October 1, 2012
Interviewed by: David Snow
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Talent For Change

If the mantra in real estate is “location, location, location,” in private equity it’s “people, people, people.” Finding talented management is vital, but it’s extremely hard to get it right.

In the first of a groundbreaking series, industry veterans Robert Nolano of Halyard Capital; John Brittain of Tatum; and Lewis Raibley of Castle Harlan discuss the key traits of portfolio-company executives and share stories of deals where key execs had to be replaced. This series also includes an expert Q&A with James Dimitriou of Tatum. This program is sponsored by Tatum.

If the mantra in real estate is “location, location, location,” in private equity it’s “people, people, people.” Finding talented management is vital, but it’s extremely hard to get it right.

In the first of a groundbreaking series, industry veterans Robert Nolano of Halyard Capital; John Brittain of Tatum; and Lewis Raibley of Castle Harlan discuss the key traits of portfolio-company executives and share stories of deals where key execs had to be replaced. This series also includes an expert Q&A with James Dimitriou of Tatum. This program is sponsored by Tatum.

David Snow, Privcap: We are joined today by Bob Nolan of Halyard Capital, John Brittain of Tatum, and Lewis Raibley of Castle Harlan. Gentlemen, welcome to Privcap today. Privilege to have you here. So we’re talking about a big topic, human capital. If you talk to anyone in the private equity business, and you ask them what’s the most important ingredient for success, they’ll always say people.

And so, I’m very interested in the varied experiences that all of you have had in deploying people in the hopes of attaining private equity success. So maybe starting with Bob, and your firm, Halyard capital. So how important is getting the human capital component right in success of a private equity deal? Where does it rank as far as other ingredients to success?

Robert Nolan, Halyard Capital: About 1A, 1B. It ranks about 98% of the entire effort. It is the most important feature, as you’ve just cited at the outset. The reason is because it is hard to find the right person for the right job. It should not be assumed otherwise. And there are skills that are required for these jobs that aren’t always readily apparent because companies change, you’re dealing with personalities, you’re dealing with product development, you’re dealing with evolving markets.

And so the features that we look for in a executive really revolve around adaptability. And it’s a broad term, and properly applied, I would say, it’s the individual demonstrates curiosity, flexibility, energy, of course, and some agility in behavior around moving markets. And that brings us into many different areas in which they have to excel.

There’s no one perfect model, and don’t believe it if someone tells you there is because it so much depends on the individual circumstances that the company faces. But, by far, it is the most important issue we deal with. And, unfortunately, occasionally we deal with it repetitively where we have to change management, and it’s even more so important then.

Snow: John, your firm, Tatum, which helps private equity clients in getting the human capital and the human resources part of the equation right. Do you agree that if private equity is defined as capital that comes in to facilitate growth and change, so what does that mean then for the kinds of people that you need to put in a private equity type of investment?

John Brittain, Tatum: I couldn’t agree with Bob more from the perspective. The way I look at it is, the people you need to have in the leadership of a company, private equity-sponsored or otherwise is going to be in a changing business condition environment, those who can drive value creation. And value creation isn’t just simply looking at organic revenue growth of three to five percent, margin expansion, it’s truly creating value. It’s coming into a changing environment, which is either high-growth business or a restructuring business, and building and creating value.

And there are unique people only who can do that and can live in that kind of environment and to drive that kind of value. And that’s exactly the kind of leadership talent that you need. And they may be people who don’t necessarily come from just a high-growth industry. They may have been involved with restructurings. But they have somehow been in an environment where they build, restructure, created new products, created new revenue segments, created new process re-engineering, and are in value creation.

And I couldn’t agree more with Bob, in terms of the perspective of adaptability. They have to be able to work and to thrive in that kind of environment. And we at Tatum constantly are evaluating organizations and talent based on that. And people who have moved from multiple industries and businesses quite often have that talent and that skill set. They thrive in environments of change and creating value.

