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Keys for Partnering with a Private Equity Firm to Find the Right Portfolio CEO

When acquiring a business or being a majority stakeholder, it is important to conduct a thorough and extensive assessment of the acquired entities’ leadership team, according to Ravi S. Ruprai of the boutique firm, RSR Executive Search & Leadership Advisory Consultants. “I have seen many examples of where private equity firms sometimes fall short at assessing the one asset that is the key to their investment’s success, talent,” he says.

So how do we do that? “Firstly, understand what the broader business goals of the investors, and then align the human capital strategy with the end-goal,” Ravi says. “Of course, for the most part we know that the typical life cycle of an investment is between three to five years, but there’s more to it than just that.”

What’s the culture like? Do we want to change that? The DNI strategy, is there one in place? How does the existing team operate together while working remotely? “Once we have these key pieces of information and agreed with the lead partners, we can then assess the executive leadership team against the agreed business goals,” Ravi says. “Often, the result is that there is a need for new leaders within the organization, either because the existing team self-select out (as part of the acquisition agreement) or be asked to leave after being assessed.”

Timing is Key

Ravi notes that knowing when to replace a CEO is key. “I experienced this situation with a private equity firm, the then sitting CEO had fixed the product portfolio but was not experienced at taking the newly innovated product portfolio to market, hence the need for a sales/ go-to-market oriented successor,” he says. “Knowing it is time for a change and taking action is vital.”

Board and Key Stakeholder Alignment

Ravi says that too often, search partners are focused on a “fast start, yes we all want that, but unless we have done our homework, (sweat equity) upfront, often the search process goes off the rails, and the partnership can quickly turn sour.” So how do we solve for this?

“Set expectations early; clearly communicate to the key stakeholders how you are looking to partner with them as a trusted advisor and collaborate with them in order to execute flawlessly,” says Ravi “When multiple stakeholders are involved, it is vital to build some alignment upfront, and the quicker the better! We, as search partners need to build out a list of key questions for the decision makers, such as prior CEO experience, do they have to have been a PE portfolio CEO before or not? Industry relevance? Size of P&L experience; early foundational expertise such as sales/ go-to-market versus product/engineering, domestic vs. international  operating experience.”

Once the questionnaire has been built out, you can then interview each of the stakeholders and build out a grid of what the feedback was on criterion laid out, according to Ravi. “If we are lucky, we can see a pattern emerging, and approximately 75-80 percent have aligned on what the critical competencies need to be,” he says.

So what about the remainder?

“Well, we often do massage the requirements during the search process, and this is where a great search / leadership advisory consultant will separate themselves from the many,” Ravi says. “In my experience, it is rare to get 100 percent alignment at the beginning of a project, no matter how straight forward it may look from the onset, more often than not a curve ball comes into play during the execution phase… We deal with the curve ball and each situation as they come up, and experience teaches the search partner on how to handle each one. Once there is broad consensus, we go out and build a draft position specification, whilst concurrently agreeing a sector and company target list and discuss to get sign-off, (commonly an iterative process) during the execution phase.”

“Assessing prior experience can be the most contentious criteria for the selection committee, as a search and leadership advisory consultant, I have often seen that whilst there is comfort in hiring an executive with prior CEO and industry experience, the first criteria can often narrow the pool of what is the most competitive market we have seen in decades,” Ravi says. “The latter can also be somewhat more of the same, whereby the candidate may recycle the strategic playbook from their last role, which in some instances is not a bad thing, however some want an executive who thinks differently and comes with a fresh pair of eyes.”

Strategic Ability & Systems Thinking

 “Strategic ability to a new path forward and executing upon” does not necessarily mean hiring someone from a top management consulting firm that brings strategy experience yet has limited operational and execution chops to carry out the role. The systems piece is also important, the ability to understand what is needed in order to make strategic changes quickly.

Resilience

Often, we see poster boy profiles littered with success after success, yet the people who are most resilient are those that have had failures, recognized them and importantly learned from them! The most successful businesspeople will have had many failures; the ones that stand out from a highly competitive field are those that came out the other side and applied what they learned as their careers progressed.

