How Trust, Flexibility, and Embracing New Approaches Can Help CEOs Adapt to PE Ownership

This article was published in Chief Executive in December 2023.

By Chris Stipe, Accordion & Prasanth Ramanand, Maestro

Attracting investment from private equity investors is a notable career milestone and achievement for any CEO, especially a company founder. PE investment signals an expression of confidence in the business as it’s been built to this point, as well as its future prospects. It is also a validation of leadership and management. 

While PE firms assume varying levels of involvement in the day-to-day operations of portfolio companies, PE ownership inevitably comes with significant changes to processes for the newly enshrined portfolio company. 

These are some of the changes and challenges CEOs typically face in the transition to PE ownership and the approaches that can aid in easing the adjustment, enabling the company to reap the full benefits of PE investment. 

A More Formal Approach to Selling New Ideas

By nature, CEOs are entrepreneurial and constantly exploring new ideas and investments to take their companies forward and unlock growth opportunities. Pursuing a new idea, approach, or strategy, or even investing in new technology may have been an informal process before entering the world of PE, requiring buy-in from a handful of colleagues on the executive team or a smaller pool of investors. 

The effort and rigor required to sell a new idea or procure that new system will be elevated with new barriers to confront, particularly since PE-backed companies are already restrained by liquidity issues that preclude taking on additional capital spend. An expanded universe of investors, bankers, observers, and other stakeholders with whom the CEO probably does not have a relationship of any kind must be convinced of the potential value, requiring more than just a casual conversation. 

To ensure good ideas do not die on the vine, CEOs of PE-backed firms must be prepared to make their case in a more formal, data-driven manner and identify, with detail, the resources that will be required. Gather and present the imperial evidence needed to explicitly showcase how the new idea will lead to growth and ultimately enable the PE firm to successfully realize the investment thesis. 

Establishing Trust and Alignment Amid Personnel Changes 

PE ownership and portfolio company management changes go hand-in-hand. Sometimes changes are made in the immediate aftermath of the transaction. In other cases, they happen over time. But change is inevitable, particularly in the CFO office where 75% are replaced during the hold period. 

CEOs of PE-backed companies might find themselves surrounded by newer faces with the expertise needed to drive a value creation plan but potentially without the trust and coordination to which they are accustomed. They are now challenged with leading the implementation of a growth plan to the satisfaction of the PE owner with a new team that has little history with one another.  

In this scenario, building trust from the ground up needs to be the priority. CEOs need to take the time to determine how this team can best work together and then grab control of the growth agenda. Alignment and consensus can be established by removing siloes, facilitating deeper interactions between functions, and ensuring everyone understands their respective responsibilities and roles. Only then can CEOs effectively nurture the newly formed and constantly changing team to become a unified unit that is supportive of one another, especially during engagement with investors.

Flexibility, Agility, and Multiple Pathways to Growth  

Finally, every business wants to grow. Every CEO and management team works hard to achieve their growth goals. But in a PE-backed environment, the focus on growth is more pronounced and non-negotiable. Flatlining is not an option. 

Even in the best of times, identifying where growth will come from is difficult if not impossible to project. In today’s times, fluctuating interest rates, changing consumer spending habits, and the volatile macroeconomic environment remain threats to performance.

For this reason, CEOs must adopt a more flexible and agile approach to growth planning than, perhaps, they might have before PE investment. Instead of sticking with a singular game plan through thick and thin, PE-backed CEOs need to have a few different irons in the fire, consider multiple scenarios, and be ready to diverge from the original path to successfully navigate the unforeseen and achieve growth targets. 

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