PE’s Hiring Advice for Merrill: Avoid the Chronically Unlucky

PE’s Hiring Advice for Merrill: Avoid the Chronically Unlucky
Posted by Tennille Tracy

Was Merrill Lynch looking for a professional CEO finder when it appointed Alberto Cribiore to temporarily fill the shoes of the ousted Stan O’Neal?

As a private-equity veteran – he is founder of Brera Capital Partners and once was co-president of Clayton Dubilier & Rice – Cribiore has probably conducted dozens of searches for executives to run the companies he buys. He now appears to be reprising that role at Merrill.

So then, what do private-equity pros look for in a CEO? That was the first question we put to Jonathan Goldstein, one of the founding partners of Sextant Search Partners, a New York headhunter that regularly recruits executives for PE firms. Here’s our interview with him:

Deal Journal: What qualities do PE fund managers tend to look for in CEOs?Jonathan Goldstein: They look for people who have expertise in the industry and people who can add value quickly. They look for people who can think clearly and act quickly and report information in a concise way. …
We find it is also very important that the person comes not just from a company within the same industry but a company that is of a similar size. That’s because the resources of a $5 billion firm are different from a $500 million firm. For a smaller firm, the CEO has to be hands-on. For a bigger firm, the person has to be good at delegating. So for Merrill Lynch, this has to be somebody very skilled at delegating and be a good leader. Merrill’s investors are going to want to see that.”

DJ: Is there one quality that PE fund managers do not like to see in a CEO?JG: A PE professional once said to me that they don’t like to hire people that are chronically unlucky. They want to see people that have been successful in their lives.”

DJ: Do they prefer to hire executives from within the companies they buy? Or hire outsiders?JG: Sometimes they’ll promote executives from within, absolutely, or move them around. Every possible scenario can be imagined. But by the time they get to us, they have decided that nobody from the inside works. I think private equity firms look to people that they know already - the managers that they’ve worked with before.

DJ: How do PE fund managers differ from other people looking to hire top executives?JG: I think that maybe the most important thing a PE investor is looking for is that the operating manager - the CEO to be - appreciates the time frame that a PE firm works in – the need to move quickly and produce results. It’s a different time frame and a different mentality than CEOs of firms are typically used to.

Value Enhancement Levers

• Human capital. Use specialist to allow deal team to focus on origination and execution
• Discipline. Force rigorous monitoring of operating performance for early warning radar
• Catalyst. Build competencies to push companies to act outside comfort zone
• Rescue. When needed, provide interim resources or intervene
  

Top Operating Partner Pitfalls to be Avoided

1. Divorcing deal team from operational value enhancement
2. Lack of committed resources to drive and manage change
3. Confusing oversight with management
4. Driving conformity by insisting inflexibly on cross-portfolio practices
5. Fostering dependency (vs. detachability) of portfolio company
   

Investcorp Commitment to Add Value Post-Investment

From brochure at http://www.investcorp.com/getDoc.aspx?Doccd=Complete%20Annual%20Repo&Appcd=Pgfi2.5

Investcorp has an ongoing commitment to its investors to protect the value of the investment portfolio by identifying and actively addressing issues at operating companies. Investcorp has a dedicated team of post-acquisition specialists who work with the management of portfolio companies to develop effective strategies, including providing capital support where required. Such support transactions are only entered into after a thorough examination of the risks involved and an independent confirmation that risks are mitigated by the strength of the management teams, new business plans and the companies’ competitive market positions. In turn, the strengthening of the capital structures of these companies helps mitigate the need for additional provisions.v

American Securities Uses Strategy Group to Add Value

From team bios at http://www.american-securities.com/team_ld.php

The ASCP Strategy Group is a resource that ASCP makes available to its portfolio companies, as requested, to help with overall strategy, growing new businesses or product lines and prioritizing the multiple value creating opportunities available to our companies. Mr. Dranikoff joined ASCP in 2003 after spending seven years as a management consultant at McKinsey & Company in New York. During his time at McKinsey & Company, Mr. Dranikoff worked primarily with industrial companies, helping them create and execute growth strategies. Prior to joining McKinsey, he worked as an attorney for Weil, Gotshal & Manges LLP in New York for three years. He holds a JD, cum laude, from Harvard Law School amd a BA and MA in Economics from Johns Hopkins University

Bain Capital on Operational Value Added: Get Active Early

From Knowledge@ Wharton Capital of Driving Returns from Value Added Investing
http://knowledge.wharton.upenn.edu/article.cfm?articleid=1457

"The only way to get value is by helping portfolio companies grow at some rate faster than their competitors," said Dan Haas, leader of Bain & Co.'s Private Equity Group and moderator of a conference panel titled "Operational Value Add." Over time, Bain has discovered several keys to adding value to a portfolio company. First, he said, funds must take an active role and structure deals that suit their own strategy. "What's most important is you get the [deal] right for the size of the fund, the style of investing of the fund and the culture of the fund," he said.
Finally, Haas said, Bain has learned that "early matters." Citing Bain's experience with "hundreds of companies," he noted that "returns on deals where the private equity fund got involved in the first year of ownership performed two times better than when the fund gets involved at a later time."

TPG Adds Operational Expertise in Turnaround; Focus on Reporting

From Knowledge@Wharton conference at http://knowledge.wharton.upenn.edu/article.cfm?articleid=1457

In a turnaround situation, speed and decisiveness are even more important, said Dick W. Boyce, a partner at Texas Pacific Group. In this kind of deal, fund executives are not looking out three to five years, but one year at most. To give managers the data they need to make quick decisions, TPG requires portfolio companies to file weekly flash reports on results and to pay close attention to cash management. Many companies that have not had to cope with the kind of leverage behind private equity investment pay little attention to cash management, Boyce noted. . . .

Boyce noted that TPG also tries to install reporting that focuses on the future. For example, when he was working on a turnaround at J. Crew, he learned that putting a catalog out in front of consumer panels before inventory was ordered allowed managers to predict top sellers 90% of the time. That prevented the company from running short on hot items and getting stuck with excess stock eight or nine months later when the clothes were in stores. "It's crucial to get managers to think about what's the better predictor, rather than being a person looking in the rear-view mirror," he said.