Hire The Right CFO

A lot depends on the type of private equity firm the CEO is going into, i.e., whether the investors are geared toward financial re-engineering, revenue growth, and/or looking for a fast exit (within three years). The ability to select the right chief financial officer is key, as he/she will have a multifaceted role, serving as a partner to and proxy for the chief executive officer, and to be a bridge between the business and the private equity firm. The CFO has to speak the language of the investors and be aligned with the CEO. The CFO can be the conduit of information to the private equity firm.

Relationship Building

Successful leaders know and understand the importance of building close relationships with colleagues and importantly with investors of private equity portfolios. It is highly likely that that there will be board or crisis meetings when things are not going as planned. The CEO is more likely to get the support if he/she has built a strong working and trusted relationship with the board vs. the alternative. They understand the board’s motivations and drivers. A good leader will have assessed the board dynamics during their due-diligence phase whilst being considered for the role.

Due Diligence

Ravi says that a “successful leader will take a step back and as mentioned above will have some level of understanding of the board dynamics, but will also look at the portfolio company itself. He/she will have assessed ‘What is broken under the hood,’ the financial structure of the business, competitive landscape, a measure on the leadership team (strengths and weaknesses, etc.), and have an idea of who he/she needs to hiring in to fix things quickly.”

Self-Awareness

“Leave your ego at the door,” Ravi says. “Successful leaders will be open to feedback and will sort out different views no matter how uncomfortable it might be to hear it. Leaders are also proactive in their communication as opposed to being reactive and defensive. The CEO will often be authentic and direct, yet come with a degree of candor, and be able to drill down to the important facts with the ability to deliver them real-time with confidence.”

A Proven Track Record in Leadership

The CEO will have a network of proven executives that he or she can draw upon to make an impact quickly. It is important to get this right, especially the CFO function, according to Ravi. “The CEO will have had a track record of developing and retaining talent,” he says. “The ability to act quickly and decisively yet with a degree of empathy is key especially where cultural dynamics need to be aligned.”

Assessing the Right Skills is Key

Ravi notes that CEOs and top executives should be assessed as described earlier. Increasingly, private equity firms will need to assess their top portfolio more rigorously as if they were evaluating the market, product, operational and financial viability of a potential investment or acquisition.

The Race for Diversity is On

“I wrote about this emerging trend well before COVID-19, the race to add ethnic minorities and gender diversity to boards and key executive positions is now more relevant than ever, and it’s a topic that will always now be front of mind,” says Ravi. “Newly minted dealmakers in charge at their firms want to right past imbalances and want to appeal to investors who are more likely to part with their cash when diversity initiatives are in effect. And many believe that in a field where relationships are all, and where business owners in all genders, sexual orientation and colors, diversification improves the odds of winning lucrative deals in a picked-over market.”

Onboarding

Onboarding is what separates a valued trusted advisor from the transactional-focused search consultant. “Whilst getting the right placement into the role, within a highly competitive market is key, just as important is the onboarding process,” Ravi says. “This process can be done by taking detailed feedback from references and really getting a balanced view of the candidate (i.e., strengths AND areas for improvement), so to be able to build a full 360 profile on the successful candidate–all valuable data when building the 90-day onboarding plan, and the longer-term development plan which has proven to influence leadership retention and morale.”

Portfolio Support, Vital for Future Growth

With a red hot market and multiples becoming more and more lucrative, Mr. Ruprai says that private equity firms need to bolster their portfolio company operations in order to achieve their target returns on their investments. For example, since the onset of COVID-19, the need to work remotely has become a common theme, therefore the IT infrastructure of being able to carry out complex tasks and work remotely is vital for a firm’s success. “They consist of people in different areas of operations-data analytics, human resources, supply chain management, and sales and marketing,” Mr. Ruprai says. “The need for a talent leader is now more important than ever. Recently I was talking to a technology focused fund, that listed a talent focused operating partner as a ‘value creation’ partner. This in itself shines the light that the most important asset you acquire from an investment is TALENT!”

 

 

 

 

 

 

 

 

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