7. The Private Equity Sprint

PE ownership also means, however, that the CEO has a good deal less autonomy than the public company CEO in setting the direction for the firm. The investment thesis includes a series of benchmarks for achieving results by a given time. It also includes an ambitious target for return investors, which will be in excess of the anticipated return of public markets. Achieving those results in the time planned is an intense challenge, one that involves considerable risk for portfolio company CEOs. The intense pressure to quickly produce results overwhelms many.

Research has found that 73 percent of PE CEOs are replaced at some point during the holding period, most often within the first two years, because PE boards demand faster proof that the CEO is meeting performance goals. Being replaced may lead to substantial financial loss for the CEO because, in PE deals, the CEO and some of the upper management team are usually required to invest personal wealth in the deal. In return, they’re granted a portion of the increase in equity realized at exit, the amount of which varies but is generally between 2 percent and 4 percent.

PE firms act quickly if early targets are missed. Indeed, research has found that one-third of PE CEOs are forced out within the first one hundred days of PE ownership.

In all cases, an essential truth is that the CEO is still the one primarily in charge of running the company. The PE firm provides an idealized model of the transformation process, and the CEO brings the wisdom of experience in how to actually manage the messier, human process of execution.

Improving the performance of companies that are performing fairly well is now the predominant objective, and PE firms have learned that a CEO’s people leadership abilities are the vital complement to strength in finance and operations for this new frontier of performance improvement.