Top Traits Private Equity Firms Look For In A CEO
We’re often asked what private equity firms look for in a CEO or management team they are considering backing. While attributes like investment criteria will vary by firm, some are more universal, such as the traits firms look for in a CEO. This is especially true in the lower middle market, where private equity firms expect to work closely with the founder or management team they are partnering with. This is not meant to be an exhaustive list or to be read as a “deal-breaker” for all private equity firms, but rather to give a general idea of the skills and leadership traits that private equity firms tend to find attractive in a future partner.
Sense of Urgency
For private equity firms – and for portfolio companies themselves, which often have aggressive growth goals as a motivation for taking on an investor – time is of the essence when executing on the plan and growing the business. The business model itself for private equity firms relies on this: driving value creation over a certain period of time. For CEOs of a potential portfolio company, having that sense of urgency ensures they are never a bottleneck to that process. It’s similar to an entrepreneurial mindset in that the CEO is hands-on, hustling along with the rest of their team to reach bold goals, and the opposite of, say, a governmental agency mindset. Firms strive to partner with CEOs with this attitude, as it demonstrates the CEO’s innate drive to grow their shared investment without any need for the firm to get too in-the-weeds at the company.
Private equity firms prefer to speak in facts over generalities. If a CEO speaks in vague, abstract terms when discussing their company, the story tends to change over time based on circumstances. In contrast, CEOs who are prepared with a fact-based story of the business demonstrate they have a clear grasp of the company and the vision they want to accomplish with their private equity partner. With a fact-based CEO, firms are confident that they are getting the full story and that it will remain consistent over time. This also ensures communication throughout the partnership remains open and clear to all parties.
The opposite of someone who says “I feel like we’re moving in the right direction” or uses some other abstract concept of success, a results-oriented CEO will have clearly articulated measures of success. Things like driving EBITDA growth or paying down debt, with quantifiable metrics or key performance indicators (KPIs). CEOs who can translate non-quantitative aspects like culture into measurable results are even more attractive to private equity firms, as it further establishes their skill of tracking and attaining targets. Firms need to know that their CEO partners are on top of company performance and will proactively come to them with any areas where performance may be lagging to help find solutions, rather than the firm having to ferret these out in reports without context once a problem has already fully formed.
Assigns Responsibility (Not Blame)
Private equity firms prioritize CEOs that take personal accountability for the results of the company, whether they are good or bad. This does not mean that the CEO can’t delegate or assign responsibility of metrics or areas of performance to other team members; on the contrary, this is often necessary when moving at the pace many portfolio companies need to in order to grow. However, firms never want to see a CEO pointing the finger at a team member if results turn sour, as ultimately the buck stops with them. In cases where results aren’t where they need to be, private equity firms want a partner who comes ready with a plan of action to redistribute responsibility among the team, take on a certain function themselves until improved, or a robust sales campaign, to name a few examples.
Focused on Growing Equity Value
Ultimately, growing equity value is the priority of everyone involved in a private equity partnership. This can be accomplished in myriad ways, including growth of EBITDA, debt paydown, etc., but the end goal is the same. A CEO that understands how to calculate equity value, the drivers that influence this value, and who can have a fluid conversation about what’s going on at the company and how that impacts equity value will always be appreciated by a private equity firm. Speaking the same language is important (as touched on earlier in this blog), and equity value serves as the foundation of the language firms need to speak with their partner companies. CEOs that grasp the concept from the start not only will have an easier time articulating their plans for the company during the transaction phase, but are also in a better position to define and implement any adjustments needed to the company to achieve goals throughout the partnership.
For CEOs looking to partner with a private equity firm, understanding that their personality traits – not just the company’s numbers – may influence the firm’s decision to transact or not is key. Even if a leader doesn’t naturally possess all of these, most can be cultivated with time and practice, like many other leadership skills, and will be invaluable when partnering with a private equity firm.