Can You Lead a Private Equity Portfolio Company?

By: David Astorino and Steven Gilbert

A Unique Operating Environment

Most private equity firms have high levels of debt. They require constant attention to cash flow, spending, debt repayment, and financial targets so their companies can exit in two to five years. In addition, there is the issue of the company owner’s sale and exit, which rarely exists in public company environments. The overriding requirement is to manage and pay down debt in reasonable time frames.

Private equity requires CEOs and their teams to be aggressive in making big restructurings and changes in trying to run and fix companies. In doing this, they need to operate with a speed often uncharacteristic of public organizations. The private equity firm is focused on fewer goals and a defined endgame frequently outlined in financial terms.

In addition, portfolio companies typically have fewer human and financial resources than their corporate counterparts. Private equity CEOs usually need to have a broader grasp of business functions and be able to make decisions that might be delegated in public companies.

Private equity stakes for CEOs and top teams are generally illiquid and long term—different than the conventional equity incentives of corporate stock options that vest annually. Longer-term and inherent illiquidity associated with private equity deals requires CEOs and their top teams to plan and make decisions over a three-to-five-year period. They must be adapted to medium-term value creation.

Despite the pressure for results, CEOs and top teams of private equity firms do not have to address the reporting requirements of public companies. Freed of analysts’ quarterly reporting demands and publicity, they can take a longer-term view of affairs and possibly even cut some corners.

Traits of Successful Private Equity CEOs

Each private equity business is normally guided by a leader with specialized industry knowledge. Because of the debt burden, private equity CEOs must also possess solid financial knowledge and expertise. They must know how to manage high debt and reduce costs, and they need to be focused on capital management and debt reduction. Real financial savvy is key as financial strategies command the most attention. Private equity firms have added new, more complex measuring sticks to business, which means CEOs need to be more than just numerate or simply able to read and manipulate the (corporate) P&L.

Besides solid financial expertise, private equity CEOs typically have broad experience in every function, particularly product development, supply chain, sales, and marketing: They are generalists. Behaviorally, they excel at prioritizing, allocating resources, and resolving conflict over goals. They must create and run streamlined businesses, so they have to adapt to any lacking resources and be flexible enough to run lean.

Leaders need to have a ruthless decisiveness that functional and public company executives often lack. They must be quick to make tough, important commercial and financial choices. Typical failures of struggling portfolio leaders include being unable to remove inadequate executives and cut overhead quickly.

They also must be comfortable with high risk and uncertainties. Management can earn huge payouts if the deal thesis is actualized. Unlike public companies that seek to deliver steady returns to shareholders and where executives are often rewarded for playing it safe, private equity CEOs have to provide entrepreneurial leadership and pursue proactive change.

Private equity portfolio companies typically lead autonomous businesses in decentralized organizational structures. Leaders must be able to select, motivate, and mobilize small top teams to deliver commercial results in strict adherence to investors’ time frames. At the same time, they must forge effective board-level partnerships with frequently intrusive, hands-on, financially astute owners. They must be operate independently most of the time yet recognize when they need to be collaborative.

The Importance of Leadership

The leaders of private equity portfolio companies are a special breed. They lead takeover targets to higher levels of operating returns as compared with their corporate owners. They are usually best in class in their functional specialism, financially savvy, long-term thinkers, ruthlessly decisive, risk takers, operationally strong, and psychologically able to shoulder the burden of high debt and to initiate and pursue drastic change to pay it down fast. Beyond individual capabilities, they must be able to corral, engage, and lead others. Each operating environment has its unique challenges and opportunities, but here are a critical handful of leadership requirements confirmed by our portfolio CEOs that transcend the majority of operating environments:

  • Quickly getting the right people into the right roles.
  • Ensuring the entire organization knows its priorities and objectives.
  • Digging in and focusing on the details that matter.
  • Balancing the need to be autonomous with the flexibility and openness to both leverage and engage the board.
  • Understanding the dynamics of the business better than anyone else.
  • Thinking like a board member … not just like a CEO.
  • Knowing how, where, and when to modulate the pace button.

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