A Tech Exec's Handbook to Thriving Under PE Ownership

Are you a senior tech executive looking to transition to a new job? Chances of you landing one in a PE-backed Software company are pretty high.

Private Equity (PE) firms have firmly established themselves as major players in the Software industry. But their voracious pursuit of Software deals is just beginning. Data shows that more than 57% of global PE technology deals are Software both in terms of value and volume (source: Pitchbook).

So as a senior tech leader, at some point in your career, you will likely have to have the right mindset to play by the PE rules. And here's what you need to know.

Before taking the leap into a PE-owned tech company, senior executives should brace themselves for a unique operating environment. While immensely rewarding, it comes with its own set of dynamics:

1. High Debt Burden: Leveraged buyouts can potentially strain a tech company's financials with a heavy debt load. During economic downturns, especially in high-interest environments, escaping this debt cycle can be challenging.
2. Innovation Trade-offs: PE firms tend to focus on scaling proven products/services over unproven experiments. For leaders used to pursuing moonshots, recalibrating towards innovations with clear ROI paths may require an adjustment.
3. Metric-Driven Management: Expect rigorous performance management driven by data and metrics. This analytical approach may feel like a shift for executives accustomed to greater qualitative autonomy.
4. Institutional Knowledge Risks: With workforce reductions being a key cost-cutting lever, there are risks of losing vital institutional knowledge about products, processes, and customers - potentially impacting service quality.
5. Customer Backlash Risks: As software is tightly embedded in the organization workflow, PE firms sometimes leverage this to increase pricing. This could lead to customer pushback, even if well-justified. In such cases, deft customer management skills become critical.

However, PE ownership also unlocks compelling advantages that allow firms to generate attractive tech returns:?

1. Governance Transformation: An intense focus on enhancing transparency and corporate governance by investing in cutting-edge solutions across finance, HR, legal, procurement and other functions. This data-driven approach often surprises executives joining from other environments. For instance, a Senior CXO from a PE-owned SaaS company recently elaborated on our podcast on the strategic focus of their organization under PE ownership: "Entire organization is pivoted towards the North Star of ARR...and how that translates into your EBITDA, which is your profitability." This insight exemplifies how PE firms center their strategies around vital financial indicators like ARR and EBITDA, ensuring that every part of the organization aligns with these goals to drive profitability and sustainable growth. This metrics-driven approach not only enhances financial performance but also aligns the entire organization towards shareholder value, which is crucial for the success of PE investments in the technology sector.
2. Force-Multiplier Expertise: Access to a vast network of retired, seasoned C-suite operators who can impart hundreds of years of collective wisdom to significantly uplift operational efficiencies - expertise difficult for public firms to assemble.
3. Need for Speed: PE owners can swiftly reposition companies to capitalize on emerging trends like cloud and AI without bureaucratic inertia, removing leadership roadblocks through strong change management.
4. Equity Value-Alignment: Executives often benefit from equity participation, aligning their compensation with the company's performance and shareholder value creation.
5. Disciplined M&A Playbook: M&A strategies follow a disciplined playbook of acquiring capabilities that genuinely augment value rather than merely buying scale.

While adapting to PE's unique culture can be an adjustment, many leaders have charted a successful course by:

1. Mastering the Playbooks: Developing a deep understanding of each firm's unique investment thesis and operational model, while swiftly adapting and integrating their own proven strategies.
2. Absorbing Prior Experiences: Proactively sharing proven ideas and approaches that previously helped reduce costs or drive efficiencies to enhance the value-add for PE investing and operating partners.
3. Leveraging Peer Wisdom: Capitalizing on access to vast peer networks of leaders at other portfolio companies, as well as operational experts serving on boards and as advisors to accelerate initiatives and expand capabilities.
4. Embracing Intense Execution: Adopting a mindset focused on rapid, decisive execution over bureaucratic buy-in processes while objectively discontinuing unclear investments. Patience takes a backseat to delivering results.
5. Aligning to Key Metrics: Relentlessly meeting and exceeding agreed-upon key performance indicators that directly create value, ensuring all investments from hiring to M&A map to these critical metrics.

With over $2.5 trillion in dry powder, PE's appetite for enterprise software remains strong. The sector's low capital needs, deep stickiness, and potential for non-linear scaling all point towards further consolidation amid strong macro tech trends.

For ambitious executives looking to blend strong execution abilities with an entrepreneurial mindset, working at a Private Equity firm could open up new exciting career opportunities. But fair warning - it's not for the faint-hearted. Expect an intense and unpredictable experience as these firms aggressively chase high returns in the software industry.