Over the last decade, the private equity industry has sky-rocketed as cheap debt from low interest rates has provided fuel to the leverage model along with more investors realizing the remarkably favorable risk-reward ratio of a well-managed PE-backed backed deal. As the private equity model continues to build momentum, more executives from public companies are being approached to join PE-backed companies. Have you been approached by a PE-backed firm? If so, I’m going to share some PE industry insights from Dave Justus, a veteran PE-backed CFO, and also a Lead5 advisory board member. I’ll close with 4 key attributes that successful private equity executives must have to thrive under this ownership structure.
Why is Private Equity Booming?
Dave Justus is the former CFO of Avetta and he’s a PE-backed veteran, and Dave also serves on the Lead5 advisory board. He recently shared these insights on private equity’s emergence.
Mr. Justus says, “Investment by private equity firms (PE) is booming and, in some ways, overtaking public and venture capital as the preferred investment model. While PE funds are being raised at a record rate, the number of publicly listed companies in the US has dropped by 20% over the past 10 years and by over 50% over the past 20 years. The attractiveness of being a public company has diminished somewhat in the past decade because of regulatory pressures and costs.”
Mr. Justus continued, “With venture capital (VC) deals, investors were mainly betting on the success of the CEO and management team’s ability to create a sustainable business. The typical success rate for early stage was around 1 in a 100. The odds in VC were long, but the returns were very high with a successful exit. PE on the other hand invests in professionalizing and scaling proven businesses in established markets, without taking much, if any, business plan and market adoption risk. PE firms typically expect a 3x return on their investment in a 3-to-5-year horizon. In a nutshell, PE can be a heavy lift operating environment to professionalize and scale the business in an established market, but is much more of a ‘sure bet.’ As a result, there’s a flood of executives looking to get into this space.”
B2B firms have traditionally represented the largest private equity target, but PE-capital continues to pour into IT, B2C, Financial Services, and other industries. In 2017, over 4000 PE-backed deals occurred, representing an investment value of over $500B. With deal volumes staying high, more top executives from traditional public companies are being recruited to play key roles in company transformations.
Lead5 Analysis Shows Private Equity Salary Growth
This PE growth is generating higher salaries for qualified executives. For example, Lead5 compensation analysis has shown an increase in the average base salary for CFO’s of PE backed lower middle market companies over the last 2 years. The mid-point of base salary has traditionally been roughly $250,000. With a highly competitive market for proven players with previous PE portfolio company CFO experience, the base salary range has jumped up to $300,000.
What makes a PE-backed executive successful?
To be a successful executive at a PE-backed firm, you must recognize that the investment horizon for most PE-backed deals is 3-5 years and operate with an appropriate sense of urgency. You must be comfortable leading in an environment that demands successful financial results on a compacted timeline. Also, part of the PE-backed ‘playbook’ is cutting out unnecessary expenses so being resourceful with limited resources is paramount to your success.
Here’s a list of executive leadership traits that are critically important in a PE-backed operating model:
1. Bias for action. Within larger public firms, due to the sheer size and some of the ingrown bureaucracy that comprises the company culture, you probably attend (and maybe even lead) some meetings that are customary – where updates are exchanged, and decisions are postponed or never even made. In the PE-backed company culture, meetings are principally about making important decisions, some of which will change the direction of the firm. In short, it’s about being decisive and taking action.
2. Entrepreneurial. PE-Backed firms are notorious for ‘stripping out the fat’ and this includes support and administrative staff. Are you comfortable rolling up your sleeves and doing whatever work that needs to be done? Successful PE execs find this environment to be both challenging and rewarding.
3. Team Skills/Emotional intelligence. With limited resources, can you rally your team and inspire them to move the firm forward? First, you have to be able to earn the trust of your subordinates. Then you have to understand when to hit the pedal and when to give your team a break. Can you keep the work environment upbeat and positive when the heat is on?
4. Confident Communicator. You’ll be expected to produce results quickly, and you’ll be asked to provide progress updates more frequently than at large public firms. Do you have the confidence and communication skills to defend what you’re doing? It’s important to recognize that leadership in a PE-backed firm requires effective communication with not only your subordinates and customers, but also the private equity firm that has an investment stake in your success.
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