Unlearn Fast, Pause Never!
With more and more capital flowing into PE funds, investors are seeking higher returns, better service, and fund managers are working in an environment with increased pressure and higher stakes.
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Private equity in India is the proverbial belle of the ball. And she’s turning out to be quite the party animal. Consider this: in the last 15 years, private equity has injected more than $100 billions of capital into India. With more and more capital flowing into PE funds, investors are seeking higher returns, better service, and fund managers are working in an environment with increased pressure and higher stakes.
And there is perhaps no better suitor to this belle than the right leader – today, portfolio company CEOs are a coveted breed; dynamic, inspirational figures who can co-create the destiny of the asset and thereby vindicate the investment attractiveness of India in the global economy. As a result of this public attention, portfolio company CEOs find themselves the subject of many a management dissertation, research report and news headline, and never has there been a time that their actions have made as much an impact as now. Especially as availability of well-run businesses to invest in has become such a challenge that investors have to perforce start re-building organizations from scratch.
But being at the helm of a PE-owned company is quite different from being an entrepreneur managing a self-funded start-up, or even a multinational. Having led an organization with PE-driven ownership for around 15 years, I find myself often discussing the vagaries of the role with other leaders, and what makes the job so different from others.
The first aspect to understand about any portfolio company is the pace and the heavy financial leverage that it is under. The long-term horizon for this business is not a 10-year goalpost, but often the imminent selling of the company at the end of a set investment period. Visions therefore need to be shorter, fast-paced and the short term is almost as important (if not more) than the medium and the long term. At the same time sustainable businesses are the driver of value creation so a portfolio company CEO has to invariably be the doer and the thinker both, flitting between multiple mindsets of successful execution as well as long-term enterprise value creation..
Unlike divisional heads in larger organizations who develop deep expertise in a particular function, a CEO in a PE funded business requires to know how to run every function within a business – from ops to HR. Especially as these are often fledgling businesses which cannot hope to have a running management team from day one. And anyone who’s done this will know that owning a P/L, fraught with cash flow pressures and ever-growing human capital issues, is not a job for the faint-hearted.
A big part of this role is the shared plan of the fund and its CEO – and the sharper this alignment, the more efficiently is the ship run. Loosely, this plan’s single aim is to capture what the fund would want to say to strategic buyers at the end of the investment horizon. A skilled CEO will not only focus on the quarter numbers but equally have the acumen to foresee the cathedral while laying the bricks. Thus, every implementation plan needs to have the ability to battle the immediate demons in terms of competition or the market, but also to become an integral part of long term value creation . For eg , in the beginning of Radio City’s life as a PE-owned business, the vision to become a Great Place to Work, attracted top talent who wanted to work in an empowering culture, which was the immediate need. But the GPTW ethos of pride, integrity and fairness also created a sustainable organization with a value system attractive to a long term strategic investor.
In my experience, I have learned that hitting the ground running is not enough – you need to hit the ground sprinting. And the best way to get a leg up early in the game, is to start with the right team in place. A strong portfolio company CEO will understand this and will recruit talent intelligently – a high skilled, motivated and lean workforce of trusted colleagues at the start of the investment cycle is a great place to begin. Remember that unlike a large enterprise, you will need to hire complementary and supplementary skills; never duplicative. The idea is to hold down all direct staff and operational costs, with a firm eye on your EBITDA. At this party, productivity is the currency of choice and its value never wanes.
Much like all relationships – from a marriage to a team, communication is a both a builder of dreams and a breaker of chains. As a CEO, understanding the ethos of how a PE fund works is central to defining the contours of your communication with the board. Know that a PE board is looking for proactive and frequent communication, not formal slideshows and that they will value candor above all else – so if you are able to engage the board to find solutions to your business challenges, then you will benefit from the combined experience of the fund managers. And just like in any relationship, an understanding of your partner is a critical first step to establishing trust and confidence. It is always useful to develop an appreciation of the fund’s inner workings, its fund-raising cycles, and how its policies can influence the firm’s interactions with your business. Are there other businesses that the fund is chasing that could take the attention away from your business? Are there other group companies that you could benefit from an alliance with? Knowledge may be power, but when applied at an opportune time, it can almost be a magic wand.
Eventually, like any business leader, an oft-ignored but critical attribute is an imagination – both vivid and fecund. When Motorola was raking in the bucks on its feature phones, Research in Motion was trying to imagine a future when emails could be accessed on a handheld device. It was inconceivable then, but soon enough, BlackBerry was born, and not long after, executives got so addicted to having email at their fingertips that the device earned the nickname Crack Berry. The business world is filled with examples like these, when an intrepid leader put himself out on a limb propelled by a rich imagination and the grit to see it through. And if you can ace the delicate dance of managing your cash flow with team morale while fanning your imaginative powers, then let me tell you this – this party’s only getting started.
Disclaimer: The views expressed in the article above are those of the authors' and do not necessarily represent or reflect the views of this publishing house. Unless otherwise noted, the author is writing in his/her personal capacity. They are not intended and should not be thought to represent official ideas, attitudes, or policies of any agency or institution.