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.
Wednesday, November 7, 2007
Sunday, October 28, 2007
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
- Divorcing deal team from operational value enhancement
- Lack of committed resources to drive and manage change
- Confusing oversight with management
- Driving conformity by insisting inflexibly on cross-portfolio practices
- 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
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."
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.
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.
Vestar Formalizes Business Advisory Capabiliies Through Vestar Resources
Excerpt from 9/20/07 press release naming president at http://www.forbes.com/businesswire/feeds/businesswire/2007/09/20/businesswire20070920006019r1.html
Vestar Resources extends support to portfolio company management teams by providing access to expertise in critical strategic areas that helps insure business success and superior returns for all investors. The Vestar Resources team consists of seasoned executives and former management consultants who possess extensive operating experience and strategic insight of the healthcare, industrial, financial services, media and communications, and consumer sectors. Working closely with management, Vestar Resources helps the portfolio company address key issues including maximizing enterprise value, growth and profitability.
From Vestar brochure at http://www.vestarcapital.com/home/Files/Vestar_Brochure_New.pdf
While Vestar relies fully on its management partners to run their businesses, its principals maintain close dialogue with them and serve as an informed resource for strategic, business, and financial judgment. Recognizing that the best advice is often based as much on seasoned operating experience as on sound financial analysis, Vestar formalized its business advisory efforts through the establishment of Vestar Resources, its portfolio monitoring and management arm.
Vestar Resources has assembled a group of senior business executives who have diverse industry backgrounds and extensive hands-on operating experience. These industry veterans can serve as Vestar’s designees on company boards and are often utilized as sounding boards by management teams.
Vestar Resources extends support to portfolio company management teams by providing access to expertise in critical strategic areas that helps insure business success and superior returns for all investors. The Vestar Resources team consists of seasoned executives and former management consultants who possess extensive operating experience and strategic insight of the healthcare, industrial, financial services, media and communications, and consumer sectors. Working closely with management, Vestar Resources helps the portfolio company address key issues including maximizing enterprise value, growth and profitability.
From Vestar brochure at http://www.vestarcapital.com/home/Files/Vestar_Brochure_New.pdf
While Vestar relies fully on its management partners to run their businesses, its principals maintain close dialogue with them and serve as an informed resource for strategic, business, and financial judgment. Recognizing that the best advice is often based as much on seasoned operating experience as on sound financial analysis, Vestar formalized its business advisory efforts through the establishment of Vestar Resources, its portfolio monitoring and management arm.
Vestar Resources has assembled a group of senior business executives who have diverse industry backgrounds and extensive hands-on operating experience. These industry veterans can serve as Vestar’s designees on company boards and are often utilized as sounding boards by management teams.
Henry Kravis Explains How KKR Adds Value Post-Investment
Excepted from 2006 speach appearing at http://www.kkr.com/news/speeches/02-21-06.html
Today, if you talk to a KKR professional for any length of time, you will likely hear the firm’s mantra: “to be successful, the real work in a private equity transaction begins on the first day of owning a company. Buying a company is easy. Just pay enough and you will own a company.” The hard part is making changes in the way a company operates so as to increase shareholder value. In the late 1990s, we made mistakes by not immediately getting the management of a newly acquired company to agree to certain first steps for change. We thought management had gone down the road and turned right, but in fact they had turned left. We had to find them and bring them back to where we thought they were going. This is time consuming and set us back by six months or more.
To make sure we corrected this mistake, we began implementing a “100-day plan” that is agreed upon by management and ourselves. This way we ring-fence the management and have an agreed upon plan to immediately improve the operations of the company. This plan is a detailed agreement on the steps necessary to achieve strategic and operational goals – for example, what are you going to do to improve margins and productivity? How can we shorten the supply chain? It is a very detailed, line-by-line, person-by-person review and strategy. In many ways, it looks like a 100-day plan that, say, GE would implement once they buy a company. A 100-day plan assigns specific responsibilities to managers, KKR professionals, and our own in-house consultants and is an effective means of holding management accountable for results. This one improvement in the way we operate is probably the most important change we have made.
In addition to the daily or weekly KKR interaction with management, KKR actively monitors its investments at the board level, and we rigorously review the performance of companies before our portfolio committee. When necessary, we put people in the company who work with management to improve certain operations. A key KKR resource for strengthening operations is our in-house consulting business, called Capstone. We didn’t have a comparable resource for most of the 1990s, and, consequently, we had been missing opportunities to improve businesses. With a team of 18 consultants based in New York, Menlo Park, and London, Capstone focuses on operational issues that have an immediate impact on the bottom line in such areas as manufacturing, product sourcing, and sales and marketing. We don’t require our companies to use Capstone, but we find that most managements eagerly embrace its operational expertise and bottom-line focus. In fact, our biggest problem is getting the Capstone personnel back from the company where they are working, because managements want to keep them engaged since they are truly value added.
One of Capstone’s most valuable contributions is helping our portfolio companies develop actionable metrics to monitor performance. I have been very surprised how few companies have truly good metrics in place. Financial statements, as valuable as they are, give you a rearview look at performance. Appropriate metrics in manufacturing, sales, distribution, purchasing, and other areas help you look at a business going forward. They identify opportunities to improve operations and measure progress toward goals.
Our input, including metrics, 100-day plans, and active monitoring create a productive sense of urgency in our portfolio companies from the first day of our ownership. These changes have been very instrumental in the strong improvements in our portfolio of companies.
