Making the jump: Managing the transition to private equity ownership

The transition into a new executive role in private equity is tough. The performance demands and rigour of private equity’s active governance model can be daunting. And, it’s not just the CEO’s that struggle. Fund managers are challenged also. There is fear and insecurity on both sides of a fresh MBO that can hinder essential trust-building. The figures are telling. Private equity professionals report a CEO turnover of 50-60%. Having the wrong CEO for the task at hand is, regrettably, not an unusual occurrence.

There are fundamentally two reasons for the high turnover. The first and most common is a lack of trust or transparency between the senior executive and sponsor. It is not enough to have a motivating MIP to unite the thinking. If the sponsor and CEO have divergent goals or values, this invariably leads to a clash and replacement of the CEO. As Dr. Geoff Scott, a serially successful mid-market CEO puts it, “you need to get naked in the fishbowl with the sponsor.” The second factor explaining high CEO turnover is a basic lack of awareness, in particular of newly appointed CEOs, for what it takes to survive and thrive in a private equity environment.

Fund managers need a clear view of the qualities they are looking for in a CEO, and they must make this explicitly clear to the current or potential future position holders. The best portfolio company CEOs are closely aligned with their sponsors; they know their numbers; they are great communicators; they empower their teams and the workforce; they are ruthless when it comes to performance decisions; and they can handle conflicts and deal with ambiguity. As TPG Senior Advisor, Norman Walker notes, “the best CEOs strive for excellence, not perfection.” Coupled with industry expertise and a relevant track record, an executive who demonstrates these capabilities can qualify as an outstanding portfolio company CEO.

However, not every executive is fit to implement every investment plan. Much depends on the type of deal and the value creation thesis. Four value growth archetypes are common in private equity buy-outs: growth, efficiency, transformations, und turn-around. Each archetype requires a different approach, as well as executives with different abilities, skills and competencies. The perfect CEO to drive successful international expansion might fail horribly in a turn-around. Unfortunately, the number of “transformation” cases, which require a hybrid of both growth and efficiency skills is increasing in the low return environment, and are very difficult to manage with a single CEO.

CEOs who wish to keep their positions need to be clear on the sponsor’s expectations and the type of transformation they are charged with. They need to understand and embrace the owner’s value growth ambition, and its impact on their own role. In seeking clarity and transparency on objectives and approach, CEOs are not alone. Sponsors are also eager to achieve alignment of goals with the newly appointed executive and ensure timely realisation of the investment plan.

But even when there is alignment between investors and the senior executive, CEOs can still fall short of expectations due to their lack of specific skills required for the next value growth step. To bridge the gap, executives can seek help through coaching or mentorship. Often this can be delivered by a Board member or non-executive director (NED). But this can also be difficult if the NED is officially sanctioned by the sponsor. Few CEOs want to open-up about their greatest fears and concerns with a board member. A neutral sparring partner, who has successfully navigated the same deal cycle before as the CEO, is better positioned to act as a trusted advisor to new CEOs.

By: Valentina Pozzobon, Consultant, Humatica.

Humatica’s CEO² advisory service connects successful senior buy out managers with current portfolio company CEOs and enables new CEOs to benefit from the experience and lessons learnt. An unbiased view from a proven buy-out leader can help to manage the transition to private equity governance. For more information about Humatica’s CEO² advisory service, please click here or send an e-mail to andros.payne@humatica.com.