A playbook for newly minted private equity portfolio-company CEOs

Viewed in McKinsey & Company

The role of a chief executive officer in the 21st century is a challenging one. Looking for something even more challenging? That likely would be serving as a CEO for a private equity-owned portfolio company.

More private equity-owned companies

With private equity’s growing prevalence in corporate ownership, it is a challenge many chief executives are now faced with meeting. This prevalence is both notable and, as of the fourth quarter of 2020, unprecedented. “Despite the pandemic,” McKinsey reports, “PE firms closed more than 3,100 deals in the fourth quarter, the largest count of any quarter to date.”

How is it different?

What makes the role of the PE-owned portfolio CEO so complicated? The answer to that question lies in a whole set of challenges not commonly confronting a traditional privately or publicly-held corporation’s CEO.

The board directors are engaged in the operations

It starts with the role of the board of directors. Unlike a traditional private or publicly-owned company, private equity boards are vastly more engaged in the operations and strategy of the company.

Corporate strategies are engraved

Additionally, unlike traditional companies, the CEO of private equity-owned portfolio companies has almost no leeway on corporate strategy. “CEOs in PE face a paradox,” this McKinsey report argues, because “the business plan is often ‘written in blood’.”

CEOs are (vastly) engaged in the financials.

This lack of strategic flexibility also requires a typical PE portfolio CEO to be vastly more engaged in financials than typical privately or publicly-owned corporate CEOs. “In a public company, the CFO will drive all that, but in PE, the CEO has an equally strong grasp of the financials,” one PE partner said in this McKinsey report.

Fast execution pace

The differences don’t end there. The biggest difference, McKinsey reports, is the pace of the work itself. “PE firms operate with strict timetables for when a company should deliver against its deal thesis, which means that urgency is a way of life for leaders,” this report states.

This also leaves vastly less time for a CEO to conduct his or her hiring. As one PE executive who specializes in hiring told McKinsey, “the honeymoon period is short, and we encourage the CEOs we hire to make talent decisions very quickly.”

Close relationship with every board member

Given all these pressures, what steps can today’s PE-owned portfolio CEO take to be successful? McKinsey points to a few. First is a CEOs relationship with his or her board. Because a typical PE board is both more engaged and likely more unyielding in their business assumptions and expectations, it becomes crucial for the CEO to build individual relationships with all board members, to fully grasp the expectations of each board member, and sometimes to be prepared for considerable differences of views among these board members.

Create value, value and value

This is addressed through a CEO’s commitment to a steady pace of communication and pro-active measures with the board. “Come to your owners with ideas. Put forward a point of view on organic and inorganic growth. Your job is to constantly search for new sources of value, act at pace, and use informal and formal communication channels,” McKinsey argues.

The private equity portfolio CEO should be prepared to act both assertively and expeditiously on just about every function, McKinsey argues, including assembling an execution-oriented, cohesive, and yet diverse management team.

A realistic yet ambitious 100-day plan is important and should include constant reflection on a key question: “If you were a venture-capital or PE firm, would you buy the business and keep your talent?” Answering this question in the affirmative requires action. “Maintain an expansive mindset that encompasses all potential levers for value creation, including potential profit or balance-sheet improvements, working-capital optimization, product innovation, customer partnerships, regulatory actions, M&A opportunities, and the right exit strategies,” McKinsey concludes.

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