The private equity industry has certainly changed since its beginning. The low-hanging-fruit deals are in the past and a market saturated with new firms, direct investing LPs and lots of dry powder makes deal sourcing increasingly competitive. The changing dynamics of the industry have also affected the relationship between the private equity firm and the CEOs of their target businesses.
“In the 1990s, when the business was less mature, private equity firms were able to negotiate sweet terms because targets were less sophisticated about valuations and there were fewer competitors vying for deals,” Forbes reports.
Now portfolio company CEOs are more sophisticated, and maintaining the best possible relationship with them is a major part of a PE firm’s job. As most private equity firms have embraced the operating partner model, the operating partner and his/her relationship with the portfolio company CEO can have very real consequences on an investment’s success.
Vindi Banga, an Operating Partner at Clayton, Dubilier & Rice and current Chairman of Mauser, a global industrial packaging company, is no stranger to making the relationship between private equity and its portfolio management teams work. It starts with having sat on both sides of the table.
In a recent interview with Real Deals he commented, “I’ve been a chief executive for many years and it’s a pretty lonely job – the buck stops with you. It’s important and helpful to have a chairman you can bounce ideas off, talk about the opportunities and the challenges, but it only works if you have an open and trusting relationship and one that is not set in angst or fear. It’s also crucial for the operating partner to really get to know the company, because you can’t form this kind of relationship otherwise.”
Mr. Banga continued, “It’s like a captain and a coach on a sports team. The chief executive is the captain on the playing field, he is visibly in charge. Our role is to be the coach, to observe, supplement, comment, and help.”
That said, this relationship can often come with serious challenges. A study from the Boston Consulting Group provides insight on where this relationship can go wrong:
- A lack of understanding of the other side’s perspective
- A failure to adapt to the unique demands of the relationship
- The lack of a fully trusting and transparent relationship between the CEO and PE firm
- An incomplete appreciation of the value a PE firm brings to the table
“Despite the inevitable challenges and complexities of the relationship, we found that the overwhelming majority of CEOs at portfolio companies – more than 90 percent – agree that the PE owner has had a positive effect on their company’s performance. Perhaps more surprisingly, an almost equal percentage of CEOs say that the PE firm has enabled them to succeed in their role and has made them better at their jobs.”