For private equity firms, having the right CEO for a portfolio company can be the difference between a profitable investment and a leech of firm resources. The CEO envisions the path for growth and drives strategy and performance by flawlessly executing business initiatives, seizing opportunities and maneuvering around threats in order to deliver value to investors. Herbert Mines Associates has consolidated years of experience recruiting, tracking and assessing PE-backed CEOs to present a strategic point-of-view on what makes a successful CEO candidate.
While an executive’s past experience is not the only metric for his or her future performance, demonstrated success in prior roles is critical – both on measurable elements like revenue and EBITDA growth, as well as softer competencies like building organizational capabilities and a performance-focused culture. Herbert Mines Associates has developed a comprehensive methodology for assessing capabilities and experiences most desirable in PE-backed CEOs.
PRIOR EXPERIENCE PROFILE
While directly relevant industry experience is compelling on any strong CEO candidate resume, it is imperative to look beyond an executive’s prior titles and brand affiliations to consider more broadly the financial responsibilities and organizational structures of their previous positions.
Full P&L Responsibility: Being a division president is not the same as being a CEO, particularly since a PE situation requires managing cash and dealing with leverage. While it is certainly possible to step up to a CEO-level P&L successfully, there is a learning curve which will likely place increased emphasis on the capabilities of the CFO.
Classically Trained, Once Removed: Moving from a big company to the middle market is a significant change. The systems and support are typically not available, so it requires an agility, nimbleness and ability to operate in a roll-up-your-sleeves environment. We have found that executives who began their career in an “academy” company and then transitioned successfully to a smaller, more entrepreneurial company are a better fit for PE-backed situations. The exceptions are executives who had unusually scrappy and resource-starved roles within big companies – for example, a P&G executive who ran Eastern Europe or was tapped for an internal start-up.
THE SIX KEY CHARACTERISTICS FOR SUCCESS
Beyond a candidate’s experience profile, our assessments and referencing seek to uncover intangibles and softer competencies that we believe may be even more critical to success:
1. Focus on Results: Does he or she have an almost maniacal focus on results that aligns with the vision, objectives and exit strategy of the PE sponsors? For example, a CEO who focuses on building a brand for the long-term is fundamentally out of sync with a sponsor who only cares about reaching an EBITDA goal with revenue growth.
2. Bias for Action: Does the executive have a palpable bias for action – a real sense of urgency about positive change?If a CEO is too slow to hire or too slow to fire, it’s a problem. If a CEO is too slow in taking advantage of opportunities or changing things that aren’t working, it may be an even bigger problem.
3. Fact-Based AND Gut Instincts: Private equity firms are driven by data and facts, so their CEOs need to make decisions that way too. At the same time, executives who know how to take calculated risks and are comfortable making decisions in uncertainty often produce breakthrough results.
4. Team Smarts: Does the CEO build teams that complement his or her skillset? The role of the CFO is particularly critical in a PE-backed situation.
5. No Surprises: A “business partner” approach is key to an effective relationship between a CEO and investors, and nothing undermines that relationship faster than withholding information. Thus we look for evidence of a completely transparent style. Will the CEO alert the sponsors to potential problems early and bring alternative paths of action?
6. Confident Enough to Avoid Defensiveness: CEOs will be challenged and questioned by PE professionals, who are usually young and always whip smart. It takes a level of self-confidence, patience and open-mindedness to get the most out of those interactions.
In sum, softer competencies are at least as important as an executive’s experiences. Comprehensive assessments and extensive and unbiased referencing are critical to hiring the right CEO for a PE-backed company.