BRIEFINGS PODCAST: PRIVATE EQUITY—THE NEW LONG GAME

Private Equity—The New Long Game

NOTE: While this transcript has been reviewed, it may contain errors. Please review the episode audio before quoting from this transcript.

Jill Wiltfong:

Is private equity playing a new long game?

Chad Astmann:

A lot of these companies are struggling. It is record long hold periods at the moment. There's a sea change.

Jill Wiltfong:

What are the leadership qualities you're looking for in the C-suite?

Crosby Baker:

Sense of urgency is in the talk. Fail fast mentality versus having analysis paralysis.

Jill Wiltfong:

When I'm really ready to get into private equity, I know who to call.

[Son]:

Dad, Dad, it's time for a bedtime story.

[Dad]:

Okay, son. Hmm. This one looks interesting, but I'm not sure if you're old enough.

[Son]:

Oh, come on. I can handle it.

[Dad]:

Once upon a time, in a land far, far away, there was an evil group of rulers who called themselves B.A.D. Capital. Several times a year they would go out and conquer a new village, not with an army, but with money. Lots and lots of it. They would use it to renovate the huts and then throw out the village leaders so they could resell the village for even more money.

[Son]:

Oh gosh, that sounds terrible. I'm going to have nightmares! What if they come for our village?

[Mom]:

What on earth are you reading Tim? Is that your book on private equity?

[Dad]:

Just The Legend of B.A.D. Capital. It's a classic.

[Mom]:

No, no, no. That's an old 1980s version. Here's the latest one. Son, these firms actually use their wealth to train and develop all the villages they encounter. The villages sometimes aren't sold for years, and everyone gains in the end.

[Son]:

I want to read that story. Can we please?

Jill Wiltfong:

Hi, this is Jill Wiltfong, Chief Marketing Officer for Korn Ferry, and this is Briefings, our deep dive into leadership. Is the world of private equity experiencing a revolution right under our noses? PE funds were often known for rapidly buying and flipping companies, but for a host of reasons, they're holding onto firms much longer and that's changing their leadership playbook into one that now has more focus on retaining people for the long term.

So, here's the billion or actually trillion-dollar question: is private equity playing a new long game?

Here today to speak with me on this topic is Chad Astmann, Korn Ferry's Co-Head of Global Investment Management.

Hi Chad, thanks for joining me.

Chad Astmann:

Thank you, Jill. It's great to be here.

Jill Wiltfong:

Chad, before we dive into the nitty gritty of all of this, can you give our non-private equity audience a super brief overview on kind of what it is that private equity funds do and kind of how they operated before this recent change?

Chad Astmann:

The basic model is these are general partnerships that take outside capital from institutions and wealthy individuals and invest that money in private companies. And ideally what they want to do is do that at a relatively low value and then sell at a high value. So, it's a fairly simple model.

Jill Wiltfong:

And so, if I have this right, and I think this is right, back in 2000, private equity firms took about three years as I understand it, to kind of buy, slash and sell. But now that's increasing, it's taking more like five, almost six years, which is the longest in history. Is that right? And why is this happening if it is?

Chad Astmann:

You're absolutely right, Jill. It is record long hold periods at the moment. A lot of the global market has shifted today, including interest rates which have changed rapidly. So, when a lot of the companies that were currently owned by private equity were purchased, interest rates were very low. So, you could lever up or you could borrow capital, invest in these companies with the expectation that you could sell them relatively quickly at a profit. What's happened, as you well know, is interest rates have gone way up globally thanks to all of the central bank movement.

As a result, a lot of these companies are struggling. And so, whereas normally the private equity company would want to sell these portfolio companies in the three-to-five-year timeline, they're not in a position to do so because these companies are considered to be underwater and would not be sold at a profit at this point.

[Jim Schleckser]:

I want to talk to you about what's going to happen to your company after you sell it to a private equity firm. They're going to fire you. You go, whoa, wait a minute, Jim. Yes, they're going to fire you. Almost in every case with the CEOs we've worked with, a private equity buyer within one year, they're fired. Why? Because there's a fundamental disagreement in how the business should be run and either the CEO leaves or the private equity firm asks them to leave.

