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Guest: Randy Dewey, the President of CEO Coaching International. Randy has over 30 years of experience delivering rapid growth and expansion across various industries and countries.
Quick Background: In order to Make BIG Happen, private equity firms need the companies they invest in to get BIG too. And, in most cases, the sooner the better.
On today’s show, Randy discusses how the team at CEO Coaching International works with private equity firms and their portco (portfolio company) CEOs to accelerate growth, improve execution, and maximize returns. Randy shares some insights on the importance of early intervention in newly acquired companies, bridging the gap between private equity expectations and portfolio company execution, and how coaching can help CEOs navigate the increased pressure that often comes with private equity ownership.
4 Keys to A Successful PE – Portco Relationship from Randy Dewey
1. Engage a coach early.
Typically, a private equity firm will bring in a coach near the close of a deal to help the portfolio company CEO execute on the deal’s parameters. But some of the most successful investments that Randy Dewey has worked on had the foresight to bring in a coach even earlier and engage Randy as part of the deal team.
“Early matters,” Randy says, “because as your relationship with the new company that you’ve just acquired begins, getting things right at the beginning is super critical. First and foremost, the deal thesis needs to be understood and the new management needs to understand how things have changed within how they’re operating. There could be things they used to be able to do that are not necessarily allowed in the new structure, or certain rules and parameters that are now being imposed. And the quicker the parties can get to understand each other and understand what the new rules of engagement are, the better.”
While a private equity firm might hold a portfolio company for three-to-six years before a harvest, Randy says that the first quarter after an investment is critical. If the portfolio company CEO stumbles out of the gate, or isn’t prepared for how his or her responsibilities have changed, the company’s long-term trajectory could be threatened — as could that CEO’s job security. And, in Randy’s experience, the agreement between the PE firm and the portco might be heavy on numbers but light on an execution plan.
“During the due diligence period, management would have sold the idea of where things were going in the industry and why this business was attractive,” Randy says. “Some of the forecasts related to sales growth and EBITDA margin performance, all those things have to be materialized now that the deal is closed. We have to now take all those numbers that we’ve seen through due diligence and actually put a strategy and an execution plan and KPIs in place to be able to help make sure that we are realizing that through the hold period. We have a defined period of time where we’re going to grow the value of the business and then they’re going to move to harvest, meaning when the PE firm is going to start to sell the assets in that portfolio and monetize on them so that they can ultimately close up the fund.”
2. Establish trust.
One aspect of the PE-portco relationship that can be challenging for the CEO is what Randy Dewey describes as a “cone of silence.” Even if they utilize an operating partner, the PE firm isn’t going to provide regular feedback and oversight the way a family owner or board of directors might. That isolation can make it very difficult for the portco CEO to manage the company in ways that are consistent with the PE firm’s ultimate sale goals.
Randy says, “We have to be able to work with portco CEO in that cone of silence to be able to help the portco materialize on the things that they need to address, whether it’s concerns they have or issues they have. It’s not that we’re there as the representative of the private equity firm. Our role here is really to work with the portco CEO to be able to help bring the processes that are going to be expected to be in place, make sure that the operating philosophy of the private equity firm is now moved into the way that this management team works and operates, and then bring a level of structure and rigor behind the reporting, whether it’s the cash and capital reporting, or whether it’s the financial reporting, or whether it’s the new board that’s now been formed and the relationship there.”
You can sum up these complex interactions with one word: trust. While the different parties involved might have different roles, guidelines, responsibilities, and vested interests, the goal is the same: get the portco to BIG. Clear communication, consistent execution, and exceptional team building are essential to maintaining a mutually beneficial relationship throughout the process.
“We do a lot of organizational assessment and talent assessments to help the CEO with his C suite team and some of those key positions underneath it,” Randy Dewey says. “We help make sure that we’ve got world-class people to be able to help accomplish those outcomes. So there’s always a team component, there’s a strategy component, and ultimately there’s a system of accountability that’s required. Are our reporting processes in place? Not just internally, but also externally to our board of directors, or the private equity firm operating partner? Are we keeping a level of transparency that’s essential to continue to help building that trust to be able to accomplish the objectives that have been set before us?”
