Private equity for future leaders

To the uninitiated, the prospect of a CEO role in a private equity portfolio company can be appealing and intimidating in equal measure. The potential for greater reward is real, but just as much is the risk of failure, so it’s not for everyone. The MBS Group recently co-hosted a private dinner with a leading European private equity firm, where the theme of the night was demystifying the role for a group of high performing future leaders, some already involved in private equity, some coming from the corporate or VC world. Below, Maria Henderson – head of our dedicated PE Practice – outlines some of the key themes that emerged from the night.

Financial acumen

The portfolio CEO must be acutely attuned to the implications of a private equity deal’s financial structure and the inherent need to create value, with the ultimate focus on making a profitable exit. Although it may be considered taboo and even gauche in British culture, those involved in a private equity deal are required to openly talk money. The ability to constantly and intuitively value one’s own equity holding, and understand how that valuation changes as debt, interest levels and market sentiment fluctuate, is paramount. Not adopting this approach could suggest a CEO who is out of tune with the value creation agenda of the company as a whole, and be a red flag to co-investors.

Strong communication skills and a good relationship with the board

With the layers at the top of a PE-backed company greatly compressed, communication channels are short and direct, and investors are inevitably more involved. A portfolio company CEO must not be afraid to use these channels, frequently and openly, especially when issues arise. Keeping the board in the loop is crucial. The CEO must find their interactions with investors helpful and supportive, rather than feeling over-managed.

Lean management teams

Management teams in portfolio companies are lean, making communication more efficient and emphasising the focus on delivery of the plan. As such, the CEO must be a good talent-manager and recruiter, and the skillset of the CEO and their team must be quite broad, as there are fewer functional experts to rely on within a portfolio company.

Making the move into PE

Managers on a strong corporate career path but keen to work in private equity would do well to remember that successfully ‘breaking in’ often comes down to timing. Being part of a team that goes through a buyout is a great route, as they are likely to be given a chance to learn and prove themselves in the context of the new company. Alternatively, joining a private equity portfolio company in a key role, but slightly removed from the spotlight, can provide an excellent opportunity to adapt to the new environment and build a strong relationship with the fund. Many go on to become the CEO this way.

The importance of due diligence

Private equity firms are extremely analytically rigorous and do as much due diligence as possible on their investments. The same goes for their management team. CEOs can expect to be well vetted before joining a portfolio company, and should take a similar approach to the firm they’re joining. It’s important to understand more than just the finances of the company, and to research the scale of the task at hand. Unsurprisingly, perceived or real failure on the part of a management team is anathema to PE firms, which is why the selection process is so rigorous, and few are offered second chances if the first attempt is unsuccessful.