Why would you be one of the 38% who don’t know what they are looking for? The Alix Partners Vardis 2015 Succession Planning survey identified that an astonishing 38% of investment firms don’t have a defined profile for the portfolio company’s CEO.
A large proportion of funds back incumbent management on acquisition of an asset without a detailed and thorough analysis of the leadership needs of an asset. Of those that do evaluate management capability and performance at the point of acquisition, too many conduct backward looking evaluations based on historic growth and delivery, not enough consider the focuses, challenges and aspirations of the business going forward and the skills needed to achieve optimum performance and deliver the investment thesis. It is comfortable perhaps, and human nature to stick with what you know, but in 30% of cases this results in a change of CEO a full 2 years into a deal, due to under performance with the inevitable knock on effect on IRR and the holding period.
What is a Leadership Thesis™?
At the simplest level, the leadership thesis un-packs three focus areas for leaders that will drive investment outcomes: Value, Risk and Momentum. The Vardis experience has been that exploring and answering three questions – as precisely as possible - will help to develop an actionable leadership thesis:
- What are the key sources of value creation, about which leaders must have strategic vision and insight?
- What are the key execution challenges and risks to deliver the investment thesis? What does success look like?
- Which leadership roles are pivotal to success, and what profiles are most likely to succeed in them?
The best Leadership Theses, will be absolutely reflective of investment thesis and will identify in significant detail the leadership attributes and experience that will be required to deliver for the fund.
The Leadership Thesis is both dynamic and forward looking. The skills required to take the business to where it is today may not be those most relevant for the future. A PE CEO needs the right blend of skills and attributes to deliver for a fund at a particular point an asset’s life and in a specific environment. Unforeseen changes in the operating environment will necessitate review and adaptation of the Leadership Thesis.
Four key benefits for private equity in having a Leadership Thesis
The process of developing a Leadership Thesis at the outset of any investment has a number of key benefits for private equity:
I. Firstly it creates an environment where the thinking around leadership and key leadership attributes becomes explicit rather than being a nebulous collection of thoughts and aspirations amongst the key stakeholders. Very often as headhunters we find that stakeholders believe they are aligned as to what is needed in the leadership of an asset but realize usually some way down the line in the hiring process that there is not unanimity of thinking and in fact attitudes as to what is required to deliver the investment outcome may be very divergent. Forcing those discussions into the open at a much earlier stage in the life of an investment is a critical part of ensuring that there is real alignment of all parties and therefore a mandate for decision making. Many searches fail, or encounter significant delays when it becomes apparent that there isn’t a congruous view as to what is required.
II. Secondly, setting a Leadership Thesis necessitates detailed review of the leadership requirements in the light of the Investment Thesis and what is needed to achieve its outcomes. This debate and the process of committing to paper provides another forum in which to ensure that the skills sought in the leadership are the right skills for each asset at that point in its lifecycle. We recently had a mandate where we were asked by a client to find a best in class brand marketer to lead and revitalize an historic brand. Post the appointment, it became apparent that given a tough and highly competitive operating environment, the asset would benefit from someone with strong turnaround expertise, able to optimize margin and create an operating environment that would allow the business to continue to compete.
III. Thirdly, developing a Leadership Thesis offers a chance to look at the leader within the context of the wider senior management team and to evaluate the split of skillset across the broader group. Very often it is the balance within a management team and compensating strengths of those key members that can deliver the best outcome. A CEO may succeed with one management team where he could not deliver with another – the complementarity both of skills and personalities is key.
IV. Finally, private equity is a unique environment and it requires a unique hiring strategy. Where in a traditional corporate environment candidates will generally look to move to a bigger job, an expanded or more demanding role with each promotion, in private equity it is key to over hire. Building a leadership thesis is about understanding what it will take to deliver the investment thesis over the proposed lifetime of the investment and then putting in place a leader who has real credibility in delivering that investment thesis – most commonly because they have done it before or done it before in a larger context. Time horizons are short and for maximum IRR, proven credibility significantly de-risks the investment. If you look ahead, to what is needed to create a successful exit, you can then ensure that the CEO has the proven skill set to deliver.
Getting the best from a Leadership Thesis is about matching the Leadership to the task in hand, it is about having absolute confidence that there is a unitary view about what is required to deliver an investment thesis that maximizes returns and it is about having a framework within which one can make the very best decisions about senior management hires.
Why would you be one of the 38% who don’t know what they are looking for?
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 Private Equity DNA™. For further information, please visit www.vardis.com.
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.