Before Jeff Warren joined executive-search firm Russell Reynolds Associates, he spent four years doing acquisitions and finance at a KKR portfolio company, KSL Recreation.
“I’ve sat on the other side of the table from private equity owners in board meetings and presentations around ‘How do we grow the business?’” Warren said. “I think that perspective is really helpful, not only in recruiting to the portfolio companies. … It’s also helpful in understanding what makes private equity investment professionals tick.”
As leader of Russell Reynolds’s global-alternatives practice, Warren works with asset owners, management firms and portfolio companies. GP clients, he says, range from “the largest buyout firms in the world through middle-market LBO shops to lower-middle-market private equity firms that are more regional in nature, [and] a number of venture and growth equity firms as well.”
Warren’s team helps firms and portfolio companies with recruiting and leadership/succession planning. “At the end of the day, the business is about multiplying money,” he said. “One of the biggest levers there in how you optimize returns is people.”
These days, Warren said, firms know how to cut costs and reorganize supply chains. “Those are the types of levers that most folks have already been able to make routine in a first, call it 12-month playbook, or less,” he says. “The real challenge in a low-growth macroenvironment is: How do you drive revenue? You [do it either] organically or … through acquisition. The CEOs that are able to do that are the ones that are standing out and that our clients are really after.”
Warren and three colleagues recently produced a report on what makes a great portfolio-company CEO. Looking at 75 buyouts, they tried to answer three questions: What is the typical background of successful CEOs? When are they appointed in the company life cycle? And how do they lead?
The study found a relatively low level of prior portfolio-company leadership experience among CEOs of the best-performing investments. What seemed to matter instead was “P&L responsibility in that industry,” Warren said. “And if you looked at functional experience, sales and operational leadership experience were most closely linked to success. Less so finance.”
“In terms of the timing, a longstanding CEO or a new CEO could produce the high growth that you need, but if you delay any leadership change it clearly leads to lower returns.”
And with respect to behavioral style, successful managers “tended to show more humility, to be more even-keeled, capable of empowering their teams and able to juggle priorities. By contrast, those that were jettisoned were profiled as more independent, and they tended to have less regard for rules and processes and were often times not good communicators with the board.”
In the “uber-competitive” current environment, with so many pools of capital chasing deals and bidding up asset prices, “the real emphasis has to be around creating value post-investment, which makes it even more crucial that you have the right leadership teams.” Results orientation and a sense of urgency are the most important leadership traits to GPs, Warren said, “because at the end of the day, time kills returns.”
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