The Private Equity CEO/CFO Report - Apr 24

THE HIGH-LEVEL STORY

Private Equity is sorting through their portfolios right now trying to understand which assets need to (can) be divested, slightly improved or warrant significant reinvestment and time. As that high level game plays out, executives are doing similar math, calculating the probability and timelines of successful exits and reconsidering their situations. The musical chairs game we've been talking about for months is happening in pockets right now.

On the operational level, CEOs and CFOs are struggling with broken investment theses and trying to manage their debt while jumpstarting growth. There is continued frustration with the GTM side of the house and the inability to adapt to new buying realities. Many CEOs and CFOs are becoming heavily involved in go-to-market activities. One CFO I spoke with last week was working on territory re-segmentation. Another key frustration for CEOs right now is how to handle hybrid workforces that are under-performing. One trend to consider is how the confluence of frustration around hybrid work plays out in tandem with increasingly sophisticated automation and AI capabilities.

Highlights:

1. PE SEARCHES FOR LIQUIDITY?
2. UNFOCUSED EXECUTION IS DRIVING POOR PRIVATE EQUITY PERFORMANCE
3. CEOS BELIEVE THAT BUYING FRICTION IS EXTENDING BUYING TIMELINES
4. STRATEGIC CFOS NEED TO MOVE BEYOND QUANTITATIVE "PROOF"
5. CEOS ARE ACTIVELY ADJUSTING STRATEGY PULSE SURVEY
6. 7-RULES TO GUIDE NEW CEOS IN BUILDING HIGH PERFORMING TEAMS
7. 87% OF CEOS ARE ACCELERATING GROWTH BUT LACK CONVICTION
8. 6 KEYS TO CEO EXCELLENCE
9. 4 WAYS CFOS NEED TO THINK ABOUT AI IMPLEMENTATION

PE-Xcelerate is launching our 2nd PE CHRO Accelerator next month and our next PE CFO Accelerator in May. Still 100 NPS, 100 Take Action, 100 Superior and + 75% confidence in ability to perform as an A-Player. We're also launching our SLT Accelerator which fast-forwards senior leader execution and alignment. Finally, we're launching our virtual IPO Ready CFO one day program.

Enjoy reading this of data, stories and resources for April. Please DM with typos/errors.

PE SEARCHES FOR LIQUIDITY

Pitchbook's quarterly report highlights a PE community searching for liquidity in a down market.

• Private equity (PE) firms lost market share in both deal value and count in 2023 for the first time in eight years.
• Without significant exits to generate capital for reinvestment, there's concern that PE fundraising could stall, leading to decreased deployment of capital.
• PE firms have been working on developing exit routes and liquidity solutions, such as continuation funds.
• Continuation funds aim to provide a secondary market for buyout funds and have seen substantial growth, with $78.3 billion closed in 2023, up 65.1% from the previous year.
• The emergence of continuation funds suggests a potential avenue for sustaining PE activity amidst challenging market conditions.

UNFOCUSED EXECUTION IS DRIVING POOR PRIVATE EQUITY PERFORMANCE

Alix Partners annual PE Leadership Survey found that PE Executives identified unfocused execution, lack of urgency and lack of adaptability as the three areas contributing to C-Suite performance.

They also found that the biggest challenges for PE firms, as hold times increase, were finding sustainable growth, retaining talent and building strong leadership teams.

Another key finding was that PE Firms identified effective change management as the key missing ingredient for business transformation.

CEOS BELIEVE THAT BUYING FRICTION IS EXTENDING BUYING TIMELINES

SBI Growth found that "Buying friction" is a significant obstacle to commercial productivity. Buying friction was identified as the top barrier by CEOs and a major pain point for customers navigating purchase journeys within organizations.

• Their research indicates and increasing complexity in decision-making, with an average of 12+ stakeholders involved, many lacking a comprehensive understanding of the situation. Decision timeframes are lengthening, with the average purchase cycle time at 9.6 months.
• GTM team sizes and unclear role definitions contribute to buyer overwhelm, along with the abundance of options, products, and pricing models available. Empathetic customer interaction is crucial for companies navigating these challenges effectively.

They see four areas GTM must change: 1. Evolve with buyer demands 2. Anticipate buyer change to move the deal process forward 3. Pull forward executive involvement with dedicated c-suite propositions and 4. driving in-person engagements.

TO BECOME MORE STRATEGIC, CFOS NEED TO MOVE BEYOND QUANTITATIVE "PROOF"

Strategy guru Roger Martin argues that if CFOs are going to elevate their contribution to organizational strategy they need to prioritize strategic economics over quantitative proof, foster a culture of strategic excellence and innovate within the organization.

