positioning the private equity portfolio company ceo for success

Spencer Stuart consultants focus on senior-level executive search. Spencer Stuart applies its extensive knowledge of industries. board director appointments.About Spencer Stuart Spencer Stuart is one of the world’s leading executive search consulting firms. Privately held since 1956. functions and talent to advise select clients — ranging from major multinationals to emerging companies to nonprofit organizations — and address their leadership requirements. . succession planning and in-depth senior executive management assessments. Through 50 offices in more than 25 countries and a broad range of practice groups.

Today. high risk. Since those early days. This has been a welcomed development for the growing number of leaders aspiring to the CEO role. considering that the ownership model just started to evolve in the mid-1980s and picked up speed in the early 1990s. including First Chicago Equity Corp. The Blackstone Group. including the largest Fortune 500 companies. The largest firms — including Kohlberg Kravis Roberts. there are several hundred private equity firms in the United States with more than $1 billion in assets under management and many hundreds more smaller firms. fewer resources freedom and greater reward potential traits of the successful private equity ceo finding the private equity ceo setting up for success board governance is uniquely challenging and rewarding conclusion 2 3 4 6 8 9 10 11 The private equity and venture capital-backed portfolio company chief executive officer is a relatively new phenomenon. Firms such as Madison Dearborn Partners. Reflecting the broad acceptance of the model. institutional investors and even smaller private equity firms. had their roots in just a very few investment companies created in the 1970s. which emerged in the 1980s and 1990s. commercial and investment banks.the portfolio company career path private equity challenges: high debt. 1 . managed and built. GTCR and Willis Stein & Partners. high-networth individuals.000 CEO opportunities at privately owned portfolio companies. the private equity ownership model has set in motion dramatic changes in the ways businesses are financed. The rise of private equity ownership has had another effect on talented executives: it has created more than 3. and Continental Illinois Venture Corp. whose career options in the past were limited to public companies and family-owned businesses willing to hire outsiders. private equity funds include a wide range of investors. Madison Dearborn Partners and others — have bought and sold dozens of stand-alone legal entities and can have assets under management in excess of $10 billion. pension funds.

Procter & Gamble and others with autonomous businesses and a decentralized organizational structure regularly produce effective leaders who have had opportunities to move into general management roles with monumental leaps in scale and increasingly complex responsibilities. “The more time I spend in this business. the more convinced I am that the great CEOs are those who can identify. and continues to be. They also possess a sense of urgency about executing the company’s mission. U. private equity firms and their portfolio companies represent a more exciting entrepreneurial fit and an opportunity to advance their career to become a CEO — opportunities they may never get if they remain in large. and firms required a steady supply of strong leaders for their portfolio companies. Others apply the hard lessons learned from their first assignment and succeed in their next one — if given the opportunity. The executives who most successfully make the transition to private equity portfolio companies. For many of these high-achieving individuals. One growing source of seasoned leadership talent for private equity firms and venturebacked startups was. problem solvers and have financial savvy.The portfolio company career path By the time the “Roaring ‘90s” arrived. – Based Venture Capital and Private Equity Firms 2006 Assets > $1 billion Assets < $1 billion 242 1. While these organizations have provided a superb training ground for general managers and future business leaders. train and retain the best people. a significant number of executives who thrive in a large public company environment ultimately fail in their first private equity portfolio leadership role. including management buyouts and corporate spin-offs. from within the ranks of large.” Avy Stein. unique ownership models and a higher degree of board oversight. recruit.350 Source: Galante's Venture Capital & Private Equity Directory 2 . Organizations such as General Electric. senior partner at Willis Stein & Partners Unfortunately. public companies. public companies. the entrepreneurial leaders within these companies often find themselves competing against a large pool of equally skilled general managers for too few opportunities at the highest levels of their organization.S. They are able to adapt quickly to new environments. evolving leadership requirements. discovering too late that they are better suited for roles in larger companies with more resources and a different culture. typically are change agents. investments were pouring into private equity at unprecedented amounts.