Jill Wiltfong:

That's Jim Schleckser, CEO of the CEO Project speaking, and he's right. Roughly three out of four CEOs leave their company after a PE acquisition, over half of which are unplanned, often causing major disruption.

Chad, now that holding periods are growing longer, are PE firms facing more pressure to figure out how to make and get those CEOs to stay?

Chad Astmann:

There's a sea change in the way that private equity companies interact with these portfolio company CEOs, and they're doing that in new and exciting ways, which are, is leading to CEOs becoming serial private equity players. I'll give you an example, maybe from my personal experience. One of my best friends is the CEO of a private equity backed organization. It's a big PE firm. This individual is a high potential and he's been given an executive coach.

He's been given a leadership development track that's specific and tailored to him. And I will tell you that he is not only being successful in driving value in that portfolio company, but he is incredibly loyal now to that private equity company and he will probably stay and move on to the next company they buy and the next and the next.

[Interviewer]:

Do employees want equity? Is this something that they still believe can help them expand wealth in the private markets as firms like KKR sell their firms?

[Pete Stavros]:

I think we need to change the mindset so that workers get the same access to wealth creation opportunities that senior executives do.

Jill Wiltfong:

That's Co-Head of Global Private equity at KKR, Pete Stavros, talking about how their private equity firm offers stock to its workers. It seems like a big shift Chad, instead of letting workers and acquired companies go, private equity now seems to be making more effort to retain them. So, it's maybe not so much about being nice to them. Of course, you still have to be a top performer, but is this about a greater push to keep top workers at all levels around?

Chad Astmann:

It is, and it is a great quote, and it certainly is another sea change that we're seeing. It's not just that organization, but many others have made this shift to what they call pushing equity down into the employee base. Why is that really important? It's really important because it is demonstrative of how the industry is valuing human capital, and that is a very big shift in the treatment of human capital, which before frankly was a little ancillary.

Jill Wiltfong:

Chad, that was super interesting. Thank you. I'll certainly be keeping a close eye on how this new era of private equity develops. Appreciate you being here.

Chad Astmann:

Thanks Jill. It's been great being here.

Jill Wiltfong:

Well, that was a nice crash course in what private equity leadership looks like today. Time to get a perspective on this massive shift from inside one of these funds right after the break.

Rupak Bhattacharya:

Hi, and welcome to the break. I'm Rupak Bhattacharya and here's a quick look at what else is happening in business from Korn Ferry's This Week in Leadership,

[Narrator]:

Some of the millennials, some of the Gen Z bankers we're speaking with are saying they're very upset about their bonuses.

Rupak Bhattacharya:

The average year-end bonuses were down 21%. Some organizations may attribute the cuts to challenging economic conditions, but experts say the real issue is that workers' bonus targets were set too high and not reached.

[Announcer]:

The evolving role of the CHRO.

Rupak Bhattacharya:

A new study says CHRO turnover fell to 11% last year down dramatically from a record high of 28% in 2020, one reason may be higher pay with median compensation for HR chiefs at top US firms up 13% in a year. Experts have caution that the tide could easily turn as several prominent CHROs are reaching retirement age.

[Reporter]:

The paper says the rise of tools like ChatGPT will inevitably lead to certain jobs being replaced.

Rupak Bhattacharya:

Will AI be your next manager? The latest artificial intelligence technology is either quote, good or excellent at 70% of skills mentioned in management job postings according to a recent study. That may be alarming news for managers, but experts say it might help them better understand what will be expected of them in the future.

For more insights on business and leadership, head to thekornferry.com/insights, now back to Jill and our episode PE: The New Long Game.

Jill Wiltfong:

We're back and we're talking about how private equity firms are adapting to longer holding periods than ever before. I'm now joined by Crosby Baker, the Head of Portfolio Talent at HIG Capital, a fund with $59 billion of equity capital under management. Hi Crosby, thanks for joining me.

Crosby Baker:

Hi, thanks so much for having me.

Jill Wiltfong:

When acquiring a new portfolio company, what are the leadership qualities you're looking for in the C-suite today versus say, five years ago?

Crosby Baker:

Higher interest rates have created a different environment than they were five years ago, and particularly pre-COVID, but we are still approaching our talent and our management style broadly, I'd say in private equity the same way. And that is, if you think about leadership qualities that we look for, for executives, sense of urgency is in the top, right?

