Natural tension exists between a Private Equity firm’s operating partner and the ELT of a new Portfolio Company. We dissect how to cool down this tension, and at the same time get your growth expectations widely accepted across the board.

Once an investment in a new portfolio company is live, the PE operating partner is riding high. They have just successfully convinced the investment committee about the merits of this deal. They have also briefed the LP advisory committee about this new investment’s upside.

 

It’s time to get to work.

 

On the other hand, the portfolio company’s ELT is likely bracing for looming change. It’s the operating partner’s job to prioritize educating the ELT on the art of the possible. This involves a great deal of empathy, showing the journey from current to desired state and how everyone benefits from the outcome.

 

Download our PE Operating Partner Empathy Reminder Tool to ensure you check-off key topics when garnering buy-in from a portfolio company’s ELT. 

 

Nailing the First Interaction

 

A common first interaction between the PE partner and the ELT will go something like this. The PE partner opens the first meeting by presenting a plan to the ELT projecting 10-15% growth. This same business case was used with the investment committee. It demonstrates the value expected to be gained over the next 3-7 years, which is tremendous. Jaws drop around the room. The management team could not disagree more. They question the assumptions used in the business case and new overall strategic direction.

 

Questions like the following start being asked:

 

  • How on earth can we grow by 10%, while simultaneously trimming our salesforce and marketing spend?

     

  • The industry is growing at 6% and you want us to grow at 15%?

     

  • Our industry is mature, how do you expect us to grow at all?

     

Any of this sound familiar?

 

Ground the Conversation Around the Portfolio Company’s Current State

 

Again, it’s the PE partner’s duty to display empathy towards the ELT. This reaction is natural. The PE firm would not be invested unless they saw upside. This of course means departure from the portfolio company’s status quo. It also means changing elements of the business’s strategy, which may make the ELT uncomfortable. Therefore, anchoring around how the company is performing verse market is critical.

 

The ELT might not agree with the PE Partner’s assessment of the market and say as much. They might throw out anecdotes that point to different growth rates. This type of push back is ok if there is directional agreement about what is happening in the marketplace. This helps ground the conversation around where the company sits in the market. Both from the perspective of its customers and competitors. This also helps provide clarity around just how far current state is from desired state.

 

Outline the Journey

 

It’s now time for the PE partner to reveal their plan. How specifically is this company going to change? For example, if the portfolio company is growing at 5 or 6%, but the market is growing at 8-10%, the company is losing market share.

 

It’s the PE Operating Partners duty to help the ELT see that if certain initiatives are put in motion, getting to that 8-10% is possible. Options like investing in consulting services, utilizing better data, market intelligence or expediated product release are all on the table. This might mean targeting existing markets in a unique way. Perhaps it means entering completely new markets.

 

For further understanding of growth levers available for PE portfolio companies, see How Private Equity Firms Accelerate Growth. The PE Partner owes it to management to help them see what’s possible through a different motion. This helps get buy in from the ELT. The ELT realizes they are a critical part of promoting and executing this outcome. They will also share in the upside.

 

What about Mature Industries?

 

Dealing with a portfolio company in a mature industry is difficult. 2-3% growth in a mature industry might represent a tremendous accomplishment. Unfortunately, this is not the expectation the PE firm has. Radical change will likely be needed, which means a heavier lift from the ELT.

 

Examples of this type of change might be:

 

  • Moving to a subscription-based model

     

  • Acquiring an entity to enhance the current product suite

     

  • Merging with a former competitor

     

In cases such as these, the PE Partner’s job of gaining buy-in becomes tricky. They not only have to explain the journey which involves material change, but they need the ELT to promote it. The ELT will carry the weight of this transformation and certainly be uncomfortable with it. The narrative here changes slightly to growth and shared upside. How can we change our strategy or our product suite and all be in a better place? For an ELT operating in a mature industry, the inspiration might come in the form of incentives. Education around how a successful outcome (exit) benefits all parties financially, is critical.

 

Aligning the Incentives to the Journey

 

Sometimes the best way to inspire change amongst an ELT is showing them their personal upside…financially. A former colleague of mine’s company was recently purchased by a PE firm. He quickly found himself tasked with overseeing the integration of two companies the PE firm had decided to purchase (that would enhance the product suite). He viewed what many would consider a nightmare as an opportunity, as the PE firm clearly outlined the definition of shared success…through incentives.

 

That being said, a good way to gain ELT buy-in when material change is made is through incentives. This makes even the most monumental strategic changes palatable (say the company faces any of the three bullets listed in the previous section). Another example would be aligning incentives to different financial targets, for example focusing on EBITDA targets as opposed to revenue. If key execs can focus on their swim lanes, they will be receptive to ambitious growth initiatives.

 

Closing the Loop

 

If the ELT is constantly pushing-back, the PE Partner must ask themselves: what am I missing. The Partner owns this investment. They might not have done a good enough job around communicating the plan of what is possible. It is their job to own responding to the ELT’s concerns and close the loop. Ultimately, the secret to gaining the ELT of a portfolio company’s buy-in comes down to empathy.

 

Download our PE Operating Partner Empathy Reminder Tool to ensure you check-off key topics when garnering buy-in from a portfolio company’s ELT. 

 

 

Additional Resources

 

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ABOUT THE AUTHOR

Geoff Schuler

Blends the classical approach to strategy with cutting edge data analytics to help clients make their number.

Geoff is an experienced management consultant with a heavy background in working directly with executive leadership to help achieve strategic outcomes. His experiences range from engaging full executive teams on corporate strategy development, to revamping compensation structures to align with firm  goals. Recently, he worked with the senior executives of a mid-size company to tailor financial assumptions, build, and present a pro forma model that depicted the impact an acquisition strategy would have on revenue and EBIDTA. The company followed the model’s guidelines as they executed on their strategy.

 

Geoff is a CPA and self-proclaimed data hound, whose demonstrated skill set includes: commercial due diligence, go-to-market strategies, market segmentation, competitive analysis, data analytics, development of M&A strategy & all related diligence, financial modeling, and compensation evaluation & restructure.

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