Rob Kotecki, President, Volatile Media
PEI’s Operating Partner Forum
Private equity can seem like the promised land for operating executives that feel stifled by the bureaucracy of a large, traditional corporation. The asset class can be lucrative, but its culture might not suit everyone, as some may find themselves missing the resources and shared responsibility that comes with those Byzantine org charts.
So executives about to lead a portfolio company should think about how ready they are for a real culture change. Because with that freedom comes greater accountability, often with tight deadlines to reach ambitious financial goals, with far fewer resources.
Candidates should do their diligence into the private equity firm and the portfolio company in question, from asking tough questions in the interview process to tapping peers with experience in the asset class. It’s not the right culture for every frustrated corporate executive, but for some, it can be the ideal environment to prosper.
Private equity firms know their culture can be a shock to veteran corporate executives. “A lot of our PE clients really prefer operating executives with some type of prior private equity experience,” says Joanna Chang of The Lancer Group, which helps GPs source operating talent. “The experience could include any particular variety of private equity, be it venture, growth, middle market or buyout, so long as they understand how a private equity firm operates, how the leadership in a partnership works, and how to manage their mandate and timeline to a liquidity event.”
That timeline is what informs so much of the cultural differences between private equity and any blue-chip company. “In a corporation or a large family business you’re managing forever, right?” says Deborah Scher, an operating partner with Fitzroy Health. “But PE funds have end dates. Portfolio companies are managed around creating value as quickly as possible and moving to an exit.”
That exit puts a ticking clock on value creation efforts. “There’s an urgency to meet certain financial objectives and other KPI’s,” says Mike Kohlsdorf, an operating partner with Francisco Partners. Several market participants argue that not every PE firm is only about the numbers, but there’s no doubt that they are a key priority. And operating executives should expect to be held accountable for failing to reach those goals.
“A portfolio company CEO is certainly leading the value creation effort, but in many ways, they’re a hired gun,” says Chang. “They’re frequently meeting with the GP to review how the Company is performing against the expectations laid out in the investment thesis.”
And the executives are usually left to meet those expectations with fewer resources than they had in their corporate lives. “Often in a large corporation, you’re running a division with significant corporate infrastructure, so in many cases, you’re not dealing with cash management, HR, IT, or marketing but in private equity, you’re on your own,” says Kohlsdorf.
“That requires deeper knowledge across all functional areas because you now need to lead all of those functions without assistance from a corporate staff and infrastructure.” Without the benefits of those resources, it can be a steep learning curve.
“I was fortunate that my corporate employers liked to run lean and scrappy, but even so, I never once had to think about cash flow or lining up investments,” says Rolla Couchman, the CEO of EMU Learning, a portfolio company of Fitzroy Health. “In some ways, the corporate world was my training wheels and now I get to see just how good I am in my domain.”
That lack of infrastructure can also be exhilarating. “There’s a real difference in the ability to act,” says Scher. “It’ll often be the C-suite executives collaborating with the private equity team, whereas you’re not wrestling with an extended bureaucracy that requires building a consensus for approval.”
“I used to spend 90% of my days in meetings, and would have to squeeze my actual work in wherever I could,” says Couchman. “Now I spend a far greater percentage of my time doing what’s required to grow the business.” Private equity firms may hold executives accountable for results, but they also offer the autonomy for them to deliver.
This makes it crucial that corporate executives conduct their own due diligence into the GP and the specific situation at the portfolio company. “Certainly, executives have to vet the investment case and perform their own due diligence to determine if it’s realistic,” says Kohlsdorf. Given that many deal teams don’t have extensive operating expertise, it’s important that candidates use their own experience to vet that investment case and question what’s being asked of them.
The leader of one executive search firm cited the most common cause that portfolio company CEOs don’t work out is there was never an honest, in-depth conversation between that executive and the private equity firm about two key issues: expectations for the company in question and how they’d collaborate.
Even as lean as private equity backed companies can operate, it’s still fair for executives to ask if they have the resources necessary to meet expectations. “Who can you lean on?” asks Kohlsdorf. “Do they have a roster of other operating executives to collaborate with?” And often it’s a matter of asking questions about the nature of that collaboration. “Is it hands off, or do they have a list of 100 different operating plays and want you to run all of them?”
This is where corporate executives should perform their own market intelligence, by reaching out to peers who may have worked with that given firm, or at least worked in the asset class. “Over your career, you develop your own advisory board of mentors,” explains Scher. “And part of their value is perhaps not being at the firm you’re thinking of joining, and therefore can provide an independent perspective on the opportunity you are considering and what it would take to be effective there.”
The truth is that many private equity firms offer resources to help corporate executives make the transition into a more autonomous, accountable role. “In the best situations, you’ll find an operators group that have successfully run companies and bring that experience with a solid set of proven value creation platforms,” says Kohlsdorf.
The result can be a new career track that offers significant financial upside and a faster rise to the top, with a better work environment as well. “One of the most pleasant surprises was the way in which politics goes out the window when everyone on the team has a very tight connection to the success of the business,” says Couchman. “There is no room to burn energy on anything that does not deliver growth.”
No wonder so many executives are willing to risk a little culture shock to reap the rewards of a new playing field.