Managing a private equity-backed firm brings a unique set of opportunities and challenges for senior executives.
On the one hand, private equity (PE) owners provide a degree of freedom and generous compensation unmatched by publicly held corporations; on the other, PE investors focus on results and their limited tolerance for under-performance can result in rapid turnover of management teams if the interests are not aligned.
To succeed in private equity, executives must develop a transparent and collaborative relationship with PE owners
Senior executives must be focused, driven and willing to roll up their sleeves to do whatever it takes to improve their respective portfolio company. In addition to managing the balance sheet, they will be expected to implement strategic change, grow the top line, and align the company for exit 4 to 6 years down the track – often while learning the business on the fly.
To succeed in private equity, executives must develop a transparent and collaborative relationship with PE owners, who are very hands on and expect answers to questions fast. “No surprises” – is the best advice one can give CXOs.
Interaction between owners and company managers is most concentrated in the early months post-investment (when PE firms work closely with managers to implement strategic change, organizational redesign and processes to track performance) and later in preparation for exit.
Despite best intentions regarding roles and responsibilities, differing opinions can at times result in tensions between management teams and PE owners most notably due to:
- Difference of opinion regarding planning and KPI definition
- Break downs in transparency and accountability
- Poor business performance
Despite this potential for discord, an overwhelming number of CEOs – more than 90 percent of those surveyed for a BCG report – believed that PE ownership had a positive effect on performance and enabled them to be successful in their role.
When it comes to compensation, managers of PE-backed companies are incentivized from the start, one of the fundamental reasons for the success of private equity transactions.
Not only is management encouraged to invest alongside the PE owners, but remuneration packages for senior executives and the second layer in an organization usually include a significant share of equity, aligning economic interests of owners and managers.
While adding a portion of their net worth brings an element of downside risk for management, the co-investments are typically “sweetened”, for example management may receive an equity share five to seven times the value of its investment giving them the opportunity to generate outsized returns through upside leverage.
Private equity is a place where executives get to test every professional skill in their portfolio and prove that they make a difference and execute fast.
While there are definitely risks, executives who have confidence in their abilities, a preference for high-pressure, fast-paced work and the emotional intelligence to work with a very focused hands-on owner, will find the rewards are certainly worth it.