Snow: Lou, from your perspective overseeing human capital at Castle Harlan, do you agree that there’s a certain kind of person that’s necessary for private equity types of situations and private equity backed companies?

Lewis Raibley, Castle Harlan: Absolutely. John and Bob said it all, so I’ll try to give you a little perspective from what we see. There is a certain type of person. It’s generally not your corporate executive, it is a unique type of person. The person needs to be flexible, they need to be adaptable. They need to be able to listen. We have strong views about where the business ought to be going.

We discuss those with management, and we look for people who look at their business a different way. We look for our executives to say, hey, I’ve been doing it this way all along, and what if I look at it that way. And one of the things, just to give you kind of one of the ways we look at the world. We always look at new markets, new products. We always look at where you’re making your money, where you’re losing your money.

Our orientation of how to do that is different than the way most executives think about it. And we’ll look for our CEO and our CFO to really say, yeah, you know, that’s a different way to look at it. Maybe I don’t agree with it. Maybe it’s not right. Maybe it is, but they have an open mind. And I think that’s a very important element of one of our private equity executives.

They need to have an open mind, and they need to know where their weaknesses are. These guys have specific skills. Maybe they’re good at marketing. Maybe they’re good at operations. And they need to know where their weaknesses are and be open to the help. And we have a vast network of resources, as do other private equity firms, that we can bring in to help them through the transition. So that’s another key element of what we’re looking for.

Snow: Well, let’s just kind of run through some of the situations that private equity-backed companies are in. This is kind of a question for anyone. But there are carve-outs, there’s founders who need liquidity, or founders who need to bring in some extra help. Can you run through some of the most common situations that the companies that you target find themselves in, and then the kinds of talent that would be most suitable for those kinds of situations?

Nolan: Well listen, first of all, I’d like to pick up on Lou’s last point because it should not be missed, it should be accentuated. I agree– we talked about adaptability, but the ability to recognize your weakness is the key issue.

So back to now your instance of, say, the founder issue. Founders issue– the founder individual usually has taken a company from inception to some point of maturation, probably not to the institutional scale that a private equity group would ultimately do. So that’s the biggest hurdle that is found at that point in time.

And then we get back to the point of how flexible can that person be? They were obviously pivotal in helping develop the company to this current stage, that doesn’t make them suitable for the next stage. So let’s take on the founder because we’ve dealt with this a number of times. As much as we like them, there may be a better role for the founder.

Certainly you want the founder around, maybe on the board, maybe a chairman spot if that were appropriate. But certainly remain in place because they probably have important customer contacts, and they have the historical knowledge that’s going to be pivotal. But that doesn’t necessarily make them right for the next stage of development in the company. And so that’s the one that we’ve dealt with a number times.

Raibley: We’ve dealt with that quite often as well, and you need to know what the CEO is capable of and not capable of. I’ll give you a case in point. We bought a restaurant company that had hit that point of its maturation where it just needed to go to the next step, and it needed some equity to do that. It was owned by two brothers. One just said I’m cashing out, the other said I’ll stay around and be the CEO.

Shortly after the closing, within two months, we realized that this guy, great guy, built a great brand, but he wasn’t quite the guy we needed to take it to the next level. We actually, again, this gets to open mindedness. We sat down with the gentleman, and we said, we just don’t think this is the right role for you. And he said, I couldn’t agree more.

And his interest was in developing the concept. What’s the restaurant look like? Finding the right location, he did that. He was a valued member of the board, a valued member of the team, and together, by doing that, his flexibility. And we were, by the way, able to get a CEO we had worked with before to bring in, which is another thing we look to do.

If we have a successful executive, we like to bring him back for another go round. We were able to bring him in, and they worked well together. It was a very nice deal, we had a very nice exit on that. Again, the team worked well together. The CEO was appreciative of his limitations, focused him in the right spot, and it was a win for everybody.

Snow: Well, if a big portion of your jobs as private equity investors is to assess talent and match the right person with the right situation, can you talk about some of the ways that you do that– the ways that you assess someone’s fit into an organization that is experiencing change or needs to experience change? Maybe start with Bob– what are some of the tricks of your trade?

