Chief Outsiders does a lot of work with private equity, which means I’m usually talking with at least 3-4 private equity investors each week.  At the same time, I often talk with an equal number of PE-backed portfolio execs each week, mostly CEOs.  While these discussions have given me insights into their business needs, challenges, and strategies to create value in pursuit of outsized returns, we haven’t spent much time talking about the opportunities and challenges they face in working with each other.   

I recently attended a operating partner-focused conference and got to hear a lot on the topic from the private equity side.  You can read about that in my blog post, “What Operating Partners Have To Say About Working With Their Portfolio Companies.”  As I did not have a similar forum to get the other side of the coin - how portfolio company executives feel about working with private equity, I reached out to a group of PE-backed CEOs and asked them.  While my outreach was not a scientific survey, it was instructive in highlighting portfolio executives’ thoughts on working with Private Equity.

Who I heard from

Most of the CEOs I heard from had been in that role prior to the private equity investment.  The rest were either not at the company before private equity came on board or were in another executive role at the portco.  Also, most of the private equity investments came in the last 3-4 years, tracking with what I would expect regarding typical hold periods.  One CEO noted their private equity investment started in 2003.

Expectations and timelines for value creation

One thing that surprised me were the CEOs’ responses to questions about growth objectives and timelines.  About half said growth expectations were the same, and most said timelines for value creation were either the same or longer.  I had expected them to say there was more pressure to increase growth faster than they did.  When asked about common growth challenges, they ranked the following as their top 5:

1. Creating new products, services, or business models
2. Optimizing core commercial capabilities, such as sales, pricing, and marketing
3. Choosing a growth strategy
4. Ensuring your business has the skills needed for growth
5. Responding to competition and market changes

I also found it interesting that they ranked “Nurturing a great company culture” and “Performance management” pretty low when asked to rank their challenges.  Especially in light of articles like this one.

When it came to resources made available by private equity firms to support growth goals and initiatives, almost every CEO noted the prevalence of financial expertise for reporting and analysis.  Many also noted that their private equity sponsors provided internal growth experts from the PE firm, and/or industry experts on the board.  Only one person indicated their PE Group did not provide any resources to support their growth initiatives.  Most also agreed that they either could not have accessed the same resources on their own, or would have moved much slower had they done so without the sponsor’s support.

Benefits and pitfalls of working with Private Equity?

When I asked portfolio company CEOs what they considered the primary benefits of having a private equity partner, I heard things like:

• Financial engineering & capital market expertise
• Smart support / Expertise in creating value
• Availability for funding acquisitions
• Board Expertise
• Access to funding
• Strong financial savvy and resources - excellent to manage M&A and other investment criteria and technical financial matters (financing, leveraged loans, multinational entities and tax matters, etc.)
• Credibility
• Assistance in negotiating a favorable credit agreement
• Help in acquisition of an IT portal which has allowed us to expand exponentially

On the flip side, when I asked what drawbacks the CEOs saw in working with private equity (if any), I heard:

• Shorter time horizon for ROI
• Somewhat constrained by amount of debt and need to service it
• Another layer of decision making
• Control
• Budgeted Revenue and EBITDA targets are used to determine annual bonuses for the Executive Team
• PE pushes us to hire more sales reps than budgeted so it is difficult to achieve EBITDA targets as it takes over 1 year for the sales reps to become productive 

I think two of the CEOs said it best with the following comments:

“All positive if you select the right firms.”

“20 years of positive experience, growth and wealth creation for management and the financial sponsors.”

If you are, or have been, an executive at a private equity portfolio company, what have your experiences been?