Leading tech in a PE portfolio company: 5 things you need to know

While the PE industry is not as active as it has been in previous years, what goes down typically comes back up, so CIOs are likely to get calls from recruiters about joining a PE portfolio company sometime soon.

Some PE firms buy a portfolio company, replace key leaders (including the CIO) and let the management team figure out how to grow the value of their investment. But these hands-off private equity firms are few and far between. Most PE firms have a deal partner, who made the acquisition happen, and an operating group, whose job is to ensure the management team achieves the value creation plan (VCP), which is the company’s agreed upon roadmap to a high multiple return.

So, why is leading IT in a PE portfolio company different?

Influence on technology strategy

In most public companies, the CEO and board rely heavily on the CIO to bring forward the right tech strategy. In a PE-backed company, the board often has considerable experience in this regard from across their portfolio. As such, PE partners often have a stronger desire to participate in developing your tech strategy. As a CIO new to PE, you might think that’s your job. But if you have the right PE partners, you’ll realize that with more executives who have tech strategy knowledge, the more change champions you have in your corner.

Take data, for example. A PE IT operating partner recently told me that if a company doesn’t have an AI strategy, that company won’t generate interest from future buyers. Newly purchased portfolio companies, or portcos, typically have fragmented data, limited data skills, and no data strategy or governance. With a PE investment thesis that hinges on turning data into value, PE partners often influence the culture and investment strategy to prioritize data. As a portfolio company CIO recently told me, “PE influence doesn’t magically produce funding for data investments, but it does drive a different level of conversation about what’s important.”

Longer time horizon

In a public company, the board reports to Wall Street about past and future actions every 90 days. In a private company, the team still reports to the board, but the board represents a concentrated group of owners who take a longer view. Their perspective is that short-term decisions alone won’t create true transformation and a significant payout. Also, a key part of a PE strategy is to show potential future value to prospective buyers. The current owners change enough to transform the business and make it attractive on the market, but they leave the longer-term decisions to a future buyer.

This different timeline allows the leadership team more breathing room. The team doesn’t get a pass forever, but if it can demonstrate how its actions will drive an exit in three to five years, it’s less constrained by a short-term view.

At the same time, we can’t mistake the longer time horizon with an indifference to speed. When PE buys a company, it’s focused on speed to market. With an ownership timeline of three to five years, PE partners need their CIOs to have a serious bias for action, and more flexibility than in public companies. As CIO of a PE portco, don’t expect to set a 12-month budget and stick to it. You’ll need to be more dynamic than that.

Architectural decisions

Many PE firms look for industries with consolidation opportunities, using a core business as a growth platform to incorporate new businesses. This differs from the public company mindset, where acquisitions are more opportunistic, or fill a specific gap. As such, acquisition rates in public companies are generally not as high as in PE. In large public companies, acquisitions are typically significant events, with an all-hands-on deck approach to integrating a large business. At PE businesses, where a “tuck in” acquisition approach is often at play, the IT team manages the right platform to make acquisitions integration a core capability.

Since consolidating businesses to become an industry leader is a tried-and-true PE strategy, acquisitions need to be immediately accretive. With a future landscape that’s never crystal clear, CIOs need to put in a flexible enough architecture not only to grow the business now, but to allow future owners to continue to benefit from those decisions. Again, the PE firm is selling the future growth potential of the business, as much as the present value.

Leadership style

While my CIO friends who’ve moved from public to PE say their leadership style hasn’t changed, they acknowledge the speed of change, particularly in decision-making, is faster in a PE-backed company. There’s a mindset of making quick decisions and moving on, with less internal politics compared to a public company. The PE board and operating group act as accelerants to decision-making, so decisions create as little friction as possible. So, while your leadership style might not change, you’ll find yourself spending less time influencing the executive team than in the past, and also more of a shared focus on the roadmap. The entire board lives and dies by the VCP.

Transformation

Private equity has historically unleashed synergies through consolidation. Funds would buy multiple companies, drive up the value by putting those companies together, and then sell the larger company at a profit. The model was buy low, consolidate, and sell high. If those companies were often not properly integrated, that was an issue for the next owner.

But over the last few years, with interest rates high and the purchase price for companies going up, private equity can’t get the same returns by just putting a few companies together. Today, value comes only from true transformation, so PE firms are looking for CIOs who can transform an entire company, not department by department.

“When I recruit CIOs to our portfolio companies, I look for people who have a technology background, but think like a business unit leader, which is different from business acumen,” as one IT operating partner for a PE firm told me. “Business acumen is understanding business drivers, performance, and markets. Business unit leadership is the ability to change the business model of a $500 million company. CIOs of portfolio companies need to think about running a business, not running a department.”

Being a CIO of a PE-owned business isn’t for the faint of heart with the CEO, board, and your business partners (with their PE partners) deeply invested in your work. This situation can provide a unique set of challenges, but also tremendous opportunity. Once you’ve delivered on a PE value creation plan, so everyone, including you, enjoys a meaningful exit, you’ll be a known entity in the PE community, which, for many, is a ticket to increasingly challenging and lucrative CIO roles.