Pruning private equity portfolios 


Financier Worldwide Magazine

September 2014 Issue

September 2014 Issue

There has been a noticeable increase in the number of private equity firms replacing the executives of their portfolio companies and, in some cases, hiring a completely new management team. One might call this a ‘pruning period’ – PE firms are taking a hard look at the management teams they have invested in and are deciding to upgrade their teams with more qualified leadership to achieve their growth goals.

There are several explanations for this trend. After years of record-low interest rates, the Fed is showing signs that they won’t prop up the economy for too much longer. In anticipation of a rise in interest rates, PE firms are ensuring that they have strong leaders in place to help grow their portfolio companies under tougher financial circumstances. Furthermore, PE firms continue to use their portfolio companies as foundations for building bigger, more complex companies through a series of mergers and acquisitions. This type of complex business requires executives with experience building the infrastructure to scale the company’s growth and positioning the company for sale once it reaches its optimal value.

This strategy of purchasing a company and then upgrading its leadership team can lead to success and a speedier return-on-investment for PE firms. PE firms hoping to identify a leader that can propel the portfolio company into high-growth should look for candidates with the following experience:

Mergers and acquisitions due diligence. In order to build a larger company around an existing, mid-sized organisation, a company will need an executive who has experience with mergers and acquisitions within the given industry. This experience will allow him or her to actively manage the process, identify potential risks, and provide the ‘on-the-ground’ knowledge that the PE firm requires.

Post merger/acquisition integration. Integrating companies successfully post merger requires a specialised skill set. Executives must look at synergies and redundancies across the merged organisations to streamline processes and improve efficiency. They’ll need to (quickly) evaluate the leadership of the merged companies, retaining the best employees and managing any downsizing in a manner that will minimise impact on employee morale. More importantly, an executive will need to retain the talent that will not only run the company now, but will be able to manage the business as it continues on its path of rapid growth. Having the foresight to retain the best people and combine them into teams that will eventually operate a much different company and a vibrant corporate culture is an art form.

Implementing Enterprise Resource Planning systems. After a merger or acquisition, company leaders will need to implement an ERP system that will pull together the individual systems of the existing companies. When two companies merge, the landscape of systems and databases – from financial to CRM, purchasing to inventory – can be cumbersome and inefficient. Executives leading these changes will have to implement a sound, effective ERP system that will be a good fit for the new merged business enterprise as it grows. The selected system must be scalable – serving as a solid foundation for any other systems that may have to be added into it from future acquisitions. This process can be complicated, and the best executives for the job will have a firm understanding of the automated systems available and a reasonable understanding of the existing processes.

Growing a business internationally. Any high-growth strategy, especially for companies with a healthy US market share, will include an international component. The most effective leaders will have experience growing a national company to a global company. This experience will also help the executive handle any mergers or acquisitions with entities outside the US.

Doing all of the above with diplomacy and grace. Executives of portfolio companies that hope to double or triple in size need to have experience, but they also need to have a specialised set of soft skills that will positively guide the company as it expands. Change is difficult for tenured employees – some of the best employees of the company may want to flee in light of leadership changes and staff redistribution. An effective executive will be able to influence people and identify other influencers, understand the nuances of company’s culture and tailor their messages to them, and communicate across departments (and across ranks). Excellent listening skills will be required – he or she will need to hear the concerns of employees and learn how to best motivate the workforce.

Adding seasoned executives, those with experience tripling the size of a company and proactively managing it as it becomes larger and more complex, into a cohesive leadership team is a critical step in ensuring a great ROI for a PE firm’s principals. But, in some cases, the existing leadership team may be well suited for the job.

Take the recent example of a manufacturing firm that specialised in creating a single, large gear used in industrial applications. The PE firm investing in the company decided to rapidly change the entire business and focus on repairing gears instead of manufacturing them. By doing so, the company retained their most valuable asset, their intellectual capital, while removing a number of obstacles: a very long production process with environmental implications, among others. In this instance, the existing management team was well prepared for the new course of action, and the company’s profits soared. The PE firm offered a competitive compensation and incentive package, including sharing in the growth of the enterprise’s equity value, to ensure that the management team stayed on board.

Even if the upgraded management team consists of a mixture of existing and newly hired senior leaders, PE firms should prioritise recruiting candidates with the aforementioned skills and developing a compensation package that will incentivise executives to stay with the company for the long-haul. There’s nothing more disruptive and alarming, for both investors and employees, than losing critical leaders and effective executives during stages of aggressive growth.


Terry Gallagher is the president of Battalia Winston. He can be contacted on +1 (732) 549 8200 or by email:

© Financier Worldwide

©2001-2016 Financier Worldwide Ltd. All rights reserved.