Founding partner of CEO Advisory Guru, LLC. Best-selling author of The Private Equity Playbook and The Exit-Strategy Playbook.
Private equity (PE) deal volume hit $2.4 trillion in 2022. Clearly, the world of PE is a lucrative one for investors.
It’s also extremely volatile.
A 2018 report drives this home. It pointed out that only 27% of CEOs of companies acquired by PE will still be in place at the end of their company’s investment hold period (typically five years). That’s right: In the world of PE, 73% of CEOs are let go or leave in less than five years.
As shocking as this statistic is, I can tell you that it’s absolutely possible to beat these odds. For example, in my own career as a CEO for PE-backed companies—a career that spanned 21 years, nine PE sponsors, three different organizations and multiple hold periods—I had a 100% survival rate on the first hold period and a career survival rate of 75% across all.
I believe my success can be attributed to two important strategies. By implementing these strategies below, you could increase your chances of surviving and thriving in the world of private equity.
Let’s get realistic.
Before we dig in, I think it’s worth acknowledging that some turnover is due to forces outside of a CEO’s control. In some cases, PE firms set unrealistic growth expectations. They may, for example, expect a certain CAGR (compound annual growth rate), but due to economic conditions, poor research and data modeling, or other factors, that growth rate might not be attainable. If the PE firm doesn’t acknowledge their error, they may let the CEO go for failing to hit impossible numbers.
There are also a percentage of CEOs who intended to leave the company immediately after selling to the PE firm. They might have been seeking to retire or to turn their attention to other adventures, which is why they may have sought to exit in the first place.
Planned exits and unreasonable expectations don’t account for 73% of CEOs leaving in the five-year investment period, though. So, what does? The answer, I believe, comes down to two things: losing momentum and a lack of education.
Strategy no. 1: Up your game.
In my first book, I made the point that successfully selling to PE is akin to winning a sports championship. However, in sports and in PE, it’s not enough to win a championship once. You have to keep winning to stay on the team.
Many CEOs are unprepared to turn up their intensity after selling to private equity. Staying with our sports analogy, they’re not mentally ready for spring training and a new season. That’s a problem, because their new owners will be looking for them to come back harder than ever.
So, that’s strategy number one: Maintain your momentum—or up your game—once PE takes over. I can tell you that almost universally, they’re looking to increase their MOIC (multiple of invested capital) by at least three times. If they don’t see you driving as hard as possible to hit that goal, you probably won’t survive.
Strategy no. 2: Educate yourself.
Along with resting on their laurels, there’s one other big mistake many CEOs make: remaining woefully ignorant of the ins and outs of PE. Over the past four years, I’ve made it a point to conduct a basic 10-question quiz about private equity at all of my business growth seminars. Despite quizzing thousands of attendees—all successful CEOs, founders and entrepreneurs—I’ve only had one person get a perfect score. Ninety percent fail.
Let’s go through a few of my quiz questions: Do you know how many years a typical PE fund lasts? Or how many private equity firms are in operation globally? How about what the typical minimum investment size is in a PE fund for investors?
Most people don’t know these answers off the top of their head. However, if you want to survive and thrive in the world of private equity, it’s imperative to entrench these facts—and many others—firmly in your mind. Learn to speak PE’s language; understand how they think and recognize what drives them. Understand how they achieve growth and the returns they expect for your company’s investment hold period. If you don’t grasp PE’s complexities, you could doom yourself to failure.
That, then, is strategy number two: Educate yourself about the world of private equity. Take the time to learn how it works, what its needs are, and what its expectations are. The better you understand PE, the more likely you are to survive the entire length of the investment period.
Be prepared.
Given PE’s complexity, it can be helpful to work with an expert in this world as you prepare for the road ahead. Many peer groups have members who are experienced with PE. It may be worthwhile to join one of these groups so you can learn from those who have swum in these waters. You can also work with a coach who is experienced in helping business leaders navigate the world of PE. (Disclosure: Firms often hire me to coach their CEOs making the transition from founder-led to PE-owned.)
When searching for a coach or peer group to expand your knowledge base, clarify the specific experience factors that would lead to your feeling good about the investment in time or money in joining a group or hiring a coach.
If you’re considering a national chain, remember they often have individual sub-groups. Is there one where the group leader or group members are predominantly experienced at working with private equity? In an individual coaching situation, does the coach have experience working with private equity firms or CEOs?
Approach your new private equity partner, too! PE firms often have resources that they will be happy to share. Most PE firms have a portfolio of companies and thus CEOs. You can reach out to other CEOs of the firm to create your own network or peer group.
Selling your company to a PE firm is a big accomplishment. However, if you want to stay on through the length of the investment period, it’s time to double down. Educate yourself to the maximum extent possible about the world of private equity. Most of all, keep driving forward. When you’re working with PE, you’re working with a sophisticated investor class; act accordingly.
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