April 23, 2018

PE Funds & CEOs: Can’t We All Just Get Along?

This AlixPartners report says that the relationship between portfolio company CEOs & their private equity owners is often pretty rocky – and that it too often leads to disruptive & costly departures. Here’s an excerpt:

For too many PE owners, misalignment is triggering unplanned turnover among their portfolio company CEOs. Indeed, for this year’s survey respondents, CEO turnover was unplanned for 34% of investments. And everyone’s paying the price. Such turnover can disrupt entire companies, causing confusion and sparking fear among managers and employees about what the change in leadership will mean for them. Result? Productivity and morale plummet.

Equally worrisome, as much as 46% of the PE firms participating in our survey said that unplanned CEO turnover was eroding the internal rate of return (IRR) on their investments. And a whopping 83% said that such turnover was lengthening their investment hold times

What’s the problem? The report says there’s often a lot that CEOs & PE funds don’t see eye-to-eye on. PE funds say that CEOs need to better appreciate their investment timeline & need for urgency, their desire for the CEO to focus on value creation, and the need for transparency. CEOs say that PE funds need to understand the drivers of the business & the CEO’s motivations, to exhibit more patience and listen to the CEO, and to be realistic about the speed of execution of the business plan.

Given the prevalence of CEO departures, the report recommends that PE funds factor the costs associated with that possibility into their investment theses. It also recommends that greater attention be paid to assessing CEOs during due diligence, and that funds consider allowing neutral third parties play a central role in the assessment process.

John Jenkins