Co-founder of CEO Advice Guru, LLC. Best-selling author of The Private Equity Playbook and The Exit-Strategy Playbook.
Volume of private equity (PE) deal reached $2.4 trillion in 2022. Clearly, the world of PE is a lucrative one for investors.
It is also extremely volatile.
A 2018 report brings this home. They pointed it out only 27% of CEOs of companies acquired by PE will still exist at the end of their company’s investment hold period (usually five years). That’s right: in the PE world, 73% of CEOs are fired or leave in less than five years.
As shocking as this statistic is, I can tell you that it is absolutely possible to beat these odds. For example, in my own career as CEO of PE-backed companies – a 21-year career, nine PE sponsors, three different organizations, and multiple vesting periods – I had a 100% survival rate in the first vesting period and a career survival rate of 75% in total.
I believe my success can be attributed to two main strategies. By implementing the strategies below, you will increase your chances of surviving and thriving in the world of private equity.
Let’s get realistic.
Before we get into it, I think it’s worth acknowledging that some revenue is due to forces beyond a CEO’s control. In some cases, PE companies set unrealistic growth expectations. For example, they may expect a certain CAGR (composite annual growth rate), but due to economic conditions, poor research and data modeling, or other factors, that growth rate may not be achievable. If the PE company doesn’t acknowledge their mistake, they can let the CEO go for failing to hit impossible numbers.
There is also a percentage of CEOs who planned to leave the company immediately after the sale to the PE company. They may have tried to retire or turn their attention to other adventures, which may be why they tried to leave in the first place.
However, planned exits and unreasonable expectations are not the cause of 73% of CEOs leaving within the five-year investment period. So what does it do? The answer, I think, boils down to two things: losing momentum and a lack of education.
Strategy No. 1: Improve your game.
In my first book, I made the point that selling PE successfully is like winning a sports championship. However, in sports and gym it is not enough to win a championship once. You should to hold win to stay on the team.
Many CEOs are unprepared to step up their intensity after selling to private equity. To stick with our sports analogy, they are not mentally ready for spring training and a new season. That’s a problem, because their new owners will look harder than ever for them to come back.
So that’s strategy number one: keep your momentum – or improve your game – once PE takes over. I can tell you that almost universally they want to increase their MOIC (multiple of invested capital) by at least three times. If they don’t see you driving as fast as you can to meet that goal, you probably won’t survive.
Strategy No. 2: Develop yourself.
Besides resting on their laurels, there’s another big mistake many CEOs make: remaining woefully ignorant of the ins and outs of PE. For the past four years, I’ve made it a point to include a basic 10-question private equity quiz at all of my business growth seminars. Despite polling thousands of attendees — all of them successful CEOs, founders, and entrepreneurs — I’ve only had one An person gets a perfect score. Ninety percent fail.
Let’s go through some of my quiz questions: Do you know how many years an average PE fund lasts? Or how many private equity firms are active worldwide? What about what is the typical minimum investment size in a PE fund for investors?
Most people don’t know these answers by heart. However, if you want to survive and thrive in the world of private equity, it is imperative to firmly entrench these facts – and many others – in your mind. Learn to speak the language of PE; understand how they think and recognize what drives them. Understand how they achieve growth and what returns they expect for your company’s investment period. If you don’t understand the complexities of PE, you can doom yourself to failure.
That is strategy number two: immerse yourself in 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 investment period.
Given the complexity of PE, it can be helpful to partner with an expert in this world as you prepare for the road ahead. Many peer groups have members who have physical education experience. It may be worth joining one of these groups so you can learn from those who have swam in these waters. You can also work with a coach experienced in helping business leaders navigate the world of PE. (Disclosure: Companies often hire me to coach their CEOs on the transition from founder-led to PE-owned.)
If you are looking for a coach or peer group to expand your knowledge base, clarify the specific experience factors that would make you feel good about the investment of time or money to join a group or hire a a coach.
If you are considering a national chain, remember that they often have individual subgroups. Is there one where the group leader or group members are predominantly experienced in working with private equity? In an individual coaching situation, does the coach have experience working with private equity firms or CEOs?
Also approach your new private equity partner! PE companies often have resources they are happy to share. Most PE companies have a portfolio of companies and therefore CEOs. You can contact other company CEOs to create your own network or peer group.
Selling your business to a PE company is a great achievement. However, if you want to stay for the entire investment period, it’s time to double down. Educate yourself as much as you can about the world of private equity. Keep driving forward. When you work with PE, you are working with an advanced investor class; act accordingly.