate better
than anybody, including possibly the CEO, the drivers
of the business and how the business is doing,”
said Palmer. “You want a strategic business partner
who understands the business at an instinctive level;
that’s very valuable for a CEO.”
Caulk, who has been on both the management and
sponsor sides of private equity investments, agreed.
“The CFO is probably the most important position
other than the CEO. The CFO has to have the CEO’s
back because there is a lot that happens that the
CEO may not see, feel or touch, both inside the
company and with the private equity investors. The
CEO needs a CFO who is completely open and
transparent with him or her and who not only
understands the numbers but can be part of the
strategic brain trust.”
Financial sponsors look to the CFO of portfolio
companies to be the key conduit of information to the
private equity firm. Analysts at the firm talk to the
CFO all the time; they have to know the numbers
inside and out. Sometimes public bonds are used to
finance the company, so CFOs also have to know
how to deal with public investors. In short, the CFO
has to have the confidence of the CEO and the
private equity firm.
However strong the CFO, most private equity firms
expect the CEO to have a firm grasp on all of the
financial matters of the business as well; and it can be
a red flag for investors if the CEO appears to be relying
too heavily on the CFO for the financial details.
Five things PE investors look for in CEOs
> Imagination and vision
But also the ability to balance vision with
short-term results
> Self-confidence and conviction
But also humility
> Ability to think and plan
But also a bias toward calculated risk
> Work ethic; flexibility
Multitasking; dealing with ambiguity
> Self-starter
Highly autonomous operating experiences
(as proxy for CEO role)
Conclusion
First-time portfolio company CEOs, particularly those
who have spent their careers in the corporate world,
can potentially get a slower start with their first private
equity assignment if they are not aware of and
focused on important differences in leadership and
communication requirements. Managing in a high-intensity
environment with fewer human and financial
resources than they are used to requires “muscles”
that are not necessarily developed in a corporate
setting. First-time CEOs also must get comfortable
with the financial sponsor as a partner in the business.
Firms that understand the potential pitfalls and
provide the necessary support will be in a better
position to help first-timers through these challenges.
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