Indeed, our research into CFOs at Gartner showed that CFOs who had too much rigor around business cases stifled innovation.

Martin believes that CFOs should adopt a "What Would Have to be True" (WWHTBT) approach to scrutinize the economic feasibility of proposed strategies, actively generate strategic possibilities through their deep understanding of the company's economics, embrace creativity, challenge assumptions, and contribute strategic insights to drive informed decision-making.

CEOS ARE ACTIVELY ADJUSTING STRATEGY

According to KPMG's pulse survey, CEOs remain confident in growth prospects of the U.S. economy but are making strategic adjustments to address a combination of near-term risks and structural changes.

• CEOs see GenAI as central to gaining a competitive advantage and are working to rapidly advance deployment of the technology across their enterprises in a responsible way.
• CEOs are waiting for the opportune moment to pursue M&A activity – most likely later this year or in 2025.
• CEOs are proactively managing a tight labor market and focusing on initiatives to promote mental well-being and prevent burnout as acceptance of hybrid work models grows.
• The execution of ESG initiatives edged out other areas as CEOs’ top operational priority. The majority expect to see significant returns from their sustainability investments in three-to-five years.

7-RULES TO GUIDE NEW CEOS IN BUILDING HIGH PERFORMING TEAMS

New CEOs must balance speed and prudence in building their teams. Spencer Stuart highlights 7-rules in building clarity and taking action on the top team.

1. Set the North Star: New CEOs can establish a purpose-driven vision beyond financial goals.
2. Fill Information Gaps: Actively seek information about team members' capabilities and commitment.
3. Assess Executive Leadership Agility: Assess team members' agility and ability to adapt to changes.
4. Lead by Cultivating Culture: Define and articulate the desired organizational culture, aligning behaviors and norms with the leadership team.
5. Check Blind Spots and Exercise Caution: Balance the need for speed with prudence avoiding hasty actions such as packing the team with loyalists or making personnel changes without understanding their contributions and impact on the organization.
6. Address Emotional Barriers: Recognize and address emotional factors influencing decisions about team members, such as loyalty or personal relationships.
7. Communicate Authentically: Effectively communicate tough decisions with empathy and clarity, connecting them to the organization's collective purpose and future journey to inspire and engage team members.

87% OF CEOS ARE ACCELERATING GROWTH BUT LACK CONVICTION

87% of CEOs are planning aggressive growth measures according to SBI.

The top three levers are: Increase retention, penetration and expansion and optimizing go to market sales. There's also a significant increase in CEOs focusing on developing and launching new products.

Their survey results (n=87) also show a large gap between criticality and confidence, with the largest gaps market penetration (-27%), developing and launching new products (-16%) and increasing customer retention (-13%).

6 KEYS TO CEO EXCELLENCE

McKinsey cited six core activities that drive CEO Effectiveness: set the direction, align your organization on that direction, mobilize your leaders to deliver on that direction, work with your board, connect with a group of stakeholders and manage your personal effectiveness.

And along with those, 6 key mindsets to enable those activities:

1. Boldness: Emphasizes the importance of having a vision and taking decisive action, even in the face of uncertainty or risk.
2. Resource Allocation: Focuses on being tough-minded and strategic in allocating resources to drive organizational priorities effectively.
3. Culture Shaping: Highlights the role of leaders in shaping organizational culture by identifying and reinforcing behaviors that align with the overall vision and values.
4. Talent Development: Stresses the significance of investing in and developing talent across the organization to ensure its long-term success.
5. Personal Energy: Underlines the importance of personal commitment and energy from leaders in driving organizational success, including aspects such as meeting cadence, coaching, and team composition.
6. Personal Operating Model: Encourages leaders to delegate operational tasks and focus on higher-level strategic priorities, leveraging their team's strengths effectively.

4 WAYS CFOS NEED TO THINK ABOUT AI IMPLEMENTATION

Gartner argues that there are four key mandates for Finance on AI implementation:

1. Hiring External AI Talent: Leading AI finance organizations are more likely to hire external AI talent (32%) compared to other organizations (10%). External AI specialists expedite the technical learning curve and help overcome initial resistance to adopting AI technologies.
2. Purchasing AI-Enabled Technology: A significant 84% of leading AI finance organizations purchase software with embedded AI, versus only 42% of non-leaders. This strategy allows organizations to easily experiment with AI in various finance use cases and facilitates quicker pilot projects.
3. Experimentation with Pilots: Leading organizations deploy twice as many pilot projects in the first year as others, enabling them to explore more AI use cases rapidly. They also experience a substantial increase in the number of AI use cases deployed over time.
4. Selection of AI Implementation Leaders: Effective AI deployment in finance is often led by heads of FP&A or finance analytics, who possess strong analytical and data skills