Nolan: I wish I owned a few tricks of that trade.

First of all, let’s go back to, as you said, there are individual circumstances. So it depends on where the company is and its formation and development. But the reality is, usually when you’re undergoing this type of analysis; you’re looking for a change agent of some form. That would be delightful to say that that person always comes in a form where they have experienced it before or demonstrated that capability before.

And they’re easily found and easily recognized and easily positioned into the job. That’s seldom the case. I do think what we look for– and I’ll come back to the general characteristics– but I think what is most important is you’re looking for someone who has an aligned interest with your perspective, and then, of course, your ultimate viewpoint on where you want to take the company.

It’s not that we, as owners, want to dictate all courses of actions. That’s exactly what we don’t want to do. We want people to come in and execute on a plan that they have helped both create and then implement. But that being said, and Lou touched on this a little bit, you want people who are going to come in, like you mentioned the founder stepping aside, who are, at the end of the day, looking for the best possible outcome. And you want to strip the emotion from that situation.

The case of not positioning someone to replace the founder in that case– what do we look for? Obviously we look for intelligence. We look for experience that is formed from having made hard decisions in tough situations, hopefully with positive outcomes. But you want someone who’s been in the cauldron, who’s actually experienced what it is to go through the fire a bit. So we look for that.

Obviously, we want someone who’s curious because I think if there’s a curiosity, then things like adaptability and flexibility and behavioral elements that you would want, are going to follow suit. So I wish it were as easily said as four or five different simple checkpoints, it’s not. But, by the end of the day, it’s about finding a person who you believe can properly execute on a plan that makes sense.

Snow: John, what are some ways– what are some approaches you have to evaluate whether someone is a good fit, especially in a private equity situation, which tends to involve a lot of change and a lot of repositioning?

Brittain: It’s experiential, a lot of it. I mean, we’ll come into a situation, a private equity-sponsored portfolio company, and we’ll do a full assessment of the finance and the organization and the talent. And that’s what we’re good at and we can do. And it’s really experiential in talking and understanding that talent because what you’re doing is you’re evaluating people and process.

And you might have the right people, the wrong process. You might have the wrong process, the right people. Sometimes you’ve got the wrong people in the wrong process. So we can come in and do an evaluation of that. And you really, experientially, understand the talent and the leadership, the things we’re talking about here today.

Have they worked in a change environment? Are they open-minded about it? Can they adapt? And you look for signs and resistance to change. These are the standard ways we’ve approached it, not being open-minded to it versus sort of taking a new approach, willing to evaluate the whole process and re-engineering of processes. And when we go through that analysis, you can make a pretty good determination whether you have the right people.

And sometimes you do, sometimes it’s a bandwidth issue, you’ve got to bring in more resources. And if you don’t have the right people, and they’re not adaptable to that environment, you can assess that and you can determine it and you can take the right action. Sometimes people can be repositioned within the company. And sometimes transitions have to be of more permanent nature, in terms of bringing in new talent.

Snow: In private equity deals, such as perhaps carve-outs, which we’ve discussed, or founder transitions, you have an existing team that is being lifted from one situation into another. And I’m going to imagine that, in some cases, people who are used to a certain corporate structure or a certain founder-driven culture, simply can’t get with the program in the new situation. So what are some telltale signs of an executive who let’s, say, wants to stick to a familiar playbook or looks like they’re going to be resistant to stepping up to a different culture or a different plan?

Raibley: Well, one of the first things is when you start asking questions that maybe they don’t want to answer. I don’t mean don’t want to answer, they’re just not used to those types of questions and they’re somewhat hesitant. And they may not have the information that you think they ought to have readily available to run the business. And they get somewhat offensive. That’s a bad sign.

That’s somebody you’re really going to have to deal with. Hopefully, you can work with them and bring them along, but it’s just as likely that you won’t be able to. So I think that’s one key determinant of where you may have an issue. Again, process– I go in at the beginning of a deal during due diligence. We start talking to the executives.

