Insight

Changing CEO in private equity Too little, too late. Why it is time to take off the rose tinted glasses.

The AlixPartner-Vardis 2015 Succession Planning Survey found divergent views on ideal CEO tenure: 65% of investment firms say 3-5 years is ideal (28% public companies) and 41% public companies favour 6-10 years (24% investment firms)

Private Equity is looking for a CEO who can drive and deliver performance in a defined timescale, optimizing the crystallization of value on exit. 

“Given the time horizon of a typical investment, it is absolutely critical to have the right leader in place from the outset,” said Mark Mullen,  Partner of Vardis Europe, “yet the most common time to change a CEO is two years into an investment which negatively impacts on IRR”.

John Hoagland, Managing Partner, North America for Vardis agrees, “Private equity and ‘business as usual’ rarely go hand in hand.  This is why it’s so important to know the CEO you’re betting on can make the leap.  You need to be certain they have the ‘Private Equity DNA™’ to be successful.”

Vardis, the leading private equity specialist search firm and AlixPartners, the global advisory firm, have announced the findings of the AlixPartners-Vardis 2015 CEO Succession Planning Survey. The survey, based on responses from 103 senior-level executives, found that public companies and private equity firms have very different approaches to CEO succession and succession planning and value very different criteria in their leaders.

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AlixPartner-Vardis 2015 Succession Planning Survey examines some of the key failings in CEO succession in private equity.

  1. Lack of a Leadership Thesis™

While many hundreds of hours go into crafting, scrutinizing and road testing the Investment Thesis there is often less than a passing glance given to the skills that will be required to realize the Investment Thesis. The Survey identified that some 38% of investment firms don’t have a defined profile for their portfolio company’s CEO – they simply don’t know or haven’t thought through systematically the CEO skill set. 

The Leadership thesis is a highly developed and pre-agreed blueprint of the key skills and attributes required in the CEO from the outset of any investment and over its lifetime.  It’s a living document which will flex and adapt as circumstances and market conditions change.  It is a fundamental element at the outset of any investment and a key step in driving a successful outcome. 

  1. Lack of Assessment

 The Survey identified that private equity is much less likely to have a developed internal succession plan, 48% say they have no formally identified CEO successor candidates and 50% have no formal preparation or internal development for CEO successors. The process for succession is necessarily different in PE – in 85% of cases, external CEO candidates are recruited (compared to 51% in public companies).

When appointments are made, 47% of our respondents used just 1 tool / method to assess CEOs or prospective CEOs in addition to internal interview. Assessment tools bring additional data to selection decisions and increase transparency yet they are deployed in a limited capacity. Developing a Leadership Thesis and assessing against it early reduces the likelihood of having to change the leadership further down the line.

  1. Rose Tinted Glasses

Given the competition for assets among PE funds there is often a very long “romance” between a fund and the management of a prospective portfolio company as funds seek to create favoured bidder status. This is often followed by an equivalently long “honeymoon” period post deal where investors congratulate themselves on having bought well and fail to scrutinize management performance effectively because they have not yet effectively shifted their mindset from prospective suitor to owner operator.

The most common time during the life of an investment to change the CEO is a shocking 2 years or more into the deal (30% of cases) and this is most commonly due to underperformance. 2 years in is so often 2 years too late – the rose tinted glasses effect can threaten value delivery in even the most attractive looking investment.

  1. Not PE ready

CEO’s of portfolio companies need to be assessed not just on the basis of what they have done but on what they will be required to do over the period of the investment. The skills required for start up and early stage success are so different from those required to scale a company rapidly. The attributes that create success in a growth market may be both untested and inappropriate where conditions have changed, markets are tough and change management is required.

In The Survey, a fundamental criteria rated by private equity was having a CEO with experience of similar strategic challenges (63%). This ranked more highly than industry experience (38%) or intelligence (28%). There is simply no room or time for learning on the job.  Those that succeed are highly likely to have seen it / done it before.

Private equity is a very specific environment. Timescales are often short and expectations very high, stakeholder management issues differ considerably to plc counterparts. The right person for the job is often not the incumbent but someone who knows the territory ahead and who can hit the ground running.

Vardis has identified five key steps to ensuring that every asset has the right leader to maximize returns over the life of the investment:

  • Take off the rose tinted glasses
  • Focus on what needs to be achieved, not what has been delivered
  • Be clear on the skills needed to deliver (The Leadership Thesis)
  • Assess early and comprehensively
  • Look for management with PE DNA

About Vardis

Vardis is the leading private equity search specialist in North America, Europe & Asia.  It partners with investors throughout the deal cycle to help them Invest in, Grow and Exit their portfolio companies by appointing senior operating executives (CEOs and Direct Reports), Chairs and Outside Directors with PrivateEquityDNA™. For further information, please visit www.vardis.com

About AlixPartners

AlixPartners is a leading global business advisory firm of results-oriented professionals who specialize in creating value and restoring performance at every stage of the business life cycle. The firm thrives on its ability to make a difference in high-impact situations and to deliver sustainable, bottom-line results. The firm’s expertise covers a wide range of businesses and industries whether they are healthy, challenged or distressed. Since 1981, AlixPartners have taken a unique, small-team, action-oriented approach to helping corporate boards and management, law firms, investment banks, and investors to respond to crucial business issues. For more information, visit www.alixpartners.com.

 

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