Lessons Learned #3 - When In Doubt, (Quickly) Throw Him Out

Like most private equity investors I am far too slow to make tough decisions about portfolio company managers.  I procrastinate.  I blame market conditions,  I blame wet weather,  bad luck . . . anything to avoid the painful conclusion that THIS GUY MUST GO NOW.

My advice to a new general partner would be this:  the second time you find yourself questioning whether you have the right manager in the chair, start the search process.  And never make an investment where the shareholder agreement limits your ability to replace the CEO.

Comments

[Fred]

High quality people get you high quality outcomes.

My experience as a pe investor has been that I need to do almost nothing if the portfolio CEO is very strong, and I practically have to run the business if the CEO is weak.

So the ability to pick good managers, and quickly remove bad managers, has an enormous impact on whether being a pe investor is an enjoyable or miserable way to make a living!

Fred.

[Saul Lieberman]

When In Doubt, (Quickly) Figure it Out.
If you can't, then I hope your shareholder agreement limits your ability to replace the CEO.

[Fred W]

Definitely the hardest part of our job. It's human nature to want to give the CEO another chance or to look for external factors to blame. I have ended up building close friendships with most of my CEOs . . . doesn't make the tough decision easier.

Also, a CEO who is right for one stage of a business (eg, startup) may not be right for a later stage (eg, IPO).

[nkalakatha]

From my experience, I have never regretted sacking an underperforming manager. Sure, sometimes his or her replacement isn't that much better, but that's not a reason to turf out somebody who just isn't cutting it.

Before sacking an underperforming manager, I'm often terrified about how his or her staff will react. In general, but particularly in this job market, I think it's very rare indeed that other managers "quit in sympathy". In fact, the poor manager's subordinates very often share the same views about the manager that the PE fund has.

The other effect that very often happens is that sacking an underperforming manager can galvanise the whole organsation, almost like a fresh start - whether it be through fear that they will be next or optimism that the board has realised that the boss was underperforming and had to go.