I focus on the finance area. And how do you do these things? If people can explain how they do it and why they do it, they’re probably going to be OK. They’re going to understand why we need to change, if we need to change. And they’ll probably be able to execute.

If they can’t really articulate what they’re doing, why they’re doing it, how their business works, then again, we’re up against an issue we’re going to have to resolve. But at the outset, we go in looking for good management teams Bob said at the beginning, it’s 98%, 98% of the success is getting the right people. So you have a great company with a great strategy, and if it’s a carve-out from a large company and they’re giving you the B team on management, you’re going to have an issue.

Snow: Bob, in your experience, and in working with a management team that might continue on to run the company, or members of that management team, what have been some telltale signs of someone who might be resistant to change?

Nolan: Well, we encountered it in one instance where we bought a company from a founder, placed the founder as a board member where she was happily ensconced. And we moved the COO, who really had been overseeing most of the activity, into the CEO slot. And six months in, we started talking to him more diligently about his model.

It was basically a sales company. And he had this view that it required, if you hired a new salesperson, 9 to 12 months for that sales person to be productive. Now when your core business is nothing but sales, that just struck me as a bit odd, that it would take that long for someone to become productive. And this wasn’t that hard a product to understand.

So, obviously, as we get deeper into the business, I pulled him aside one day, and I said, look, I just can’t listen to this excuse any longer. Your model is broken if you believe that it requires 9 to 12 months for you to properly train and make a sales person productive in a business that does nothing but sales. So you need to improve it. And, of course, he said, Oh, but that can’t be done because these people can’t be trained that quickly. And what we sell is so unique. And that’s when I knew we had the wrong person.

As Lou said at the outset, it’s all about– It’s about flexibility. You know instantly. Now, in that case, intransigence was the equivalent of transparency to his mindset, so it was a little bit easier there. But those signs are so– that sign should have been quite obvious. When I looked at it, I thought well, I should have seen this sign earlier. Didn’t hurt us, as it turned out. But it could have. And so that was rather an easy one to deal with.

Brittain: I was going to say it’s interesting because it starts at the top, that resistance to change. But I’ve had the experience of one level down in a professional services environment. We had a situation with an IT services company. They’d been around for 20, 25 years, and they’d been a founder’s business.

And it needed to be repositioned and restructured. The board knew it. Brought in a new executive management team. Came on board, I was the CFO of the business. Brought in a new CEO. The board, the new executive leadership team, was aligned in terms of repositioning the company.

It had lost its way in terms of growth. There were a number of other issues. And we knew we could reposition the company competitively in the marketplace. So we took the right actions in terms of bringing in new segment leaders for the five different business segments. We had the new executive management team.

We had change agents in place, very much focused on driving the business for the growth and the revenue generation we knew it was capable of doing in a challenging industry environment. However, because it was a professional services business, the issue was the next level down. It was at the vice president level, the managing director level. Those who were executing into those professional business service sectors.

And we, as an executive team in terms of realigning the business, we came to the conclusion, after about eight to 12 months, that we really had an issue– that the business leaders, the product leaders, in those divisions weren’t able to be adaptable to change. And, ultimately, the conclusion that we made strategically, was that these individual-siloed businesses, which we were trying to drive cross-fertilization, revenue growth, between business sectors, we couldn’t do it. We did a multi-step divestiture of the business. We ending up selling out the parts were worth more than the whole because we realized, down at that level, that those units were not able, in a professional services environment, to be adaptable to a changing marketplace, despite the fact that we had all the change agents leading the business above.

Snow: Lou, you had an experience to share, without necessarily naming names?

Raibley: Without naming names, sure, sure. It was actually a generality. Bob mentioned he wished he had seen some of those signs earlier in that particular case. And we do that quite often as well. And, I think what’s important there is that when you do see the signs, and you come to the conclusion that this is not the right person, you make the change.

We’ve gone back over– we have a strategy session every year. And every couple of years we say, what have we done right? What have we done wrong with people? And a few years ago, we did that, and we looked at how did we perform if we didn’t make the change in time. And where we were reluctant to make a change, or just couldn’t come to grips with letting somebody go and replacing them, that deal didn’t do as well as it should have.

And maybe it went in the wrong direction. In cases where we did, I don’t want to say we were aggressive, but we were appropriate, we said, oh, this isn’t working. We’ve worked with this gentleman. It’s time to make a change, and when we make the change at the right time, it’s a much better outcome. So I think that’s another key element.

Nolan: I think it’s all– I don’t want to say all change is positive, but revealing situations is positive. So shedding a little light into a situation, where you find in retrospect, of course, that you didn’t know it as well as you thought you did, is always healthy. Now, back to the point, we’d all like to have 20-20 hindsight. And the fact of the matter is that we all deal with the reality as we find it. But nothing is more important than getting that question right according to management.

Brittain: Picking up on that point, we get engaged in common situations with financial sponsors to come in and assist in terms of the organization. And, inevitably, or very often, the story is exactly what Lou was talking about– is the owners want to support management and they do. They bought a product, they bought a service, they’re backing the CEO, they’re backing the management team.

And they want to be able to delegate to management to execute on that business plan. And, quite often, there seems to be a little bit of a reluctance to be aggressive at the first cut. What we find is a situation where the owners are trying to be appropriate, and they’re trying to let management run the business. And they see the signs. And sometimes they find– in hindsight, they say, well, we waited a little bit too long.

And that’s where we come in sometimes. At Tatum we can assist that with the assessment because once you sense something’s not right, usually you do need to take action. But we understand why private equity and owners want to be appropriate and to support their CEOs and take the time to make sure they make the right decisions. But sometimes, in hindsight, you and your peers will tell me, we wish we’d moved a little quicker on the situation.

Nolan: The natural presumption is that you’re hiring a team that knows what they’re doing. And it’s a premise that sometimes proves faulty.

Snow: Well, I’m picking up that human capital is, in fact, very important in private equity. I think there’s a lot more to talk about with regard to private equity and human capital, but I think for this particular session we can pause. So I’d like to thank all of you for being part of the Privcap program today.

Expert Q&A With John Brittain, CFO Partner, Tatum

Privcap: What can a private equity client expect from Tatum during the critical post-acquisition phase?

James Dimitriou, Tatum: We typically get a call from private equity around transaction. So some deal’s going on, a private equity firm says we think we need to replace somebody. It’s typically around a role. Once a few discussions take place, it becomes evident, about half the time, that it’s not about just a role but maybe it’s around a solution or project team.

So the first thing we do is we listen. We say, let’s talk a little bit more about the situation. So let’s say the half the time where it is just a role and it’s confirmed that, OK, we are going to replace a CFO, we can do that. We put some resources in front of them. We walk through the profiles and we do a match and we move forward.

The other half of the time, we’ll find out that it’s bigger than just a role-based solution. So we’ll do what we call a discovery call and we’ll get the stakeholders on the phone, might be the CEO, it might be the board, it might be members of the private equity firm, and we’ll walk through what their goals are. We’ll look at the model and what they’re trying to accomplish and where they’re trying to go. We’ll also look at the culture of the firm and what they’re trying to do. And based on that, we’ll be able to come back– and that might be a five hour phone call, might be three five hour phone calls.

Once we’ve got that information, we’ll come back to them with a list of two or three candidates. We’ll then come back, walk them through those profiles, and say, OK, all three of these people can do the job. It’s really up to you now to figure out which one of these fits your culture.

One might be really bold, kind of a bull in the china shop, maybe that’s what you need. This one over here is a little bit more– has a little bit more finesse and can walk through a little bit more mild mannered. It’s kind of like the Goldilocks syndrome, right? And basically, all of them can do the job, it’s up to you to pick the one that’s the right culture for you.

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