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Private Equity and the CEO: Partners in the Quest for Value

The type of relationship and level of cooperation between a private equity firm and its portfolio company are instrumental in determining whether a company performs as expected or fails to deliver value. Done well, the private equity/CEO relationship is highly symbiotic, producing significant benefits for both sides.

In a recent survey, more than 90% of CEOs at private-equity-owned companies said that their owner had a positive effect on their company’s performance. An almost equal percentage of CEOs said the private equity firm enabled them to succeed in their role.

Of course, the private equity/CEO relationship is not without its challenges. CEOs are accustomed to running their own show, but once they become part of the private equity firm, they have to answer to a new boss. Private equity firms have few qualms about removing an underperforming CEO.

When a private equity/CEO relationship fails, it can be due to one of several common reasons.

Poor Understanding of the Other Side’s Perspective

Failure to Tailor the Engagement

Limited Trust and Transparency

Limited Appreciation of the Private Equity Firm’s Value

Four Steps to a Better Relationship

The most successful relationships require mutual and ongoing effort. Here are four ways to make that happen.

  1. Understand where your partner is coming from. For CEOs, this often means refreshing or gaining new skills. For the private equity firms, this means taking time to identify and dispel any preconceived notions about private equity that CEOs might hold.
  2. Define the relationship up front. Set clear and achievable objectives together, defining roles in detail and avoiding a one-size-fits-all approach. Ultimately, everyone wants to grow the company.
  3. Make the relationship work throughout the cycle. As in a marriage, transparency and honesty are the most important factors in a good private equity/CEO relationship. Keep an open dialog in good times and bad.
  4. Get the full benefit from your partner. Both the private equity firm and the CEO have plenty of value to bring to the table. Tap into that expertise by making your partner your greatest ally.
Principal Investors & Private Equity
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