Board Meeting

Private-Equity versus Traditional CEO

A CEO manages a business depending on who owns it. It is important to understand that while CEOs of private and public companies are similar in their work and responsibilities, they differ in their operations. This article will break down the private equity position versus the traditional CEO.

CEO and shareholders

Suppose a private equity company does not have regular shareholder management. In that case, it is a significant advantage for the CEO because they do not have to keep public reports on the company’s profits and losses and do not have to have phone conversations with analysts and shareholders. They also relieve themselves of the obligation to prepare annual reports. In this way, the CEO has far fewer headaches and can safely cooperate with one or a couple of shareholders – or at least that’s what most people think. The fact is that a private equity firm has powerful motives for success and, therefore, forms a different set of pressures. Thus, they often find themselves under pressure from earnings before income, taxes, depreciation, and credit terms that require additional NASCAR skills not to go wrong.

The private equity shareholder is guided by metrics such as:

  • Return on investment
  • Return on cash flow
  • Holding period

Two of these three metrics require a great deal of attention and time. At the same time, the CEO does not have a retention period, which leads to even more interference in the day-to-day operations of the CEO of a private equity firm. This is more of a plus than a minus since newly minted dealmakers, after all, are pretty good at it and can carry most of the burden when it comes to renegotiating loan terms or reviewing covenants.

Private equity firms usually expect their CEO to be very focused on operations and, in a sense, act like the chief operating officer. This can be encouraging and fun for the right CEO, especially because a focus on EBITDA often does not allow the management level of the COO to be a reality in small-cap companies. Thus, a PE CEO should feel perfectly comfortable and can handle many responsibilities, even the most mundane ones.

Key Characteristics of a PE CEO

Choosing a CEO is a very demanding task, especially in private equity firms, and it can take months to find the right person for the position. However, it would help if you did not procrastinate with this choice, as you spend a lot of time and money. Below we have highlighted the basic requirements for a CEO PE, and if your candidate meets these characteristics, they are worthy of the position:

  • Smartness and speed

Often because of retention periods, private equity firms run out of time, and stakeholders are forced to fire him because the CEO fails to meet performance requirements. Maybe too harsh, but the stakes are very high—management answers to its profit-oriented limited partners.

  • Master-of-all-Hands

The CEO is not limited to his position; if the situation demands it, he must also become a cook, a janitor, an operations manager, or a chief presenting officer. Often companies are understaffed in administrative matters, so the CEO will likely have to prepare for everything.

  • Ability to feel comfortable in any position

You probably have to prepare for the fact that you will be sharing your office with your deal team. They are in the same boat as you and should always be there for you at that crucial moment.