It has helped us to identify best practices for success in this unique environment. formerly a Wind Point Partners holding.Because of the unique challenges and opportunities inherent in running a portfolio company — and the high risk of failure — identifying and attracting the best and most appropriate talent can be a significant challenge. “There is always the issue of the owner’s exit in two to five years.000 searches for CEOs and other senior-level leaders of private equity-owned companies. however. the lure of a portfolio company includes the opportunity to break free from the traditional corporate structure along with the potential payoff following a successful sale or initial public offering. As private equity ownership has increased. The number of CEO searches the firm conducts has increased three-fold since then. requiring constant attention to cash flow. Bere led large divisions within Quaker Oats before making the jump to private equity. “Most CEOs in a private equity-backed company must commit to a lifestyle and management style change. former president and chief executive officer of Bakery Chef. Spencer Stuart continues to be called upon to assist private equity firms in finding the right talent for their portfolio companies. Spencer Stuart has conducted more than 1. For entrepreneurial executives. “I can’t think of anything more exciting than being with a company that’s doing well in a private equity situation. Our interviews with more than 60. and. debt repayment and financial targets in order for companies to achieve their exit strategies. which almost never exists in most public company environments. fewer resources Because of its unique blend of risks.” 3 .000 candidates for private equity and venture capital clients.” said David L. Goldston. challenges and opportunities. and about 15 to 20 percent of current CEO searches are for private equity and venture capital owners. Bere. chairman. rewards. and they must think like the owner of the business on every issue they consider and act upon. have given us insight into the demands on portfolio company leadership and how leading a portfolio company differs from leading a public company.” Mark R. spending levels. a private equity portfolio company is not for everyone. approximately 5 percent of the CEO searches the firm conducted annually in the United States were for private equity portfolio companies. Private equity challenges: high debt. private equity companies have high levels of debt. including 7. high risk. I can’t think of anything worse than getting close to bankruptcy. In 1990.000 individuals during this period. What specifically are the challenges? Very often. president and CEO of United Online During the past 10 years. on the contrary.

GE and Ford to his current role as president and CEO of SIRVA Corporation. The attention to cost-cutting also means that portfolio company CEOs may have to do without the perks of the title. will be readily apparent. They are willing to exchange the relative security and longevity offered by 4 . you have a seat on Southwest Airlines.” Brian Kelley. both positive and negative.said Brian Kelley. They often have to make quick and difficult decisions to cut costs and preserve cash. president and CEO of SIRVA Corporation “You must have the desire and ability to thrive in a fast-paced. a private equitybacked relocation solutions company. “In the corporate world. many entrepreneurial-minded executives are drawn to portfolio companies for the freedom from the constraints of the corporate world and the potential of much greater rewards. “cash is king” at portfolio companies. in some companies in the private equity portfolio world. Portfolio companies also have fewer human and financial resources.4 billion. You also must have a very broad grasp of all the functions of a business as you typically don’t have a lot of staff or ‘experts’ in each discipline. these businesses do not have the deep pockets of a large corporation behind them. When pursuing new strategies or launching new products or marketing initiatives. Furthermore. Lee and went public in 1997. H. was aquired by T. without the reputation and global brand of a major corporation. portfolio companies can have a more difficult time attracting top talent under the CEO. You really can’t make many personnel mistakes at the senior level as the results. “A private equity portfolio company allows for the CEO to be more aggressive and make a more radical restructuring stance in trying to fix a company. The company. private equity-backed consumer products company Spectrum Brands.” observed one CEO of a $400 million portfolio company attempting a significant turnaround. you have private limos and the Falcon 50. stressful situation where everything you do and every decision you make is critical. formerly named Rayovac. Jones. the CEO is left to make many decisions that might be more easily delegated in a public company.” said David A. a former GE executive who is now CEO of a $2. which would be almost impossible to do with the same rigor and speed in a public organization. As a result. Freedom and greater reward potential Despite the challenges and the risks. so quickly increasing revenue and tightly controlling costs are top priorities for their CEOs. who brought extensive experience from leadership roles at Procter & Gamble. As a result.

Einstein/Noah Bagel Corp. Goldston. Juno and Classmates. less bureaucracy to navigate > Highly leveraged. yet a sale or IPO can provide a significant payout to top executives. several years out. according to Avy Stein.” said Mark R. “Most CEOs in a private equitybacked company must commit to a lifestyle and management style change. but the big upside comes only at the end. recapitalization or a merger with another company. president and CEO of United Online (NetZero. Public company CEO > Greater depth of financial and talent resources to draw upon > Brand-name recognition > Access to public markets to raise funds for initiatives > Quarterly earnings pressure > Greater personal liability in current regulatory climate Private equity CEO > Equity stake provides generally greater upside potential > Focus on longer term financial objectives. senior partner at Willis Stein & Partners. chairman.” The CEO of a private equity-backed portfolio company must be wholly committed to mediumterm value creation and be comfortable with a compensation package that rewards success in five to seven years. In a portfolio company. requiring unwavering attention to cash flow > Few internal functional “experts” to rely on Comparing private equity and corporate ceo roles 5 . “Private equity CEOs get paid handsomely. including an IPO.A. but not until the play is completed. and they must think like the owner of the business on every issue they consider and act upon. and was formerly a principal of leveraged buyout firm Odyssey Partners. Along the way.” he said. outright sale of the company. who also has been the president of Faberge. fewer parties have large equity stakes in the company. the CEO is paid fairly. versus the conventional annual vesting schedules of public company CEO stock options and the built-in liquidity of public common stock. “The longer term horizon and inherent illiquidity characteristics of a private equity stake encourage CEOs to make decisions that are in the best interest of the company over a three. rather than quarterly financial results > Greater autonomy. A CEO with an equity stake in a company that achieves those goals can realize tremendous economic value upon execution of a variety of exit strategies. Private equity stakes for CEOs generally are long-term and relatively illiquid. L.corporations for the potential of greater wealth. Gear. to provide a 20 percent or greater annual ROI.to five-year period.com). The overriding objective is to pay down the company’s debt in a reasonable time frame — typically five years — and to get the de-levered value of the asset.

