Although the relationship between private-equity firms (PE) and their portfolio-company CEOs is crucial to the success of PE investments, that relationship is often marred by mutual misunderstanding and skewed expectations. A new report titled “Private Equity and the CEO: Partners in the Quest for Value” was published today by The Boston Consulting Group and details how PE firms and CEOs can nurture and maintain a productive relationship that delivers benefits for both parties.
“One lesson that stands out is that while most PE professionals would describe their relationships with their CEOs as partnerships, even the most successful partnerships have points of friction,” said Antoon Schneider, a BCG partner and coauthor of the report. “For example, CEOs accustomed to running their own show often bristle when PE firms intervene in management issues.”
By the same token, PE firms have the right to remove underperforming CEOs — and they are quick to assert that right when necessary. BCG’s research into 198 companies currently under PE ownership found that 57 percent have already changed CEOs since being acquired.
Tensions between a CEO and a PE firm often arise because the CEO fails to grasp what PE firms prioritize when they select and evaluate a chief executive. PE firms, for example, generally want their CEOs to focus primarily on operational matters, while CEOs view themselves as strategists first and operators second.
Yet despite the inevitable challenges and complexities of the relationship, more than 90 percent of CEOs at portfolio companies agree that the PE owner has had a positive effect on their company’s performance. An almost equal percentage of CEOs say that the PE firm has enabled them to succeed in their role and has made them better at their jobs.
Properly managed, the PE-CEO relationship can spur value creation in a powerful way. BCG recommends that CEOs and PE firms alike keep four key imperatives in mind.
The first is to understand where the other side is coming from. For CEOs, this often means refreshing or gaining new technical and financial skills. For the PE firms, this often means taking time to identify and dispel any preconceived notions about PE that CEOs might hold.
Second, firms and CEOs should also set clear and achievable objectives together, defining roles in detail and avoiding a one-size-fits-all approach.
The third imperative is, simply, be transparent. PE firms and CEOs need to maintain transparency when the news is bad as well as when it is good.
Fourth and finally, PE firms and CEOs must consciously and continually strive to extract the full benefits of their partnership. A PE deal works best when the PE professionals and the CEO are each other’s greatest ally. In a world where private equity is focused on driving real value creation, making the relationship work should be a priority for PE firms and CEOs alike.
A free copy of the report (you do need to provide some registration info) can be downloaded by clicking HERE.
© 2013 PEPD • Private Equity’s Leading News Magazine • 11-20-13