GETTING PE PORTCO LEADERSHIP RIGHT

Chief Executive assembled veteran CEOs, investors and leadership pros to get a clear view of what it takes to steer a portfolio company today. Some takeaways. BY JENNIFER PELLET

VIRTUALLY EVERY INDUSTRY has been impacted by Covid, and the private equity sector is no different. From exit time horizons and operating practices to buying opportunities and availability of capital, the pandemic brought both challenges and opportunities to PEbacked companies—some of which are still unfolding.

For companies in industries less negatively impacted by Covid, for example, valuations have held steady thus far but are likely to dip when the capital markets tighten. “It’s hard to believe, but the valuations that we’ve seen in the public markets are still relatively robust overall,” says David Rubenstein, co-founder and co-executive chairman of The Carlyle Group. “I think we have to recognize that there’s a little bit of a, well, I won’t use the word bubble, but if there was a correction in the public markets at some point over the next year or so of 10% or 15%, I wouldn’t be shocked.”

In the meantime, the boom in SPAC activity that began in 2020 has the potential to continue. “I think that every company is being courted by multiple SPACs these days, which means that the terms are going to be strong for the owners of those assets selling into SPACS,” says Bob McCooey, SVP and head of capital markets at Nasdaq, who adds that appreciation is swelling for the method’s speed and greater flexibility. “It has felt like the new way where companies are going to go to market. There’s been an argument, ‘With [SPACs] we can just put the stock into the market and let the market determine what the price is. And we, as the owners, can sell shares on day one or day five, or whenever we want to, we’re not subject to lockup periods. We don’t want a big increase in our stock on day one and not be able to reap the benefits.’”

Another area of uncertainty is how the sudden embrace of a mostly or entirely remote workforce will play out over time. Many expect a significant number of workers to remain remote, or for a hybrid model of remote and in-person workdays to become the norm. It’s a shift that will make engaging employees and aligning them around investors’ growth goals more challenging—and it’s coming at a time when human capital management is more critical than ever, notes Ted Bililies, managing director and chief talent officer of AlixPartners.

“For many years, private equity really looked to financial re-engineering to create value and, shortly after that, operational improvement,” he says. “Human capital is the next horizon, maybe the last horizon, to creating value.”

Today’s portfolio CEOs will need to create an inspiring vision, set a strong personal example and lead with authenticity to succeed, says Bililies. “You’ve got to articulate the purpose and the values of the organization, you’ve got to demonstrate strong emotional intelligence, and you’ve got to be able to hold people accountable and help them develop.”

ACING BUYOUT LEADERSHIP

A pioneer of the private equity revolution, The Carlyle Group’s David Rubenstein (at left) has worked with hundreds of portfolio CEOs and written two books on leadership. His advice for leaders coming in as CEO after a buyout: Make a difference fast—and keep it going.

“You’re not going to change the company dramatically in the first 100 days, but you can show that you’re serious about making improvements.

And it’s even more important what you do in the first 1,000 days, because if you don’t make

M&A ANSWERS Panelists Doug Mellinger, managing director of Clarion Capital Partners, and Phil Spencer, CEO of Mega Broadband Investments, on making mergers work.

If there’s a disagreement with founders who are still present in management, how is that conflict handled?

Doug Mellinger: About 75 percent of the time we buy a company, we’re buying it from a founder and a fairly large percentage of those would like to stay on. To me, it’s all about managing expectations. You have that honest conversation about, are you planning to be there for the next decade through two different owners? We’ve never run into somebody that ends up saying, yeah, I want to keep going through sales over and over again. So, they’re probably going to be in that seat for anywhere from six to 24, 36 months.

And our job is to work together, to make sure that there’s a succession. We do have situations where they say they’re willing to give up leadership, and then they’re really resisting the changes. Unfortunately, we then sometimes have to part ways. We’re dealing with a situation right now where we had a founder with two kids who came as part of the deal. And the founder was just going to keep a small piece but was meddling and showing up at the office. We had to have that tough discussion, which was, ‘You’re not welcome. You’re welcome to come for the board meeting, but you’re not welcome to just show up. That’s not what the agreement was and you’re creating a problem for your kids as well.’ They’re not fun conversations, but we have to have them.

What are some of the biggest challenges in acquiring companies in an M&A rollup?

Phil Spencer: The first thing that we do is, you know, we want to have a clear thesis, and we want to stick to it. You don’t want to be all over the place. You want to have it relatively narrow but broad enough that you can get deals done. Let’s assume we were going to do a hotel roll-up. Well, is it going to be luxury hotel, or is it going to be bargain brand? Is it going to be tier three, tier four cities, or is it going to be major metros?

You need to make sure that there’s a cultural fit and that you’re capable of shifting the culture if it’s not where you want it to be. If I’m trying [for a certain degree of professionalism] in the organization and buying a company where they were in flip-flops and T-shirts, well, that’s going to be a struggle. Because in the end, when you’re bringing together five or six different companies, you’ve all gotta be pushing in the same direction.

What do you see happening with valuations over the next few years?

Doug Mellinger: There’s a lot of capital out there right now. You’ve got Covid-affected industries that will come back and valuations will come up on those, but it’s actually more about the credit markets. So, what people need to look for if they want to project out over the next couple of years is determining the point at which cost of capital goes up. At what point will there not be as much credit available? You’re going to need to put more equity on the table. And, at some point when cost of capital goes up, then valuations will come down. Right now, we’re living in a free-capital world and valuations are going to stay high for quite a while. That will change at some point, but it could be five or seven years from now. CE

changes by then, you’re probably not going to be able to get them done.”

Communicate. “You have to be a good communicator—people in this era of social media and so forth, expect instant communications and instant responses.” Dig in. “Roll up your sleeves and get in there working. People do it symbolically by rolling up your sleeves. But you have to say, ‘I am one of you. I’m in the foxhole with you.’ That can go a long way.” Don’t hide the bad news. “Tell the

private equity investors, ‘Look, this is not working out. We’ve got to do something better.’ Give people bad news up front and be honest about it. Honesty goes a long way.”