When we looked at our business in the late 1990s, we also recognized that the world was shrinking and that we needed to have a global footprint. Many of the companies we buy are multinationals that require diligence and operational efforts across different markets. In addition to our offices in New York and Menlo Park, we have opened offices in London and Paris and we have recently established a presence in Asia, with new offices in Hong Kong and Tokyo.
Our global perspective not only helps us make better investment decisions around the world, but also strengthens our ability to improve our portfolio companies – wherever they may be. For example, we can help our U.S. and European companies globally source key parts, shorten supply chains, and enter new markets due to our Asian presence.
Today, if you talk to a KKR professional for any length of time, you will likely hear the firm’s mantra: “to be successful, the real work in a private equity transaction begins on the first day of owning a company. Buying a company is easy. Just pay enough and you will own a company.” The hard part is making changes in the way a company operates so as to increase shareholder value. In the late 1990s, we made mistakes by not immediately getting the management of a newly acquired company to agree to certain first steps for change. We thought management had gone down the road and turned right, but in fact they had turned left. We had to find them and bring them back to where we thought they were going. This is time consuming and set us back by six months or more.
To make sure we corrected this mistake, we began implementing a “100-day plan” that is agreed upon by management and ourselves. This way we ring-fence the management and have an agreed upon plan to immediately improve the operations of the company. This plan is a detailed agreement on the steps necessary to achieve strategic and operational goals – for example, what are you going to do to improve margins and productivity? How can we shorten the supply chain? It is a very detailed, line-by-line, person-by-person review and strategy. In many ways, it looks like a 100-day plan that, say, GE would implement once they buy a company. A 100-day plan assigns specific responsibilities to managers, KKR professionals, and our own in-house consultants and is an effective means of holding management accountable for results. This one improvement in the way we operate is probably the most important change we have made.
In addition to the daily or weekly KKR interaction with management, KKR actively monitors its investments at the board level, and we rigorously review the performance of companies before our portfolio committee. When necessary, we put people in the company who work with management to improve certain operations. A key KKR resource for strengthening operations is our in-house consulting business, called Capstone. We didn’t have a comparable resource for most of the 1990s, and, consequently, we had been missing opportunities to improve businesses. With a team of 18 consultants based in New York, Menlo Park, and London, Capstone focuses on operational issues that have an immediate impact on the bottom line in such areas as manufacturing, product sourcing, and sales and marketing. We don’t require our companies to use Capstone, but we find that most managements eagerly embrace its operational expertise and bottom-line focus. In fact, our biggest problem is getting the Capstone personnel back from the company where they are working, because managements want to keep them engaged since they are truly value added.
One of Capstone’s most valuable contributions is helping our portfolio companies develop actionable metrics to monitor performance. I have been very surprised how few companies have truly good metrics in place. Financial statements, as valuable as they are, give you a rearview look at performance. Appropriate metrics in manufacturing, sales, distribution, purchasing, and other areas help you look at a business going forward. They identify opportunities to improve operations and measure progress toward goals.
Our input, including metrics, 100-day plans, and active monitoring create a productive sense of urgency in our portfolio companies from the first day of our ownership. These changes have been very instrumental in the strong improvements in our portfolio of companies.
When we looked at our business in the late 1990s, we also recognized that the world was shrinking and that we needed to have a global footprint. Many of the companies we buy are multinationals that require diligence and operational efforts across different markets. In addition to our offices in New York and Menlo Park, we have opened offices in London and Paris and we have recently established a presence in Asia, with new offices in Hong Kong and Tokyo.
Our global perspective not only helps us make better investment decisions around the world, but also strengthens our ability to improve our portfolio companies – wherever they may be. For example, we can help our U.S. and European companies globally source key parts, shorten supply chains, and enter new markets due to our Asian presence.
Blackstone provides Operations oversight
(from http://www.blackstone.com/private_equity/investment.htm)l
Our portfolio management group consists of professionals with significant operating experience who work with our portfolio companies on operating issues. After a portfolio company acquisition is consummated, our portfolio management group typically works with management of the portfolio company and outside advisors to implement a 100-day plan to enhance the company's operations. Each 100-day plan is reviewed and approved by our investment committee. As part of our portfolio company monitoring program, we enlist our senior advisors to assist our portfolio management group and work closely with portfolio companies to help them improve their operating performance. We believe that the experience of our senior advisors and our own portfolio management personnel, combined with the expertise of our investment professionals in assisting portfolio companies with add-on acquisitions, divestitures, financings and other capital markets transactions, help our portfolio companies enhance value. Our focus on assisting our portfolio companies with operational oversight, as well as our ability to attract, motivate and retain superior portfolio company management teams, are critical to the success of our private equity investments. The majority of our investment gains has resulted from increases in the EBITDA of our portfolio companies.
Our portfolio management group consists of professionals with significant operating experience who work with our portfolio companies on operating issues. After a portfolio company acquisition is consummated, our portfolio management group typically works with management of the portfolio company and outside advisors to implement a 100-day plan to enhance the company's operations. Each 100-day plan is reviewed and approved by our investment committee. As part of our portfolio company monitoring program, we enlist our senior advisors to assist our portfolio management group and work closely with portfolio companies to help them improve their operating performance. We believe that the experience of our senior advisors and our own portfolio management personnel, combined with the expertise of our investment professionals in assisting portfolio companies with add-on acquisitions, divestitures, financings and other capital markets transactions, help our portfolio companies enhance value. Our focus on assisting our portfolio companies with operational oversight, as well as our ability to attract, motivate and retain superior portfolio company management teams, are critical to the success of our private equity investments. The majority of our investment gains has resulted from increases in the EBITDA of our portfolio companies.
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