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Hundreds of Billions of Private Equity dollars are trying to get off the sidelines and into the game. The single most important decision criterion is the quality of management. What makes an executive bankable to PE groups?
So much has already been said written about bankability that it's difficult to sort through the noise. Here, are four key criteria that cover most of the ground. If you stand up to these four tests, chances are excellent that investors will get behind you.
Track Record of P&L Success
As one PE partner recently told an executive, "We want you to earn, not learn on our watch." Without a doubt, this is the single most important factor. Do you have a track record of earning money in the same or a related industry? Have you run businesses of a similar size?
Nothing is as impressive as consistent growth of both revenue and earnings. However, most sophisticated investors understand that stuff happens. Bumps in the road are not necessarily an issue. You should be prepared to talk about them openly and show how you overcame them. One important note: the CEO title is not the key. Bottom line responsibility is everything. For example, the general manager of a $200MM division of a large corporation will usually be bankable to run a similarly sized company in the same industry. Whereas the CEO and owner of a $20MM company in the same industry may not be.
2. Leadership / People Skills
Are you a team builder? Have you demonstrated the talent to motivate and empower your subordinates? Do you have some key players who've worked with you before and would like to join you in a new venture?
Equally important, do the investors think that you'll be easy to work with at the board level? Will you take the time to understand their perspective and listen to their ideas? It's good for the entrepreneur to have a certain level of understanding of the business of operating a Private Equity fund. This will sensitize him/her to the partner's needs.
3. Desire to Build
Investors are looking for executives who thrive on the process of building a business and are willing to stay with it until a successful exit is achieved. A window of 5-7 years is normal. They become wary if they think that you're looking for a quick flip.
4. Skin in the Game
With very few exceptions, investors want the CEO to make a serious capital commitment to the venture. It is universally believed that this insures that your attention and motivation will remain focused. How much is serious? The answer varies but most PE firms would say that they know it when they see it. They don't need you to take out a second mortgage but they do want to know that the investment will represent a significant portion of your liquid net worth. A range of $250K - $1MM covers most cases. It's not uncommon for a PE group to offer to lend the executive money on attractive terms in order to increase the commitment.
And one More . . .
In many cases, the PE group identifies the opportunity and then searches out the executive. However, the best opportunities may be created by an executive who has located an opportunity and is seeking investors. In this case, the PE firm expects you to be able to explain and defend the investment thesis. This discussion will include market opportunity assessment, a plan for operating the business with appropriate financial projections and a discussion of potential exits.
If you're Bankable, you're Valuable
Executives who pass the bankability test are the rock stars of the Private Equity world. Understand your value and expect to be well compensated. However, don't focus too much on salary. The most important way to become wealthy in running a PE backed company is through incentive equity. Negotiate hard for a lot of upside at the time of the exit. If a PE group is achieving their IRR target for the investment, it's appropriate for upper management to share in the wealth in a big way. For example, if the PE fund can earn an IRR of 30% or more after granting management 15% of the equity, then everybody is a winner.
So much has already been said written about bankability that it's difficult to sort through the noise. Here, are four key criteria that cover most of the ground. If you stand up to these four tests, chances are excellent that investors will get behind you.
Track Record of P&L Success
As one PE partner recently told an executive, "We want you to earn, not learn on our watch." Without a doubt, this is the single most important factor. Do you have a track record of earning money in the same or a related industry? Have you run businesses of a similar size?
Nothing is as impressive as consistent growth of both revenue and earnings. However, most sophisticated investors understand that stuff happens. Bumps in the road are not necessarily an issue. You should be prepared to talk about them openly and show how you overcame them. One important note: the CEO title is not the key. Bottom line responsibility is everything. For example, the general manager of a $200MM division of a large corporation will usually be bankable to run a similarly sized company in the same industry. Whereas the CEO and owner of a $20MM company in the same industry may not be.
2. Leadership / People Skills
Are you a team builder? Have you demonstrated the talent to motivate and empower your subordinates? Do you have some key players who've worked with you before and would like to join you in a new venture?
Equally important, do the investors think that you'll be easy to work with at the board level? Will you take the time to understand their perspective and listen to their ideas? It's good for the entrepreneur to have a certain level of understanding of the business of operating a Private Equity fund. This will sensitize him/her to the partner's needs.
3. Desire to Build
Investors are looking for executives who thrive on the process of building a business and are willing to stay with it until a successful exit is achieved. A window of 5-7 years is normal. They become wary if they think that you're looking for a quick flip.
4. Skin in the Game
With very few exceptions, investors want the CEO to make a serious capital commitment to the venture. It is universally believed that this insures that your attention and motivation will remain focused. How much is serious? The answer varies but most PE firms would say that they know it when they see it. They don't need you to take out a second mortgage but they do want to know that the investment will represent a significant portion of your liquid net worth. A range of $250K - $1MM covers most cases. It's not uncommon for a PE group to offer to lend the executive money on attractive terms in order to increase the commitment.
And one More . . .
In many cases, the PE group identifies the opportunity and then searches out the executive. However, the best opportunities may be created by an executive who has located an opportunity and is seeking investors. In this case, the PE firm expects you to be able to explain and defend the investment thesis. This discussion will include market opportunity assessment, a plan for operating the business with appropriate financial projections and a discussion of potential exits.
If you're Bankable, you're Valuable
Executives who pass the bankability test are the rock stars of the Private Equity world. Understand your value and expect to be well compensated. However, don't focus too much on salary. The most important way to become wealthy in running a PE backed company is through incentive equity. Negotiate hard for a lot of upside at the time of the exit. If a PE group is achieving their IRR target for the investment, it's appropriate for upper management to share in the wealth in a big way. For example, if the PE fund can earn an IRR of 30% or more after granting management 15% of the equity, then everybody is a winner.