February 24, 2021 – Private equity firms have learned from the lessons of the global financial crisis of 2008-2009, in which the industry was widely seen as having missed a major opportunity to acquire assets at steep discounts. As a result, PE firms have been more active during the pandemic, determined not to miss the opportunity this time around. Some have been deploying capital, while others have waited to see when we will hit the bottom.
“It is important to act proactively and to take advantage of opportunities caused by the virus and to make sure that you are staffing up your firm with the right leaders to steer the company in the right direction,” said Jeff Hocking, a partner with ON Partners. PE firms are in a much better place to take advantage of the market changes post-COVID-19 for many reasons. “They are positioned very differently than VC firms (which typically specialize in one or two industries and look at smaller opportunities) and corporate development teams of major companies that only invest in opportunities that benefit their individual companies,” said Mr. Hocking.
Additional reasons: Mr. Hocking noted that PE firms are in a unique position in that many have raised very large funds that are dedicated to investing in undervalued assets. What’s more, they have dedicated teams whose sole job is to identify investment opportunities. PE firms also have the assets and teams to potentially buy multiple companies and combine them to compete with competitors that are much larger than typical mid-market companies. And some of the major PE firms have dedicated industry sector specializations and are not just tied to one or two, such as technology or industrial. This diversification, Mr. Hocking said, will pay off tremendously in the near future.
Significant PE firm resources have been deployed to position current portfolio companies to survive the pandemic. However, the larger organizations, in particular, are quietly looking at companies that will need a PE firm to survive.
“There is no shortage of funds, but it appears that cautious planning is taking place now – and everyone fully agrees that once the pandemic is behind us, the PE sector will be as active as ever,” said Mr. Hocking.
Returning to Normal
“Depending on how much of a downturn we actually end up seeing, some PE firms may be taking over companies that have cut dramatically and now need to be rebuilt,” said Mr. Hocking. “Hopefully, we won’t see a drastic downturn and PE firms will continue to look for turnaround experience and previous experience working in PE environments, which will always be in demand.”
Once everyday life and business begins to return to normal, PE firms will be focused on growth experience at the CEO and CRO level, said Mr. Hocking. But to ensure their investments are focused on the right actions, one role that he believes will be in demand, maybe even more so than in the past, is the chief financial officer.
“Next to the CEO, the most important role in a PE-backed company is the CFO,” said Mr. Hocking. “Post COVID-19, PE firms will be investing in companies poised for growth, but every PE firm wants measured growth with profitability versus the growth at all costs business models we have seen in the past.”
Traits PE firms will look for, he said, will include: a prior track record of working successfully in a PE backed environment; extensive exposure to the board; and strong leadership and decision-making skills – even if they are unpopular decisions. All PE firms want to maximize their investments and will rely on a CFO to do this, sometimes more so than the CEO.
Key Traits of Turnaround CEOs
Baillie Parker said that having a highly skilled strategic problem solver in the CEO position is extremely important. “Strong turnaround CEOs have the ability to quickly digest information and data and distill the underlying issues in the business,” he said. “Once you are far enough along in the interview process, let candidates review the financials and the board documents. Observe what questions they ask.”
Look closely at their previous leadership roles and understand how they identified and prioritized problems and came up with a new strategic plan for the business. “You don’t want a candidate who is only capable of solving operational issues, which is just one aspect of the turnaround,” said Mr. Parker. “You also need someone with a demonstrated ability to create a new strategy for growth with a very specific timetable around tactics and execution.”
PE Executives and Portfolio CEOs Identify Vital Attributes for Success in Turbulent Times
Building a strong executive team is one of the most important skills for a CEO, PE executives and portfolio CEOs told Summit Leadership Partners in a new survey. The difference is how the leaders choose to reach those goals. In a new Hunt Scanlon Media “Talent Talks” podcast, Summit Leadership’s CEO, Dan Hawkins, discusses the pros and cons of talent due diligence vs. organization assessments post-transaction. He also addresses how PE portfolios can accelerate the talent component of their value creation plan.
On a recent CEO search for a distressed private equity-backed company, Mr. Parker remembers, one finalist stood out because he had previous successful turnaround experience. “More importantly, though, he had demonstrated success shifting market focus from a troubled sector – in this case energy – into new, higher growth markets,” said Mr. Parker.
It is also important for the CEO to be a realist with an open and transparent communication style. “This person must have the ability to confront the uncomfortable,” said Mr. Parker. “Once she or he has distilled the business challenges, (s)he needs to be able to communicate those problems to the team and create a realistic transformation story that everyone can understand.”
“During a CEO search for a troubled company, our private equity client was taken aback by the candidate’s directness voicing her concerns about the company’s strategic direction as well as its operational footprint,” said Mr. Parker. “Ultimately, though, they realized this sort of candor was exactly what they were lacking.”
Mr. Parker also suggested that interviewers ask the candidate what mistakes she or he has made in the past and in retrospect how they would do things differently. “If the candidate is not self-aware enough to take ownership of past mistakes, the individual will not have the transparency needed for a turnaround,” said Mr. Parker. “Having the ability to acknowledge missteps and know how to correct them is key.”
As executive recruiters, ON Partners mission is to propel an organization’s mission by building C-level and board leadership teams. The firm was founded in 2006. Mr. Hocking has over 20 years of search experience. Previously head of the North American technology practice at Korn Ferry, he serves private equity and major software companies with a focus on the technology and software sectors. Mr. Parker has completed over 300 searches for C-level, board, and high-level executives across a range of functions. His work focuses primarily in private equity across the technology and industrial sectors.
Contributed by Scott A. Scanlon, Editor-in-Chief; Dale M. Zupsansky, Managing Editor; and Stephen Sawicki, Managing Editor – Hunt Scanlon Media