these CEOs typically can take a longer term view on the company. Jones.” David A. sales and finance. They must know how to manage high debt and reduce costs. now. CEO of Spectrum Brands Traits of the successful private equity CEO Because of the debt load. understand pricing strategies and be comfortable reaching out to capital markets. experience in a private investor-backed business. Successful portfolio company CEOs also excel at setting priorities and efficiently allocating resources. his firm looks for executives with financial 6 . will be readily apparent. supply chain management. With incentives freed from quarterly analysts’ demands. both positive and negative.” said Kelley. a Boston-based private equity firm with about $12 billion of capital under management. Despite the pressure to achieve financial milestones. CEOs from private portfolio companies traditionally have not had to contend with the heavy emphasis on reporting and preparation of quarterly financials required of a public company and. “You really can’t make many personnel mistakes at the senior level as the results. they can pursue solutions and resources without public pressure from shareholders on Wall Street.” said Scott Schoen. when problems arise. Portfolio company CEOs also need broad experience leading every function. Canning.” For that reason. president of Chicago-based private equity firm Madison Dearborn Partners. all the expense and preparation required for compliance with the Sarbanes-Oxley Act. commented that CEOs who are most likely to succeed are those who stay “laser focused on capital management and debt reduction. portfolio company CEOs must possess in-depth financial knowledge and experience. the private equity firms we work with routinely ask us to identify candidates who have had exposure to a high-debt environment and. and are able to build an effective partnership with a more hands-on and financially astute board. which would be almost impossible to do with the same rigor and speed in a public organization. particularly product development. John A. ideally. “A private equity portfolio company allows for the CEO to be more aggressive and make a more radical restructuring stance in trying to fix a company. co-president of Thomas Lee Partners. In fact. its smaller size makes it easier to mobilize the organization to accomplish those goals and make decisions quickly.While a portfolio company has to be far more focused on fewer goals and a well-defined end game. “CEOs of private equity companies have the luxury to make decisions with a longer term horizon and.

employees look to the CEO for personal guidance and leadership much more often than within the traditional Fortune 1000 company and they frequently test the CEO’s values. However. At the same time. Private equity CEOs must keep the organization focused on executing key priorities. Thus. They also are unafraid to make changes quickly where appropriate. 7 Core competencies of successful portfolio company CEOs basis. debt repayment experience > Broad general management experience and exposure to a variety of functional disciplines > Entrepreneurial and self-starting orientation > Ability to develop. Successful portfolio company CEOs are not territorial about their role and willingly take on any task that needs to be accomplished. train and retain the best people. highly focused team that may lack the perceived star power seen in bigger companies.acumen because they understand the consequences of the company’s leveraged position. the more convinced I am that the great CEOs are those who can identify. the CEO’s passion and ability to sell his or her vision for the company — both the strategy for building the company and the potential financial reward for success — is crucial. he emphasized that they need to have a risk orientation. different leadership requirements and the unique ownership model and board relationships The portfolio company CEO also must be flexible enough to run a streamlined environment without the resources of a large corporation and with few pretensions about the status or boundaries of the job. cash flow management. including P&L. but important. and be able to spell out the compelling rewards stemming from a potential success.” Canning said. “You must be ruthless and separate emotion from human resources decisions. have a clear picture of the company’s future that will excite others. “The more time I spend in this business. recruit.” . intellect and decisions. “They are willing to revisit strategy. Equally important as the types of financial and operating experience they have amassed are their leadership skills. which functional and public company executives often lack. Those he has seen fail typically had difficulty adapting to the relative lack of resources compared with public companies or were slow to make tough. The private equity CEO often is reliant on a small. The portfolio company CEO also must demonstrate a passion for the business. tactics and personnel on a regular > Strong financial expertise. and must be willing to roll up their sleeves to get the job done.” Stein said. execute and focus team on strategic vision > Risk orientation and sense of urgency > Thrive on change and solving problems > Ability to adapt quickly to new environments. decisions.

