The allure for executives of having private equity ownership

Would it be better to be a CEO accountable to Steve Schwarzman rather than Nelson Peltz? Schwartzman is the founder of private equity giant Blackstone, which made its name by taking companies private through leveraged buyouts. Peltz’s Trian Partners, on the other hand, is known for its activist campaigns at public companies. Most recently, Peltz has been pushing for change at Disney, where CEO Bob Iger is now cutting 7,000 jobs along with $5.5 billion in annual cost cuts.

A recent academic paper examined the differences in the selection of CEOs in public and private companies. The learn, by Paul Gompers, Steven Kaplan, and Vladimir Mukharlyamov, noted that a previous study found that 72 percent of S&P 500 CEOs surveyed between 1993 and 2012 were internal promotions. A recent example is Amazon veteran Andy Jassy replacing Jeff Bezos in 2021.

But in private equity takeovers, the latest newspaper found a very different job market. In nearly 200 deals between 2010 and 2016 valued at over $1 billion, private equity firms fired the current CEO 70 percent of the time. And among succeeding CEOs, more than 70 percent were contingent workers who were brand new to the company, although they typically came from the same industry.

Perhaps most interestingly, the study found that paying CEOs in PE-backed companies was very lucrative when you add in the usual 2 to 4 percentage points of the company’s equity.

The authors estimate that a private equity CEO could make between $9 million and $17 million annually, accounting for such stock allocations. A mid-cap public company CEO made about $6-$7 million. (However, it may not come as a surprise that private CEOs in companies with leveraged capital structures outperformed during a period of rising valuations.)

The study concludes that the market for private company CEOs is extremely dynamic. And with rising investor activism from public companies — even legendary executives like Salesforce’s Bob Iger and Marc Benioff are no longer safe from the likes of Peltz — working on behalf of a private equity firm could be an attractive, if less visible, place to start to run a company.

A large, high-profile public company is a unique place for quarterly conference calls and investor conference calls to make headlines. Iger was successful enough in his first tenure as Disney CEO to write a bestseller. Benioff has been a star of the thought leadership scene since founding Salesforce.com.

But along with the profile comes pressure. One often cited requirement is to hit a quarterly profit target to the nearest cent in order to satisfy institutional equity funds. Oil baron Harold Hamm took his drilling company Continental Resources private in 2022 after concluding that his preference for more exploration and production rather than dividends and buybacks would not be tolerated by public shareholders.

Some CEOs prefer to respond to a private equity owner with a single vision for a company backed by an active board. The downside is that a private equity executive can be reckless and impatient. But one boss who stayed with a company that had exited the public market in an LBO told me he was thrilled to work with a board that was more diligent and committed than is typical of a public company, which often has directors with different professional backgrounds only meet four times a year.

A veteran investment banker noted that corporate governance of public companies often feels like a check-the-box exercise. “I expect most CEOs will tell you that board meetings are 90 percent procedural and generally worthless.”

The study’s authors speculated that in part, S&P 500 companies preferred to hire primarily in-house, either because their businesses were complex or they felt there was little to gain by going external.

It’s also true that external hires can bring risks – cultural and otherwise. Promoted insiders may also have longer-term return horizons than aggressive private equity firms.

As for talented executives, successful stints in a public company can lead to a unique kind of fame. Rising stock prices of large companies made Iger and Benioff iconic figures in a way not easily replicated in a private company. But the headache of being scrutinized by disgruntled investors, politicians, and activists makes the job a lot harder these days. The good news for her is that a private equity firm may well be calling her very soon.

sujeet.indap@ft.com