When the CEO Reports to the Private-Equity Bosses

May 25, 2016 | The Wall Street Journal

Executives can make their mark -- and lots of money -- by becoming the leader of a company owned by private-equity investors.

That is why plenty of people pursue the plum positions nowadays, several executive recruiters say. But there are downsides: Senior managers risk career derailment if they can't handle the strict personal accountability, intense scrutiny and speedy decisions that private-equity firms often demand.

"It takes a different mind-set for executives to succeed with private-equity owners," says Jeffrey Cohn, managing director of global CEO succession planning at recruiters DHR International. "If you don't know what you are getting yourself into, it could be the worst experience of your career," adds Mr. Cohn, co-author of a June Harvard Business Review article about private-equity firms.

Private-equity players buy businesses using significant amounts of borrowed funds and then aim to sell them at a profit several years later. U.S. private-equity investment reached $632 billion last year, up from $358 billion in 2010, according to the American Investment Council.

The increased spending has widened demand for portfolio-company executives, says Brooke B. Coburn, a managing director for Carlyle Group LP, a private-equity firm. Amid today's competitive talent market, he goes on, "we are putting more and more resources behind recruiting the best and the brightest for our portfolio companies."

Not every executive wants to work for private-equity investors, since the job often requires tough decisions to achieve desired returns. Russell Reynolds Associates Inc., for instance, reports having trouble satisfying demand for finance chiefs of portfolio companies, which are those largely owned by private-equity investors.

"We can often attract highly qualified -- even overqualified -- CEO candidates to PE-owned companies because the financial rewards are proportionately greater," notes John Wood, a vice chairman of recruiters Heidrick & Struggles International Inc. "You can make a lot more money running a $1 billion business for private-equity owners than a $5 billion company that's publicly traded."

It isn't always easy for former public-company executives to flourish at a smaller enterprise with private-equity owners, however. J. Scott White, head of a $4 billion unit at Abbott Laboratories, made the leap late last month when he became chief executive of New Avon LLC. The former North American arm of Avon Products Inc., a major beauty-products concern, is now controlled by Cerberus Capital Management LP.
Mr. White declined to comment.

David Simmons recollects that he hesitated to quit Pfizer Inc., where he led two business units, after he was offered the CEO job at Pharmaceutical Product Development LLC in early 2012. The global contract research organization, known as PPD, is owned by Carlyle and Hellman & Friedman LLC, another private-equity firm.

Mr. Simmons says he spent a month conducting extensive due diligence about the role. He interviewed chief executives of three portfolio concerns with the same private-equity investors and public-company backgrounds. And he wrangled a daylong session with PPD's private-equity owners about why they invested in the business.

Their detailed briefing "made me comfortable about accepting the CEO job at PPD," Mr. Simmons recalls. He arrived in June 2012, and remembers that he soon enjoyed how private-equity folk "move very fast."

But not always. During a board meeting about a year ago, one private-equity executive urged Mr. Simmons to add more than 30 locations a year for a recently acquired business. The CEO says he disagreed with the proposed rapid pace, which he found risky. Fellow PPD directors accepted his alternative proposal to limit annual expansion to a maximum of 30 locations.

Executives shouldn't join a portfolio company unless they're certain they have the right leadership skills to "achieve the goals set forth by private-equity investors," says Ralph de la Torre, CEO of Steward Health Care System LLC in Boston. The integrated health-care system was created in late 2010 when Cerberus took over an ailing nonprofit hospital system that Dr. de la Torre had run.

Dr. de la Torre, a longtime heart surgeon, initially wasn't sure his strong-willed temperament would suit private-equity investors. "Taking orders is not my forte," he says.

Once he got to know key players at Cerberus, Dr. de la Torre says he realized "they wouldn't micromanage as long as I kept them in the loop." He did so to an extreme during his first year as CEO, phoning Cerberus executives at 6 a.m. and midnight several times a week. (A self-described workaholic who keeps late hours, Dr. de la Torre says he doesn't really think about time when dealing with a pressing business issue.) They finally persuaded Dr. de la Torre to communicate during normal work hours, he says.

Successful executives of portfolio companies sometimes become serial leaders. Consider Brian Esterly. Last month, he started as chief operating officer of Aspire Health Co., a provider of palliative care services partly owned by a private-equity firm.

Mr. Esterly is in his third stint at a business with private-equity backers. Calling himself financially "satisfied" from those experiences, "I am not keen on working for a large publicly traded company," he says.

Senior managers don't always adapt to the high-pressure environment, however. A few years ago, an executive of a publicly held industrial business resigned to run a financial-services portfolio company. Private-equity investors demanded a strategic plan within nine weeks and significant progress within 12 months.

The new CEO didn't satisfy the investors' goals, and their relationship strained. He lasted about a year.

 

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