Managing the relationship with a private equity portfolio company’s (portco) CEO and CFO is among the most critical priorities for PE firms, according to a new survey of leaders at PE firms and portcos by global consulting firm AlixPartners, and Vardis, global private equity search firm.
Trouble in any of the three ‘legs’ of this relationship triangle can torpedo the success of an investment by preventing key members of the management team from executing the investment thesis, thereby ultimately sabotaging returns.
The AlixPartners-Vardis Fourth Annual Private Equity Leadership Survey found a stark contrast in responses from PE and portcos about what they considered the most- pressing near-term issues portfolio companies face. Although “growth” topped the lists of both of the groups, 63 per cent of the PE-firm respondents cited “human capital” as their number two concern compared with 42 per cent of portco respondents.
The survey showed misalignment between PE and portco views on what constitute the most powerful levers of value creation in portfolio companies. Specifically, both PE and portco respondents in this year’s survey see organic and inorganic growth as key value- creation drivers for portcos – but 52 per cent of PE respondents also named operational efficiency as an important value driver, versus just 30 per cent of portco respondents.
Comparing year-over-year responses, this year’s survey showed additional signs that PE firms are increasingly recognising that investment success isn’t only about the numbers. It’s about the people: specifically, the PE-CEO-CFO relationship. Of the PE respondents who indicated that they install or upgrade portco management teams, 40 per cent wait more than one year to replace the CEO. As much as 72 per cent of those that retain portcos’ existing management teams still end up replacing the CEO after one year.
According to the survey PE investors are signalling a current and impending need to implement management changes to drive their investments. However, they appear to still have work to do in this area. The majority of PE firm respondents say portco CEOs are too slow to execute the agreed upon management team changes.
In last year’s survey, investors cited assessing portco management teams and establishing senior team alignment as top priorities. However, despite longer hold times and stiffer competition for talent, a weighted average of roughly 50 per cent of the investors responding to this year’s survey said they’re not doing much to change their talent- management strategies – including CEO and CFO succession planning. In fact, the response “No change” to the question of whether hold times had caused owners to rethink their approach to CEO succession was up from 38 per cent last year. Furthermore, while 48 per cent of PE investors said it was very important to assess the dynamics of the CEO/CFO relationship, only 74 per cent of these investors conduct pre-deal independent assessments for CEOs, and 61 per cent for CFOs. When it comes to culture, as much as 86 per cent of the portco executives in this year’s study said they see culture assessment as important when a PE firm adds a new asset to its portfolio. But just 28 per cent of them said their PE investors “always” or “often” conduct such assessments.
The top three most revealing signs of trouble among portco managements are: misalignment on strategy; infrequent communication; and an uncollaborative relationship between the CEO and CFO.
Ted Bililies, PhD, global leader of the Organisation & Transformative Leadership practice at AlixPartners and a managing director at the firm, says, “As this year’s survey findings make clear, misalignment between PE investors’ and portco executives’ perceptions and expectations persist on multiple fronts. Proactively building trust and open communication among PE sponsors and portfolio company top executives (about matters such as accountability and expectations) is key to managing this relationship triangle and getting it right from the beginning is critical to success.”
“While it’s encouraging, and indeed surprising, to see PE firms assigning such a high priority on the need to focus on human talent management strategy, there’s a clear disconnect with them actually doing it. To safeguard an investment’s success, PE owners must proactively manage each dimension of this triangle, including identifying and swiftly mitigating risks.”
