Value Creation Forum: ex-CEOs must adjust to PE

Former CEOs who are hired for PE operations teams have to adjust to different goals and methods, delegates heard at PEI’s Value Creation Forum in Beijing.

Shifting from a corporate senior management role to operations in a private equity firm involves a period of acclimatisation, according to panelists at PEI’s Value Creation Forum: China 2013 in Beijing. 

The panel, which shared views on the topic “Defining the role of the operating partner”, noted several issues an ex-corporate executive would deal with when he joins an operations team.

Brian Bunker, managing director of Asia for The Riverside Company who has extensive corporate executive experience, noted that the goals, and therefore approach to acquisitions are not the same. 

As a CEO, thousands of people worldwide were working for him and he could draw on almost unlimited resources. Now he’s working for a firm with 22 professionals that is less structured, almost an entrepreneurial environment

John Lewis, CEO, Unitas

“In private equity, everything is focused on the exit,” Bunker said. “In corporate M&A, everything centers on finding the right company that’s going to drive value and the worry is about integration. What you don’t worry about is selling the company in 5-6 years.”

In addition, inside a private equity firm an operations executive looks at a large number of companies in different sectors, which requires a certain flexibility compared to single sector corporate work. Riverside, for example, looks at 100 companies and maybe ends up buying one. 

“It’s definitely an adjustment,” added John Lewis, chief executive officer of Unitas Capital, which has several ex-CEOs who are partners. “As a CEO, thousands of people worldwide were working for him and he could draw on almost unlimited resources. Now he’s working for a firm with 22 professionals that is less structured, almost an entrepreneurial environment.”

In the CEO role, the individual knew for the next several months what he would do on a daily basis. If the CEO joins a private equity firm and does not have an immediate project, “he will wonder what the hell he’s gotten into”, Lewis said.

“But once into the project, he sees more freedom in terms of what we can do to improve the company. All our guys have made the transition and one thing that helps is if they bring a down-to-earth attitude and are willing to roll up their sleeves. An imperious attitude doesn’t work well.”

The panel also spoke about the dynamics between the deal and operational teams. Navis Capital, which was founded by ex-consultants from Boston Consulting Group, experimented with a joint approach to deals but found there was tension between the two.

“Something seen by the deal side may be fine, but operations may see it differently,” said Alberto Moreno, senior portfolio director.

Navis’ operating team therefore interacts and cooperates with the deal team, but the two sides do not have joint ownership of specific deals from sourcing to exit.

Unitas and Riverside differ in that both transaction and operations professionals work together on a deal from inception to sale. Operational partners also get carry, they said, and at Riverside the firm contributes at least 5 percent to every fund it raises “so it doesn’t matter which partner you are, you’ve got skin in the game” Bunker said.

On the topic of operational team challenges, Moreno, from Navis, cited gaining the founder’s trust so that he will accept operational support.

Navis, which does buyouts in Southeast Asia, has found that in many family-owned companies there are no reporting lines – everyone reports to the owner.

There are so many things that can be done to improve the business – often the basics are not there. The challenge is how to convince the owner/entrepreneur that he should accept support from other professionals to grow the business

Alberto Moreno, senior portfolio director, Navis Capital

“From an operations perspective it’s a dream because there are so many things that can be done to improve the business – often the basics are not there. The challenge is how to convince the owner/entrepreneur that he should accept support from other professionals to grow the business.”

Unitas, which is also control-oriented, often takes majority stakes in China though usually alongside a founder, who typically has loyalty from the entire work force, and often from suppliers and distributors and customers. 

“We don’t try to rip him out of organisation,” Lewis said. “So we spend a lot of time to make sure we have a trusting two-way relationship with the founder before making the investment. We may move slower than we need to, but in the end it’s effective.”