Transparency and adaptability are key to surviving and thriving under a new private equity owner, according to CEOs speaking on a panel at PEI's Operating Partners Forum in London Wednesday.
The discussion took as its starting point a study produced by the Boston Consulting Group, which found that 68 percent of the companies considered had changed their CEO following a buyout – usually as a direct result of one side having unrealistic expectations of the other.
In his keynote speech at the conference on Tuesday, Terra Firma chairman Guy Hands went even further, admitting that he had fired the incumbent CEO at 29 of the last 33 companies his firm has bought.
However, speaking on the panel, Eric Machiels, CEO of Infinis, a renewable energy group floated by Terra Firma last year, and Adel Al-Saleh, CEO of KKR-backed Northgate Information Solutions, explained how the relationship could work effectively.
Being transparent with a private equity owner is critical, they agreed. “If they don't hear it from you, they'll hear it from somewhere else,” Machiels said. This can damage the all-important trust an owner needs to have in the CEO, he added.
Al-Saleh stressed the importance of building both formal and informal communication channels between owner and manager. For example, he has on two occasions hired people from within the GP to work alongside him on the company's board, he said.
Machiels added that CEOs needed to use these channels to proactively seek feedback on their own performance. “The last thing you want is to find out after a year that the private equity firm holds you in low regard. The CEOs that survive are the ones that seek early feedback.”
Adaptability was also important, they suggested. Machiels said a good CEO could “seamlessly swerve across” strategic, financial and operating issues – which means having a clear strategic view, being on top of the numbers, and being able to energise people within the organisation. Adaptability also matters because different firms work in different ways, and the role of the CEO typically changes over the course of the investment, as they build out the team around them, he added.
The two CEOs also talked about how problems can arise in working with private equity deal-makers.
According to Machiels, although investment professionals are usually extremely smart, emotional intelligence “tends to be an area for development”. This can potentially cause problems when things go wrong – although this is when the more balanced view of operating partners can often be helpful, he added.
Al-Saleh also pointed out that relatively few deal-makers have “real-life experience” of running companies, which can sometimes lead them to underestimate how difficult it is or how long it takes to make changes to the organisation.
However, both CEOs also highlighted the benefits of working with an engaged private equity owner, particularly in terms of ready access to expert strategic advice and an outstanding network of contacts.