3. Close the gap.
Many portco CEOs don’t understand that, after a deal has closed, they can’t go back to business as usual just because the PE firm has gone behind Randy’s “cone of silence.” Just as the CEO made the portco an attractive investment candidate by aligning the entire organization around hitting BIG targets, leaders now have to realign the portco to the PE firm as well. Without third-party oversight from a coach, the gap between how the portco is operating and what the PE firm expects might not be evident for weeks or months.
“We had a private equity firm that approached us, they had an asset that they had just acquired, and we came in just at the end of the first quarter,” Randy recalls. “And there was a significant degree of frustration because private equity firms, they’re moving quite quickly with these transactions. And after the deal closes, there’s this sort of lull after close. The portco CEO was pretty excited about the transaction, but then all of a sudden there’s this quiet period and he just went on his way, carrying on with running the business the way he had always run the business. The first board meeting ended up happening about 90 days in. There was a big gap in understanding. Now there’s this alarm bell that was going off internally. We got in there and started coaching the company. The strategy was sound. What was sold was certainly what was there. But there was a big gap in the execution plan.”
Bridging that gap caused a financial setback that Randy and the CEO Coaching International team were able to turn around over the next quarter. Randy remembers a lot of high fives and celebrating at the annual planning session because he’d been able to coach both the PE firm and the portco through challenges that were preventing breakthrough growth. But how much faster might that portco have grown and accelerated towards the PE firm’s sale goals if someone had spotted the misalignment sooner? How much revenue was lost? How many other opportunities were missed? How much mistrust could have been avoided?
“In this case, that portco was expensing things that the private equity firm would have expected to be capitalized,” Randy Dewey says. “We would have been able to catch that early because that’s part of our process. We look at cash flow reporting as well as CapEx reporting. We would have caught that quite early in the evolution had we done that from day one, which would have avoided a lot of mistrust and difficulties in those conversations. Early matters in these types of situations, for sure.”
4. Embrace change.
Any major change spreads uncertainty throughout an organization. Words like “buying” and “selling” can cause particular unease among employees who worry that any shakeups might affect their jobs. And once private equity gets involved, even the CEO might feel like he or she doesn’t have the same control over the organization that they once did.
When a company engages with a coach to navigate any major inflection point, that company avails itself of the coach’s expertise, experience, and network of strategic partners. These resources can calm CEOs’ nerves and help them to maintain focus, instilling a confidence that the rest of the organization will rally around and that can unlock some BIG opportunities for all key stakeholders.
“The quicker you can embrace change, the better it’s going to be,” Randy Dewey says. “What is important as a portfolio CEO is to really understand, what does your private equity firm bring to the table and how can I quickly access that so that we can create value quickly? Because ultimately you as a CEO and various members of your management team are going to do well when it comes to the second bite of that apple and you’re moving to harvest. There’s an incredible financial opportunity and upside to be had. But the earlier you can really adopt and embrace the new ownership and what they’re doing and how they’re bringing in not just financial resources, but a tremendous portfolio of people and services and things that they do extremely well, and to be able to tap the value they bring, that should help unlock even greater value for you and for them ultimately.”
Top Takeaways From Randy Dewey
1. Don’t wait. The sooner you engage a CEO coach, the sooner the portco will get BIG.
2. Align around both firms’ shared goals and you’ll hit them faster.
3. Communicate clearly so that problems get fixed and progress is celebrated.
Links:
How to Build a Battle-Ready Balance Sheet – In a previous podcast episode, Randy Dewey discusses how to identify the KPIs, the obstacles, the opportunities, and the team members you need to build your best balance sheet.
4 Keys to Preparing Your Business for Sale to Private Equity – Aakash Shah reflects on how his efforts to stabilize and grow his family’s business paid off with two private equity rounds and a BIG nine-figure exit.
About CEO Coaching International
CEO Coaching International works with CEOs and their leadership teams to achieve extraordinary results quarter after quarter, year after year. Known globally for its success in coaching growth-focused entrepreneurs to meaningful exits, the firm has coached more than 1,500+ CEOs and entrepreneurs across 100+ industries and 60 countries. Its coaches—former CEOs, presidents, and executives—have led businesses ranging from startups to over $10 billion, driving double-digit sales and profit growth, many culminating in eight, nine, or ten-figure exits.
Companies that have worked with CEO Coaching International for two years or more have achieved an average revenue CAGR of 25.9%, nearly 3X the U.S. average, and an average EBITDA CAGR of 39.2%, more than 4X the national benchmark.
Discover how coaching can transform your leadership journey at ceocoachinginternational.com.
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