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Driving Success at PE-Owned Firms: How Operators Can Avoid the Pitfalls

What CEOs and CFOs at private equity-owned companies had to say about mitigating some of the challenges faced by their businesses.

Lawrence Siff
Driving Success at PE-Owned Firms: How Operators Can Avoid the Pitfalls

This article is part of ACG’s series for executives at private equity-backed companies, sponsored by RSM US LLP, a leading accounting, tax and advisory firm dedicated to the middle market. It originally appeared in the Summer 2021 print edition of Middle Market Growth.

Operating a private equity-owned company presents unique challenges, especially for CEOs and CFOs. Since the PE firm’s goal is to sell the company, they will likely be focused on value creation within a short period of time. For this article, I spoke with four CEOs and two CFOs who have been serial portfolio company leaders (often with multiple PE owners at the same time) about mitigating some of the challenges faced while leading a PE-owned company.

Insights that emerged from those conversations for the first-time CEO or CFO of a portfolio company include:

Do your homework up front. Speak with leaders of other portfolio companies to find out what it’s like working with the PE firm. As one of the CEOs I spoke with said, “You need to know what their style is; what kind of information they want and how often; what their philosophy is; and how they handle ambiguity and bad news. Some PE firms are heavily involved and others are more passive; some want to know immediately if there is any bad news and others prefer to wait until the weekly call.”

Develop an honest and transparent relationship with your sponsor. Treat them as your partner.

Treat the PE firm as your partner. “Develop an honest and transparent relationship with your sponsor,” advised one CEO. “Treat them as your partner.” All six executives said that PE firms “don’t like any surprises.” Your job as CEO or CFO is to “deliver on your financial commitments, keep them well-informed, be aggressive, constantly make improvements, and astonish them with your initiatives,” said another. For example, one focused on selling more to their existing customer base, resulting in substantially increased EBITDA, in addition to expanding overseas.

Get out of the gate quickly. Once you take PE money, the gun has gone off and the race has started. Have a well-developed 100-day plan. “IRR and CAGR are critical within a 48-60-month period,” said one CEO. Another advised not lingering over unsuccessful initiatives. “You test a new concept, it doesn’t work, own it, learn from it, and move on.”

Communication and preparation are key. All six executives emphasized that you cannot be half-prepared— ever. Talk through any issues with data as your driver. One CEO noted that you have to “roll up your sleeves and get in the weeds” so you will be able to answer the tough, detailed questions. You may be accustomed to relying on intuition and experience, but for the PE firm you have to justify your answers with analysis.

Understanding debt. All six executives commented on the role of debt. One CEO stated, “The initial challenge for me was having more operating leverage into our company, so we became more analytical, tracking where every dollar was being invested.” This led to a comprehensive review of the sourcing capabilities, which the company shifted to a more cost-effective bidding model. A CFO pointed out “you don’t want to find out your covenants the first time you trip them,” because that would put you in a precarious position with your lenders and shareholders.

Reporting demands. Communication will typically be with the CEO and CFO. Your PE firm may want to attend other meetings, such as sales, in addition to board meetings. According to one of the CEOs, you have to “distill all operations down to key components and gain alignment with the PE firm.” A lot of time will be dedicated to forecasts, focusing on risk and opportunities, as well as upsides and downsides. Have your facts lined up, focus on the issues, and recommend solutions.

It’s about strategy and execution. Strategic planning applies not only to your overall goals for the company but to your relationship with the PE firm as well. According to one CEO, “We consistently under-promise and over-deliver.” He also emphasized the importance of having a reasonable growth plan that you can execute on, being able to come up with solutions, and have levers that you can pull. The results speak for themselves: This CEO has built the company four-fold through a combination of organic growth and acquisitions.

The right people in the right place gives you more time to work on your strategy.

Strong teams win. You have to, as one CEO said, “surround yourself with a strong team that you can trust and give autonomy to. The right people in the right place gives you more time to work on your strategy.” If you don’t have the right people in place, get rid of dead weight and find the people who will help you reach not only your goals but those of the PE firm.

Listen and learn. One CEO noted that most CEOs react or respond to the PE firm, thinking that’s what’s expected of them, instead of really trying to understand what they are saying. Another said, “What I’ve learned is that you have to put yourself in the sponsor’s shoes: Ask why they are asking the question.”

The PE firms often see gaps that you as an operator don’t see. “They are sponsoring you to have reliable execution, a strong track record, and a demonstrated history of treating the shareholders as partners,” one of the CEOs noted. PE firms have deep financial knowledge which, for example, can translate into leading the companies to negotiate a better debt facility. The focus of PE firms is on strategy, growth initiatives, where to invest, and most importantly where not to, so they don’t spend much time looking in the rearview mirror. From an M&A standpoint, a strong relationship with your PE firm can tip the scales in your favor. Beyond this, a number of the CEOs discussed the vast resources PE firms have with regard to operating partners and world-class executives in human resources, manufacturing and distribution, as well as international relationships and expertise.

The PE firms bring discipline that help companies identify all the risks and opportunities. By understanding the unique challenges of being owned by a PE firm, you will be able to extract the most value from the situation, build a successful relationship, and have an exit that satisfies everyone.

Lawrence Siff is a strategic advisor to the middle market as the CEO of Neptune Advisors and C Level Community.