Three CEOs shared critical insights about the pros and cons of private equity backing in an engaging discussion moderated by Robert Newbold of Graham Partners.
Private Equity-backed CEOs
Managing a Company Versus Managing an Investment
KNOW THE FUND
The decision to take on private equity capital is a big one for any CEO. Navigating this decision thoughtfully is critical for success.
Because private equity comes in various forms and structures, from control or non-control investors to family offices or institutional investors and, in some situations, can include a combination of debt and equity capital – understanding the fund structure, fund age and how it aligns with your time horizon is crucial.
Many private equity partners bring valuable operating expertise through a network of experienced individuals with specific domain expertise to help grow the business. Other private equity partners choose to be more passive, focused primarily on financial results and Board-level updates.
While consistent themes of heightened expectations, risk tolerance, and accountability are often experienced by CEOs when bringing in a private equity partner, the most important factor is to understand the goals and expectations of both parties. The CEO’s job is to manage the company, but a private equity firm’s job is to manage the investment.
A GROWTH RESOURCE
Sourcing, structuring, and executing M&A transactions is a significant value-add of private equity partners as it allows a CEO to continue managing day-to-day operations and organic growth opportunities, while still initiating acquisitive growth opportunities. It is important for a CEO to properly manage and understand the M&A strategy of its private equity partner to ensure their philosophies align throughout integration beyond transaction execution.
Private equity-backed CEOs can also leverage the service provider network of their private equity partner to bring in best-in-class resources (i.e., accounting, legal, insurance, etc.) to further professionalize their business.
While these additional resources can be considered an incentive to any CEO, one thing to consider is that private equity support often comes with a larger group of stakeholders, including investors, senior debt providers, subordinated debt providers, operating partners, M&A targets, etc. These added partner channels may result in increased demand and commitment from a CEO.
COMMUNICATION IS KEY
Strong communication is a key tenet to a successful private equity transition. It is critical that CEOs communicate very clearly with their employees and other stakeholders in a transparent way to maintain and enhance a loyal corporate culture. Many employees have angst about bringing in a private equity partner as it relates to job security, investment horizon, and performance expectations. Employees and owners can define value in vastly different ways and it is important that all parties remain aligned for a successful relationship.
It is equally important that there is clear and transparent communication between the CEO and private equity partner to properly manage goals and expectations. Many CEOs find it helpful to delineate between the roles of the management team and those of the private equity partners.
HUMAN CAPITAL MANAGEMENT
A consistent theme across the CEOs (on the panel) was the importance of transparency and communication with employees. Bringing in a private equity partner can create perceived risks and opportunities as it relates to employees. Providing the right forum for communication with employees to make sure they understand the goals of the investor group can mitigate these risks.
Private equity can also bring incremental stability and comfort as it relates to employee retention and recruiting. As growth is expected from new investors, a reputable partner can increase a business’ ability to retain and recruit top talent. Many private equity partners are focused on remaining aligned with the management team and often key employees are provided with the opportunity to retain an ownership stake for the first time in their careers through options or profit interests. This ownership can also help create long-term alignment amongst all employees, bringing additional stability and alignment across the organization.
GOALS AND EXECUTION
It is important that a CEO's goals are aligned with its private equity partner and its employees, often serving as a bridge between these two groups. Managing a company can be very different from managing an investment, making it important for a CEO to properly define, understand, and communicate goals.
Many private equity partners institute a 100-day plan to stabilize and define the ownership transition to align goals across the organization. It is critical that the CEO and private equity partner are aligned from the onset on the exit horizon and strategy. Without a clear understanding, the economic cycles specific to a business model may not be aligned with the private equity fund’s goals as it relates to hold period and the exit horizon.
WHAT YOU NEED TO KNOW
When a CEO is responsible for managing an ownership transition, clear communication among all stakeholders is critical. Constant communication and transparency is a consistent theme to successfully managing an ownership transition and it is important that CEOs mange the expectations of all partners from Day One without losing sight of the goals and concerns of the various stakeholders in the business.