Qualities of the Private Equity-Backed Company Leader
Jan 30, 2020
By Jay Meschke
The economic recovery keeps humming along, the longest in our country’s history. Many doomsayers have predicted a slowdown, but metrics keep pointing to a solid if not strong U.S. economy in 2020. One of the major sectors that has fueled the economy consists of private equity (PE) firms and their underlying portfolio company investments. There are tens of thousands of companies sponsored by PE firms, many of which are under the radar.
Not all PE-sponsored companies are successful, and much of the success (or failure) is tied to the leadership of the CEOs heading up the enterprises. Who are these people? What are these people?
Our executive search firm assists PE firms in hiring such CEOs, and we have seen that the qualities, credentials, and attributes of these leaders are unique. I asked a handful of our PE clients to supplement my own opinions about what it takes to be a successful leader of a PE-backed company. Here’s the result:
Be metric-driven. The PE-backed CEO must understand equity value creation and what PE firms look for in an investment—in particular, EBITDA growth, debt reduction, and cash flow. He or she must also have a data-driven orientation and clearly know the details of the business, especially financially, and the drivers of profitability and cash flow.
Demonstrate a sense of urgency. Because a typical hold period for a PE firm is three to seven years, the CEO should embody a goal orientation and an extremely high sense of urgency. As such, there cannot be any paralysis by analysis. Good CEOs will demand financial results of the management team and, if individuals are not performing as expected, be able to quickly remove and replace them with stronger people who will get the job done. Most successful PE-sponsored CEOs are excellent in identifying and attracting talent.
Be resourceful, agile, and a persuasive presenter. The CEO must be able to wear a lot of hats and pick up pieces, even if it’s not in the job description. He or she also should be able to make exceptionally compelling and strong presentations in order to lead the exit process and convince investors that the company is a good buy. Accordingly, the CEO must have an uncanny ability to connect dots in new ways, strategic and tactical, and articulate the same.
Have a thick skin, passion, and a strong work ethic. Every PE firm is different in style and operating persona, but the CEO needs to possess a passion for the business, courage of convictions, and a thick enough skin to channel any criticism for a positive intent. The leader should not be defensive, always seeking solutions in a forward-thinking manner. Long hours should be anticipated, which correlates directly with a potential high payout (e.g., no pain, no gain). Nights and weekends are the norm, and someone with or who desires work-life balance need not apply.
If you’re a business professional seeking a leadership position in a PE-backed company, you may need to jump right in—even if it appears on the surface that you may be taking a slight step backward. PE firms are attracted to people with past experience inside a PE-sponsored portfolio company.
PE principals and HR professionals who recruit such leaders should keep these points in mind: It is the rare bird from corporate America who can operate effectively for PE sponsors, so opt against someone who hasn’t been through the process before or lacks private equity exposure. In addition, structure CEO interviews to assess the categories noted above and listen for specific answers to the questions. CEO candidates who provide general answers to specific questions are a risk. Lastly, check references. Positive outcomes from past situations are the best predictors of success in the future.
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