What makes CEOs of private equity backed companies successful

Although PE-backed company CEOs and other CEOs share the same role, a PE-backed CEO is tasked with unique challenges.

Many of them come underprepared for what lies ahead.

I have been recently invited to share my thoughts about the subject on the “The Private Equity Podcast”, where I have been interviewed by Alex Rawlings (link to the original episode at the bottom of this article).

Here’s a snapshot of our conversation:

The common mistakes made by Private Equity Firms 

First, many PE firms have a high sense of urgency to change leadership after the acquisition.

It could be the right decision when PE firms want to drive change and do things differently in the business, but often changing CEOs seems like a normal action to take.

Many PE firms change leadership not for driving change but because they prefer working with CEOs who trust more. This is understandable but it’s often the wrong reason. In fact, often “their” CEOs don’t perform as expected in the new context. Not because they’re not capable, but because they struggle to align with the acquired company culture and the environment.

Second, some PE firms are not enough interested in the CEO succession plan, meaning they underestimate the importance of developing future talents and leaders. The reason is simple. They’re driven by different goals. They need short-term results to exit the business. They don’t associate leadership development with an immediate added value for the business.

So sometimes, I don’t see them giving the right attention to this priority.

How to assess the current leadership team

To avoid falling into this trap, I believe PE firms should spend more time assessing the current leadership team before they complete the acquisition.

A deep assessment goes much beyond CVs and interviews though.

PE firms should ask CEOs and other C-suite executives if necessary, to take some good core competencies assessments to understand better their leadership style at a granular level. For example, to assess how they make decisions, how to cope with directive inputs, how to communicate, or how to deal with emotions.

The assessment can be eye-opening for PE leaders. It can tell them whether the CEO’s behaviors are aligned with what they want to see in the future.

The two best skills of CEOs

I don’t believe there is space anymore for CEOs who have no empathy.

Empathic leaders are much higher effective than old-style leaders because they have a stronger awareness of themselves and their people. They show caring and compassion. They listen more and ask to be challenged. This is hugely critical to build more trust and get the most out of people.

Besides, great CEOs need to be highly adaptable to change.

As the speed of change is at its highest, great CEOs must be able to drive change quickly. Not surprisingly, I read recently that 75% of CEOs are expecting to change their business model in just the next three years.

The leadership challenges of acquisitions

Lack of cultural fit between buyer and seller is often the main reason why acquisitions fail. In fact, firms like PEs or other financial institutions underestimate the importance of culture. They tend to focus on what matters most for them: financials and strategies.

This is when things start to fall into pieces but it often becomes visible later on during the integration phase.

As a result of that, I get involved at this stage and the first thing I normally notice is the poor level of trust between the two teams which prevents them from working together effectively and generating immediate results.

Covid didn’t help on this. Many new teams have started working together online without even meeting in person which highlights the limitation of remote work.

To build trust in these situations, the best approach is to align teams on why they need to work together. Why their work matters. This work with teams leads them to generate a new identity and a new set of values that can be turned into new virtuous behaviors.

When all these elements are in place, it becomes way easier to do the “hard” work.

This is not a quick fix though. It takes time for a team to learn how to work together, so investors need to understand that when they ask for unrealistic results.

How PEs can help CEOs and their teams

I believe that PEs can do way more than traditional support to help their portfolio companies.

One idea that I recommend is to focus on real community building. Meaning, helping their portfolio companies and their leaders to spend time together and learn from each other. Frequent meetings with CEOs within the portfolio could be a terrific way to share ideas, learnings, insights, and strategies.

CEOs will love that because money can’t be the only benefit of selling their companies.

Also, this could be a great way for them to avoid being isolated in their own company.

The four best attributes of successful CEOs

  1. Empathy. I think empathy is underrated. Sometimes some private equity firms still believe the Darwin Law applies to business. Only the strongest CEOs survive and thrive.

  2. Curiosity. It is not just important to understand what’s going on in the organization but is also critical for generating more innovative or disruptive ideas. It’s like shaping the future vs reacting to it.

  3. Vulnerability. Not many CEOs are vulnerable enough because they think this is a sign of weakness. I urge CEOs to change their mindset and be open to receiving feedback, listening more carefully, and showing their true personality and weaknesses if necessary. Finally, admitting they don’t know everything is OK. No CEO was born as CEO.

My suggested books for CEOs

  1. “Atomic Habits’ by James Clear, on how to change and build new behaviors

  2. “The Art of Impossible” by Steven Kotler, on how to achieve high-performance

  3. “The Five Temptations of a CEO” by Patrick Lencioni, on how to become a successful CEO

Link to “The Private Equity Podcast” episode: https://lnkd.in/d_3SdiF

Listen to the podcast related to this article: https://www.andreapetrone.com/what-makes-ceos-of-private-equity-backed-companies-successful-podcast/

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