Interview – CEO Positions at PE Portfolio Companies
Introduction – Mike Lorelli
Most of my career has been with PepsiCo where I was blessed to have been given the fortune to be a Division President twice. After which, I’ve been in the private equity space for 17 years. The dance card today is very interesting, colorful and rewarding. I’m an Operating Partner with Falconhead Capital, a small mid-market private equity firm in New York. I sit on four boards and I’ve got my coaching practice which goes under the heading of Faster Landings. At Faster Landings, we do two things – we coach senior executives in transition, and we also coach senior executives who are trying to land board seats.
When a company sells to a PE firm and the owner and/or C-suite is asked to stay on, how does the landscape change for these leaders?
The landscape changes for virtually everybody in the company. It begins with the timeline, which significantly shortens. Tomorrow now means this afternoon. Next year now means next week. Keep in mind, private equity executives are driven by three measures: internal rate of return, cash-on-cash return and hold period where less is more. Two of these measures are essentially time driven, hence the incredible immediacy to everything.
What are the unique challenges and opportunities inherent in the PE universe?
The typical portfolio company hold period is about 5 ½ years. These leaders must be ready for a tenure that feels like the half-life of uranium. They may end up being with a company through multiple owners throughout private equity, but with a particular owner, it’s likely to be on average about 5 ½ years. If they are successful as the CEO, in effect, they will be working to put themselves out of work, while providing a good IRR for the investors in a very short hold period. It does take a certain kind of stomach to succeed in the PE world.
In terms of opportunity, there are significant financial rewards. It is not unusual for a successful CEO to have equity participation that generates an equity cash component beyond base and bonus of several million dollars, perhaps as high as $10 million depending on the size of the transaction. And it’s not just the CEO that reaps the reward, the other C-suite executives would also proportionally participate in those kinds of equations.
Post engagement, a successful CEO will now have the beginnings of a track record that gives enormous credibility going into the next private equity engagement. This is one of the reasons why I’ve been able to gain four successive private equity portfolio CEO engagements. That track record means a lot in the private equity world.
If a new CEO needs to be found, what are the key characteristics a private equity firm focuses on?
It’s typically not the traditional, hard-functional skills that are very easy to calibrate and ascertain whether the individual has them – Do they understand finance? Do they understand cost accounting? Do they understand standard cost?
In contrast, the private equity firm is looking for a real roll-up your sleeves attitude and willingness because, for example, administrative assistants are virtually non-existent. Which means the new CEO will do their own expense reports, book their own travel, etc. If there is a bank meeting tomorrow, well, it may be the CEO driving to Staples to pick up the binders. It’s the CEO that writes the strategic plan. There isn’t the luxury or the money to hire a McKinsey, which is what I would have done in my PepsiCo years. The CEO will be doing all those things.
So, the kinds of skills sought are typically not the traditional hard skills previously mentioned. It’s more attitudinal. From a white paper written by a Spencer Stuart recruiter, there is an expression that if you want the skills of a PepsiCo or GE person to go into a smaller private equity setting, do not take a person directly from PepsiCo or GE because odds are that a person going directly from those mega-sized companies into a smaller cap will fail. They don’t have the staff. They don’t have the backing. They don’t have the financial groups that they can command and say go write me a strategic plan. The better executive has already transitioned into a smaller environment without all that support and succeeded.
How can non-industry veterans position themselves to be on the short list for CEO consideration?
The key for someone who is not from the same industry would be to steer the conversation, when being interviewed, to how you accelerated the P&L at a company that was in a similar growth stage, i.e. an emerging company, a fast growth company, a company in a mature market, or a turnaround. So, you are not in that same exact industry, but you were very successful steering a company in a similar growth stage. That is a good parallel.
Now, there are still recruiters out there that will insist on exact industry experience. For example, they may be interviewing for a CFO spot for a furniture business and insist on someone who has an unblemished 40-year career in the furniture industry. Thankfully, those small-minded people are becoming fewer and fewer. Candidly, when you come across one of those recruiters, my best personal advice is to end that conversation as politely and as quickly as you can. It would literally be easier for you to convince that anal retentive individual to undergo a sex change operation than for them to think of you as a smart individual that can transfer skills and learn a new category.
Consider my background as a PepsiCo and Pizza Hut CEO. Well, Pouschine Cook Capital Management asked me to go run a latex foam company and The Riverside Company took a risk that I could go build the world’s largest industrial burn care products company. That is about as far from a Diet Pepsi or a pepperoni pizza as one could imagine. They bet on the jockey.
How are Board Directors recruited?
Portfolio company boards are small. A typical private equity board is the CEO, two people from the private equity firm and two outside Directors. Most private equity firms these days are category agnostic, meaning they could buy a cement company today and buy a lipstick company tomorrow. Clearly, they can’t be expert across all categories. Instead, they will look to fill one outside Director spot with someone who knows the industry. For the other outside Director spot, they will look for someone that has functional expertise in an area that is a leverage point for the industry. For example, if it’s a financial services company, they might look for someone with an IT background. If it’s a transportation company, they might look for someone with a logistics background. If it’s a consumer packaged goods company, they might look for someone with a marketing background.
Are CEO’s with prior PE portfolio company experience in a better position to land board seats?
By all means. A prior boss of mine in the private equity space, a prior executive chairman of mine, David Gold from Riverside Capital, once made the comment that the best outside directors are serial CEOs because they really know how to zero in on the leverage points in a business.
Looking back at your 30+ year career, what general business advice would you offer to others?
The best advice is to ignore almost all advice. There is plenty of advice out there and most of it is conflicting. Likely, the PEI readership wouldn’t be where they are today if their instincts weren’t already pretty good.