This post is based on remarks IntelliVen CEO, Peter DiGiammarino made about what Private Equity Operations partners do for portfolio CEOs at a National Private Equity International Operating Partners Forum Panel Discussion in Sentry Center, New York City.
A view from the portfolio company CEO on:
- Management autonomy and sponsor inclusion; striking the right balance.
- Engaging with the General Partner over the life of the transaction.
Beyond getting deals done and setting up financing, there are three things an operations professional counts on from their private equity investor:
- Governance– i.e., provide a consistent point of accountability to report on: what we said we would do, what we did, what happened, what we learned, and what we plan to do next; we count on you to ask good questions to push up our thinking and give us your best advice.
- Focus– i.e., help us clarify whose problem we solve, how, and how well and clarify our roles to verify they make sense and that we, individually and collectively, actually do what we say we do.
- Access– i.e., help secure the money, people, partners, clients, best practices, knowledge, etc. needed to be successful.
A team is a group of people working together to achieve a common goal. If everyone sinks or swims together the investor team and the operating team aggregate to form the deal team.
The CEO’s job is to get the most out of all available resources to achieve the best possible result in the shortest possible time. Those on the investor team are there for the CEO to draw-in and leverage as best s/he can just like any other resource. Why then does it often seem that the investor team and the operating team are competing rather than working together?
Consider a real example: After five years with a successful exit for a top Private Equity firm, I stayed on as Chairman leaving my protegee in the role of first-time CEO with new investors. The organization’s single largest client-program was unexpectedly and abruptly lost in the first week, then the macro environment changed dramatically, and the new sales pipeline stalled.
The business fell way off plan:
- The private equity investors were rocked and so prepared and asked the best questions they could come up with to push up the team’s thinking and spark insights.
- The management team was shaken and felt on the verge of losing owner confidence, their jobs, and the opportunity of a lifetime. They listened carefully to every question, answered what they could in the moment, and diligently followed-up afterwards almost as if coming up with the right answers would prove that things were about to get back on track.
Things did not get back on track. Instead there was escalating uncertainty, concern, and trepidation.
The investment team did not want, or even think that they knew how, to run the business, but the management team was lured into thinking that the investors thought they did know how to manage the business! Consequently, well-intended questions from the owners:
- Were out-of-step with what the CEO thought was right to do.
- Left the CEO off-balance and wasting time trying to please.
Board interactions became ordeals to manage rather than fertile ground for good ideas that stimulate effective action. The operating team expended energy resisting what they thought their investor thought was right to do rather than on what the team thought was right to do.
What investors need, want, and deserve when things get off track is the new plan and for the business to perform on or ahead of that plan. I met with the investor team and separately with the CEO to remind them all that a CEO either:
- Has a plan and so knows what to do and is doing it
- Does not have a plan and is (or, should be) driving hard to put one together.
At the same time, the board is either:
- Supporting the CEO.
- Changing the CEO.
Trouble comes when the CEO thinks s/he has a plan, but has not communicated it well and when investors think they are being supportive, but their actions say otherwise.
When the CEO says “the world has changed”, investors should ask for the new plan and make it safe for the CEO to say: “The plan needs to be pulled together“. Urge the CEO to work with her/his team, investors, and advisers to come up with a plan everyone believes in…and do it soon! Agree on a date and when it comes, review the plan as you would any investment.
- If you are comfortable with the plan and with the CEO’s ability to execute against it, say: “OK, proceed as described!” and then support and help the CEO in every way you can.
- If the plan is not good or you lack confidence in its execution then say: “Not OK” and proceed to move him/her out.
To finish the story, the investors gave their new CEO time to work with his team to develop and present a coherent plan that they support and the business is back and performing well.
The lesson is that while investors are part of the deal team, they are not part of the management operating team. The best investors know, appreciate, and respect that operating competence is a high-order and rare skill and that investors do not have that skill. They may be operating-oriented deal guys, but they are still deal guys. Their job is to find, hire, put in place, and support an operating team.
Some operating teams are not experienced enough to know that investors are not operators and many, if not most, investors find it hard to resist dabbling in operations. When neither speaks well the language of the other, things can get bogged down or confused. There is a role on the operating team and/or on the investor team for someone who speaks both languages.
That is, the operating-oriented deal guy (i.e., attendees of this conference) and/or the deal-oriented operating guy (such as myself) can improve the odds of success by helping owners and operators to better understand each other and work better together to improve the odds of better results, sooner.
Note on management teams and their boards.
How operating teams make money in Private Equity backed businesses.