Operating Partners Forum: Choosing the right CEO

Firms need to make sure the right management team is in place at portfolio companies and awareness is growing of the importance of human capital professionals to accomplish those evaluations.

As firms concentrate more on improving operations at their portfolio companies, they have a significant need to clearly understand the skills and abilities of a company’s senior management.

Firms have been doing this by more routinely bringing on professionals who excel at issues surrounding “human capital”, according to a panel of speakers at Private Equity International’s 2012 Operating Partners Forum in New York last week.

However, the importance of this role is not widely recognised throughout the industry, the speakers said, which is unfortunate because deal-focused professionals could benefit from having human capital experts evaluating management teams in the early days of an acquisition.

Michael Feiner, senior managing director and head of human capital at Irving Place Capital, said the majority of firms he has talked to in the past have the wrong perception of the role human capital professionals play.

“They said, ‘Why would we hire someone like you?’, and when I asked what they thought human capital people do, they essentially said, ‘Well, you guys do the picnic, the blood drive and the company handbook’,” Feiner said.

All of a sudden you have to deal with these hard-driving board members looking at the business every week or two saying, 'how come it's not better'?

Gary Matthews

The fact is, human capital professionals should play important roles in the early days of an acquisition assessing the company management team, he said.

“In the first 100 days, [human capital people] could help assess how a new team will work together, what kind of sweet spots are absent in the CEO skill set [and] what the team below the CEO looks like,” Feiner said.

Dealing with personality issues is not something the deal team usually thinks about, the speakers on the panel all agreed. In fact, conflict sometimes arises between human capital professionals and the deal team when it comes to senior executives who need to be let go.

A great company leader may not be the right fit once a private equity firm takes over, and the acquiring firm needs to be aware of that pretty quickly, according to Gary Matthews, managing director and operating partner at Morgan Stanley Private Equity.

“All of a sudden you have to deal with these hard-driving board members looking at the business every week or two saying, ‘How come it’s not better?’” Matthews said. “All of a sudden there’s a whole analytical side of the job that’s required that may or may not have been there before. Suddenly attention to detail around cash and [earnings before interest, taxation, depreciation and amortisation] is far more important than it may have been pre-private equity.”

The portfolio company CEO needs to “find that balance” between stepping up results the private equity firm is

This is not something deal folks think about.

Joelle Marquis

looking for, while not becoming “so obnoxious” that no one wants to work with you, he said.

Ultimately, firms will be forced to think more about human capital issues, including the need to make quick assessments about whether the senior management team in place at an acquired company is the right fit. Especially as firms focus more on operations, they need to right people to get the job done.

“This is just not something deal folks think about,” said Joelle Marquis, partner at Arsenal Capital Partners. In the past, firms were able to make money through financial engineering, but as that gets harder, “the levers we have to pull are very different”.