Such people are rare but invaluable among private equity-backed executives
Sponsors require portfolio company leaders who can, at a minimum, deliver on the base case of an investment thesis. This is easier said than done, given the degree of difficulty inherent in most leveraged buyouts (LBOs). Dependable executives who can deliver this outcome are critical within the private equity ecosystem.
These solid leaders make good businesses better and bring poorly performing companies toward the middle of the bell curve. They are excellent stewards and good partners for their PE sponsors. However, among this group of reliable leaders are a precious few individuals capable of personally bending the arc of a business. They are the Transformational Leaders.
The difference between a reliably solid leader and the transformational executive can be boiled down to a key nexus: Reliable leaders make relatively derisked bets on the right portfolio company, whereas Transformational Leaders bet big on themselves. The latter often carries a far higher risk of derailment and a far greater potential for reward.
The manner in which executives evaluate a private equity opportunity can reveal where their leadership lies on the spectrum of incremental to transformational. When a full platform transformation is required, sponsors and executives must assess mutual fit to a level that exceeds even the standard intense degree of scrutiny.
The first area of differentiation is risk assessment and perception. Although Transformational Leaders fully diligence the risks of a deal, they are often undaunted by more substantial challenges provided the peril is balanced by a proportional amount of upside. Transformational Leaders negotiate more aggressively for equity than they do for salary. These leaders expect to drive nine figures of value creation and want their full share of the proceeds. They actively seek the highest demand deals and gladly face more risk in pursuit of greater financial upside.
Another revealing factor is self-belief. Transformational Leaders see themselves as a lever that can dramatically enhance an investment thesis. Their confidence is anchored in humility and hunger that displaces any destructive arrogance. These leaders look in the mirror and see someone who can will a company’s culture, process and profitability to untold heights. Co-investment is also a revealing litmus test, as transformational leaders insist on putting skin in the game to enrich upside.
This heightened level of self-belief gives rise to unparalleled passion. Transformational Leaders discuss extreme challenges with a sparkle in their eyes. Their primary motivator is driving an organizational transformation and realizing the resulting lucrative financial outcome.
The reliability of the above factors in assessing an executive’s impact comes with a significant caveat — the leader must hold the intellectual honesty needed to accurately evaluate their capabilities and ambition.
Executives pursuing a role in private equity must take a critical look at themselves to determine their suitability for a specific portfolio company opportunity. Reliable leaders will find themselves at high risk of derailment in any deal that demands true transformation. Sponsors who unapologetically describe the difficulty and high expectations associated with an opportunity help stimulate deeper self-evaluation for prospective candidates.
Enhanced transparency will distinguish those candidates with a truly transformative orientation, who will only be further energized by the challenge at hand.
Rob Huxtable is a partner at FALCON