they can become successful CEOs.” Finding the private equity CEO As demand for portfolio company CEOs grows. in many cases simultaneously. You must understand operations. we find it worthwhile to investigate the reasons behind the failure before doing so. Often. when they are a good fit culturally and their transition to the private equity world is well managed. finance and the linkages between these disciplines.” said Jones of Spectrum Brands. You must understand how to manage the balance sheet and cash flow of a business as well as the P&L. former president and CEO of Bakery Chef Often overlooked are portfolio company CEOs who earlier in their career presided over a failed business. You must create the vision and execute the strategy. sleep with and use it to motivate an organization. a current portfolio company CEO has experience. for the most part in private equity companies. most investors must expand their search to the corporate world. they may prove to be viable candidates. private equity or venture-backed organizations also should look for individuals who have demonstrated an entrepreneurial bent throughout their 8 . I learned a long time ago that I’m a lot smarter running good companies than troubled companies. it becomes more challenging to recruit the best and most appropriate leaders for these positions. you don’t have much room for error. due to the value built up in his or her equity stake. “Due diligence is so critical because. It’s not enough to have a sales and marketing background. you have to be entrepreneurial and self-starting because there typically is less help.” David L. To improve the odds of finding the right candidate. you must endorse the notion of risk as something that you can live with. If the reasons were beyond their control. While the risk could generate a big reward. A few hiccups and you get yourself into trouble in a hurry. but little incentive to leave before the exit strategy is achieved. While it might seem natural to discount these individuals.“Important competencies for a portfolio company CEO are to have broad-based general management experience rather than intensive focus and experience in a narrow functional discipline. product development. Finally. Meanwhile. division heads or corporate “entrepreneurs” bring exceptional industry and management experience and. The supply of experienced portfolio company executives being limited. Bere. “At the same time. a portfolio company is not for everybody. Experienced private equity CEOs who have successfully completed an exit and are on the hunt for the “right” opportunity are in very high demand and can be expensive to recruit.

Goldston said. ‘I have great news for you and I have some bad news for you.’ Those all are things you dream about in bigger public corporations. Canning. You are going to be able to move a lot faster. the culture shock can be dramatic when they find themselves operating without a corporate playbook or having to take on assignments outside the position’s traditional scope. which often are riskier and in less-than-ideal geographies. a lot of people coming out of the corporate environment do not want to go back to delving into details.” John A. “I feel very strongly that including independent directors with operating experience on the board provides a useful business perspective because many of the venture guys have little operating experience. And. You are going to help create policy for the company. expenses and have an eye toward paying down debt.” Setting up for success First-time portfolio company CEOs. financial expertise is a must.” he said. have tested their leadership skills and adapted to different cultures and environments. “Due diligence is so critical because. entrepreneurial individuals often are given international assignments. for the most part in private equity compa9 . running a plant or making sales calls again. Executives who have taken these entrepreneurial roles. “I say. often struggle with their first private equity assignment as they transition into a new environment with a vastly different set of expectations.’ So. ‘The bad news is you may need to run the plant. Bere is careful to make the trade-offs clear to any candidates who ask his advice about joining a private equity portfolio company. Unfortunately. especially those who have spent their careers in the corporate world. it’s trying to find that person who will be hands-on and will develop the strategy. but the CEO must be extremely savvy about bank covenants. CEO candidates can improve their odds for success by conducting careful due diligence on the company and the private equity firm for which they would be working. The great news is that you are going to have access to the board of directors.corporate careers. even if you haven’t had to for 10 years. For example. which tend to be much more decentralized and include full P&L responsibility and functional oversight. They must realize that cash is king and managing overhead is critical. president of Madison Dearborn Partners For some corporate executives. “Executives from large companies obviously can fit into a private equity environment. Frequently accepting new assignments within an organization is another sign that an individual has benefited from incremental leaps of opportunity and has achieved broader leadership success over all functions. again.

