What It Takes to Be a Private Equity-Backed Company Leader
When businesspeople refer to private equity-backed company leaders, they are typically referring to CEOs hired by private-equity (PE) firms to run new acquisitions in their portfolios (these portfolio companies are sometimes abbreviated as “portcos”). PE firms may hire other leaders, such as CFOs and other C-suite executives, but CEOs are the main focus.
Much of the literature about private-equity backed CEOs emphasizes differences between the environment in which portco CEOs operate and that of CEOs of other companies. “Effective leadership in this space is very different from other types of ownership platforms,” writes John Myers, managing partner, Kensington International, noting “the acquisition of a company by a private equity firm is a seismic change for its leaders and employees.” Executive-search expert Chris Reinsvold points to a tight timeline with an anticipated ending since the PE firm’s goal is typically to eventually offload the portco at a profit. As private-equity search specialist Joe Hunt writes, “private equity is looking for CEOs who can drive and deliver performance in a defined timescale, optimizing the crystallization of value on exit.” Board interaction is different because often, “the majority of the board directors are principals in the private-equity firm,” Reinsvold says. CEOs in portcos invest their own funds in the portfolio company, with, Reinsvold says, “greater emphasis on the CEOs having enough ‘skin in the game.’” But, while the portco environment may be different from the environment at other companies, CEO skills and characteristics are not so different. Successful portfolio company CEOs are very similar to non–private equity CEO profiles, asserts What makes a great PE portfolio company CEO?, a report from Russell Reynolds Associates.
The same report shows portco CEOs offer a stronger skillset over other CEOs in certain areas, indicating superior skills among portco CEOs in juggling priorities, empowering others, exhibiting an even-keeled demeanor, and maintaining humility about their own achievements.
Private-equity-backed companies evince an emphasis on organizational culture, both in terms of performance and in terms of a CEO’s fit with the portfolio company’s culture. “The right corporate culture at a portco is essential for generating the business results required by the company’s PE sponsor,” states Alix Partners’s 2020 Fifth Annual Private Equity Leadership Survey, “and a portco’s culture depends to a great degree on who’s at the helm.” This emphasis on cultural fit is sometimes blamed for weak representation of women in portco CEO roles. “Humans tend to connect socially with those who share similarities to themselves,” notes an article from private-equity talent platform Falcon. A 2019 analysis by BoardEx of privately held US and UK businesses owned by PE and venture-capital firms showed that in the 12,221 companies studied, only 7 percent had female CEOs.
Preferred Background: Education and Experience
The aspect of a prospective portco CEO’s background considered most important for success is having had total P&L responsibility, the majority having held that responsibility as a general manager or CEO, states the Russell Reynolds Associates report, which also cites sales leadership and operational experience as key to “high growth and returns.” Relevant industry experience is also prized as a success factor, asserts the report, which goes on to state that prior portfolio company CEO experience “is actually not necessary.” Other studies claim the opposite, with a Harvard Business Review article noting that experience as a CEO in a publicly traded firm fails to prepare people for success in the intense PE environment. The literature on private-equity-backed CEOs is silent on education requirements, but job postings suggest master’s-degree-level training.
Desirable Characteristics: The Need for Speed
The trait most frequently cited for success of portco CEOs is speed of execution. Words and phrases such as “sense of urgency,” “warp-speed,” “agility,” and “quickness” are often mentioned with regard to this role. While hard skills take a back seat for portco CEOs, an array of additional soft skills and personal traits are keys to success in private-equity-backed leadership of portfolio companies:
Another frequently mentioned condition for success for the portco CEO is alignment with private-equity sponsors.
Predominant Leadership Styles in Private Equity
Rick DeRose of search firm Acertitude notes that “PE leaders must embrace a range of leadership styles,” which is another way of saying the primary leadership style for portco CEOs should be a situational approach. DeRose discusses a transformational style deployed by leaders who “thrive amid rapid change” and possess “the ability to persevere, even when overwhelmed and overloaded,” as opposed to a “maintenance” style characterized by feeling “most comfortable with the status quo.” DeRose suggests that “extreme transformers” are the key to a portfolio company’s exponential growth. The Russell Reynolds Associates report points out that CEOs who are too independent and lacking “regard for rules and processes” often don’t succeed.
The importance of leadership in helming a PE firm’s portfolio companies is timely in the age of COVID-19. “In private equity,” writes Marcus Beale, managing director at Drax, “leadership is a vital aspect of value creation. Leaders and their leadership teams, along with the culture and the environments they create, have the potential to deliver exceptional returns. Whether wartime or peacetime in leadership style, the Covid crisis’ effect on portfolio businesses has only amplified this fact.”
These reports shed additional light on success factors for those interested in the private-equity-backed company-leader role: