How to Work Effectively with Your New Private Equity Partner

Congratulations! After years of growing your business from an idea to a multi-million-dollar business, you’ve partnered with a private equity firm, have available growth capital like you’ve never imagined, and you’ve taken some “chips off the table”. But now you realize that you have never had a business partner or a Board of Directors and a cold sweat ensues as you begin to wonder how to get off on the right foot with your new private equity partner.

As an Operating Partner for New Harbor Capital and an Executive Chair of several of our portfolio companies, I’ve worked with many business owners as they navigate these changes. Included below are some tips for developing a strong partnership that maximizes mutual value in your private equity relationship.

Perhaps the most important thing to remember at the beginning of your partnership period is the need for speed. Working with your private equity partner during the acquisition process, you likely developed a common understanding of your business’ future growth strategy. Your private equity partner will want to work with you to implement that strategy as quickly as possible. The key to success in this faster growth environment is to ensure you and your team have a growth mindset. Growing the business is no longer optional, and your private equity partner is ready and willing to invest the time, capital, and resources needed to help implement your growth plans. Nevertheless, you are the CEO of the company, and it is your growth plan, so you will need to operationalize the plan. This commitment to growth has been the key to success for each of New Harbor’s investments.

This growth mindset is a change in perspective for many first-time CEOs or founders, and it necessitates investing in both your people and products. This can, at times, be an uncomfortable shift – oftentimes, business owners are used to managing an annual profit goal that may be achieved through cost management and getting the most out of modestly paid employees. Growth often requires increased spending in the near term to hire the best talent, expand sales and marketing, or invest in capital assets. At New Harbor, we normally see a “J-curve” in the financial performance of our portfolio companies during which spending will increase in the first 12 to 18 months as we build the infrastructure to drive growth. However, that near-term investment creates a sling-shot effect that drives significant growth in year two and beyond.

One of the first things we recommend that our portfolio company CEOs invest in is their team. Before partnering with a private equity firm, you were likely hiring people at lower costs and finding ways to simply “make it work”. Your new private equity partner will encourage you to adjust this mindset and focus on hiring people who are true experts in their functional areas. In this way, you will surround yourself with people who challenge you, push you, and help propel your company forward. This hiring strategy sometimes means paying higher salaries and spending more on your team than you have in the past. The job of your private equity partner is to help you adopt a long-term, growth mindset and embrace the value these new employees will create. The addition of even one expert marketing or finance team member can have immediate beneficial impacts.

Another immediate difference you will experience early in this partnership period is the focus on data-driven decision-making. You’ve likely successfully operated your business up until now making decisions with some basic data and a well-educated “gut feel”. Private equity professionals are all financial experts. They typically analyze every possible data source for key insights. One of the most important investments your team can make is in tech-enabled information systems and capabilities. By investing in these types of systems, you will be able to mine and analyze your data for key insights that will help monitor and predict business performance. Leveraging this analytics capability, you can then work with your private equity partners to quickly develop a Key Performance Indicator (KPI) dashboard to publish regular results. This will ensure everyone is on the same page and will provide real-time feedback on the impacts of your investments and growth efforts.

Another important resource to leverage in this new world order is your new Board of Directors. At New Harbor, we have an extensive network of industry and subject matter experts in all the areas in which we invest. We carefully select portfolio company independent directors with deep industry knowledge and/or capabilities that will complement you and your team. Build a strong relationship with your Board of Directors. They are an incredible source of ideas and experiences that can be implemented in your business. Ensure the Board has an in-depth understanding of the investment management plan that you and your private equity partner developed during the transaction process. Schedule monthly one-on-one meetings with key Board members and bring issues that leverage their expertise. Use your Board meetings as strategy sessions to help drive the best decision-making and to ensure your strategic plans adapt to current realities and market forces. Don’t hesitate to raise key questions to the Board – you shouldn’t try to maintain the appearance of “having it all under control”. These efforts will build a strong trust between your management team and Board, resulting in a culture of shared objectives and common successes. In this way, everyone wins, together.

Lastly, it is important to note that private equity firms provide so much value beyond just capital. Firms like New Harbor have vast experience to share and learn from, industry resources and referrals to provide guidance, hiring tools to tap into, and most importantly, connections to form and grow from. We always encourage each of our portfolio company leaders to build relationships with one another – these CEOs and founders are experiencing the same challenges and asking the same questions as you. Many have previously been in your shoes and have valuable advice to share on what lies ahead in the private equity process.

These connections and this culture of camaraderie are truly invaluable and will sustain you through whatever challenges are ahead. This is the culture that New Harbor seeks to create through its partnerships.

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