when problems arise. Private equity company boards tend to be more hands-on and. Furthermore. Historically. Lee Partners Board goverance is uniquely challenging and rewarding In addition to recruiting the right leader. you don’t have much room for error. it also is a good idea to determine and get to know the partners who will serve on the portfolio company’s board. they often lack the industry knowledge and operating experience that can be an invaluable resource for a new portfolio company CEO. Experienced portfolio company CEOs also say that a firm with even a couple of struggling portfolio companies will have less focus and fewer resources to support the company. benefit when a board member serves as a mentor or sounding board. private equity firms can help position the CEO for success through decisions about the board composition and role. because most private equity partners come from investment banking. typically have five or six directors usually with one or occasionally two directors who are independent of management and the investing firm.” Due diligence goes beyond investigating the financial health and revenue projections for the company. A few hiccups and you get yourself into trouble in a hurry. “I learned a long time ago that I’m a lot smarter running good companies than troubled companies. In addition to assessing the culture. Boards of S&P 500 companies average about 10 directors with 80 percent to 90 percent of the board independent. Senior partners are more likely to be able to influence the firm’s decision making and win support for portfolio company proposals and funding requests. In fact. they can pursue solutions and resources without public pressure from shareholders on Wall Street.” Bere said. “CEOs of private equity companies have the luxury to make decisions with a longer term horizon and. It is important to assess the degree of cultural change required to sustainably improve the results of the company. many portfolio company CEOs and private equity partners say that CEOs. particularly ones who are new to private equity.nies.” Scott Schoen. as a result. can provide the CEO with more insightful input. private equity 10 . It includes talking with the CEOs of other portfolio companies and getting a sense of the company’s culture. co-president of Thomas H. Private equity company boards should have at least two or three independent directors with CEO and/or industry experience — something few portfolio companies do today. if they include outsiders at all. experienced portfolio company CEOs tell us. commercial banking or the legal profession. Portfolio companies. Schoen said.

often struggle with their first private equity assignment. they are not for everyone.” Canning said. Managing in a high-intensity environment with fewer resources and cash constraints than they are used to requires skills that are not necessarily learned or rewarded in corporations — a desire to seek out and drive change and a willingness to live on the edge. “I feel very strongly that including independent directors with operating experience on the board provides a useful business perspective because many of the venture guys have little operating experience. in part because of the cost of an outside director and because they want to maintain their control. Those who are most likely to succeed in the private equity environment are individuals who possess in-depth financial knowledge and experience. are comfortable with risk and can quickly adapt to new environments. particularly those who have spent their careers in the corporate world. CEO candidates should conduct thorough due diligence on the portfolio company and private equity firm. They thrive amid challenges. Increasingly. Before they accept a portfolio company role. While private equity leadership roles can provide dramatic rewards for those who are successful. 11 .firms have been reluctant to bring outside directors onto portfolio company boards. that outside directors can provide industry perspectives that can be invaluable to the CEO and serve an important check-and-balance function. more portfolio companies with public debt — or those looking ahead to an IPO or sale to a public company — may have little choice but to add new independent directors in light of the greater scrutiny being placed on the governance practices of all companies and the demands of the Sarbanes-Oxley Act. Executives new to private equity need to understand the trade-offs and evaluate whether their experience and preferences represent a good fit for a private equity role. By choosing a CEO with the appropriate experience. Conclusion First-time portfolio company CEOs. however. core competencies and passion for the company’s success and working collaboratively with the CEO — private equity firms can improve the odds that their investment will pay off. There appears to be a growing consensus. improving their chances for success in the position.

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During the past 10 years.” His clients include large. more entrepreneurial businesses. distributing and displaying this work. Gil can be reached at 1. marketing and administration professionals and experienced senior-level operating executives.8338 or gstenholm@spencerstuart.000 assignments for clients ranging from megafunds to startups. In addition. Spencer Stuart consultants provide a range of specialized advisory services in addition to executive search. Gil founded the firm’s Consumer Goods & Services Practice in the late 1980s and continues to be deeply involved in the practice. Stenholm joined Spencer Stuart in 1980 after five years with Booz Allen & Hamilton in Chicago. management development and sales with General Foods. consultants in the practice have completed more than 1. industrial and healthcare products/pharmaceuticals. including: > Board services > Pre-acquisition human capital due diligence > Post-merger integration > Executive benchmarking > Management assessment About the author Gilbert R. media.com .com © 2006 Spencer Stuart. Gil conducts consulting projects that involve organizational and compensation benchmarking projects. multinational companies as well as a number of smaller. finance. All rights reserved. contact permissions@spencerstuart. A senior consultant of the firm since 1985. Previous experience included roles in human resources.312. He also has authored a study and published findings on “Rules of the Road for the New CEO. For information about copying.Spencer Stuart Private Equity Practice The Spencer Stuart Private Equity Practice supports private equity firms and their portfolio companies in their quest for partners and principals. COO. He conducts searches for CEO. board director and toplevel functional roles. Baxter Travenol Laboratories and Masonite Corporation. As strategic advisers to clients covering the full spectrum of investment stages and disciplines. and is a member of the Board Services Practice.321. division president. Gil serves a wide variety of clients in consumer goods.

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