We want people, and we would, you know, you hear this, this is a characteristic across the board, you know, fail fast mentality. People that can make decisions quickly and pivot and adapt versus having analysis paralysis and saying, oh my goodness, what am I going to do? What if this doesn't work?

So, a sense of urgency and that ability to be okay to make decisions and try things that may not be a hundred percent is for sure one of the top ones.

[Interviewer]:

What happens when deals can go south? Maybe some examples of common reasons why?

[Kyle Coots]:

A lot of times it's the management team, frankly, like, and it may not be that they're not good CEOs or not good executives, they just weren't the right fit or we didn't have the right culture, or we, you know, we made a bet that was too aggressive a bet early before, you know, the business was really ready to go do that and got overextended.

Jill Wiltfong:

That's Kyle Coots, Managing Director of MIRAMAR Equity Partners talking about why portfolio companies sometimes fail. Crosby, he mentions culture. Whose job is it to build a successful culture? Is it the PE firm leaders or the portfolio company leadership?

Crosby Baker:

'Culture' is one of those like hot button terms that everybody's like, oh my goodness, I want to join a firm with a great culture. Okay, but ultimately, we're all here to move quickly, make money for our fiduciaries and get moving. Right?

And so, I think that when we think about how we approach culture in our companies, we're just being transparent about what we're trying to do, right? And make sure that everybody's working together on that and that everybody's going to do well if we're all moving in the boat together.

Jill Wiltfong:

As you're looking at roles and the organization and the operation and all those sorts of things, we've seen that 28% of portfolio company leaders say their PE owners are too hands-on while one in three PE leaders believe they're too hands-off. So how can private equity and portfolio firm leaders find that right balance? Is that pretty challenging?

Crosby Baker:

Oh, mean it's so top of mind. I get asked this question a lot. I talk about it a lot with new hires. It's all about communication. I cannot stress that enough because as I mentioned earlier, you have to be willing to look at the deal team and the private equity team as they're right there sitting there beside you and collaborators versus a line in the sand. I'm only going to talk to them at board meetings. I'm only going to talk to them when I need something.

It's super important to say, you know what, we're in this together. We're partners, open dialogue. Because what I've seen when CEOs don't do well, they're like, I've got this. I'm going to figure this out. And so, they don't communicate how sideways something is.

Jill Wiltfong:

Let me ask you about succession planning. Speaking of moving and going faster, it feels like that was probably an afterthought a little bit more in the old days of really quick exits. But with these longer holding periods, are you seeing a new approach to succession?

Crosby Baker:

It's not so much the time period, it's that the talent is not there. So, we're having to grow our own talent. So, when you think about having a CEO successor or CFO successor, all of the places where you used to get that talent, it's gone, right? The GMs of the world, the GEs who are training great general managers who could then step into these kinds of roles and take over for people, that's gone.

So, what private equity is doing is training these people ourselves, like we're being a lot more thoughtful about okay, who's going to take over? Who's going to, if we sell, if and when we sell the business, and we work with a lot of founders who are like, “you know what? I've done this. It's your turn.” Who are we bringing in behind them and then behind them, right?

Jill Wiltfong:

It was really great to get your insider knowledge today, Crosby, thank you so much for coming in.

Crosby Baker:

Thank you.

Jill Wiltfong:

The Executive Producer of "Briefings" is Jonathan Dahl. Today's episode was produced by Rupak Bhattacharya, Nadira Putri, and Teresa Allan, and edited by Jaron Henrie-McCrea. It contains reporting by Russell Pearlman, Arianne Cohen, and Peter Lauria.

Our video segment contains original artwork by Frazer Milton, Hayley Kennell, Jonathan Pink, and Sasha Kostyuk.

Don't forget to read our magazine, available at newsstands and at kornferry.com/briefings. That's it for Korn Ferry's "Briefings". I'm Jill Wiltfong. We'll see you next time.

We were joking earlier. We're like, could you just maybe just give us 1 billion of the 59? Like, would you even notice it was missing?

Crosby Baker:

I know, me too, right? Me too, guys, me too, sister.