Latest / Exit Algorithms / What Private Equity Buyers Look for Before They Pay a Premium | Marla Capozzi, McKinsey (#96)
Transcript
- Pete Vera, Exit Algorithms: Welcome to Exit Algorithms, the podcast where we decode what it really takes to unlock growth, streamline operations, and prepare your business for a high-value exit. I'm your host, Pete Vera, and today I'm joined by Marla Kapotzi. She's the leader of private capital talent and global innovation at McKinsey Company. She works directly with the world's top private equity firms and their CEOs on what actually creates value. Marla, so excited to have you here today. Welcome to the podcast. Marla Capozzi: Thanks, Pete. I'm really thrilled to be here. Pete Vera, Exit Algorithms: Yeah, absolutely. How about we start off? Do you mind sharing a bit about your background, career journey, maybe what, you know, let led you to eventually become the a partner at McKinsey? and yeah, how you ended up choosing a a focus on private capital talent. Marla Capozzi: Yeah, great. Thank you very much. I've I've been with McKinsey 26 years. And while I'm very much a consultant at heart and a counselor, I've had the amazing opportunity to also be a business builder in McKinsey. And so have been able to build several new initiatives over my time there, starting back in the early 2000s with our innovation practice and combining that into strategy back in the early 2000s. Then moving into digital transformation long before AI and the work that we started to do building those with our clients. Then founded one of the founders of McKinsey Academy. We started to realize that it was really important to start building the capabilities within our clients, not just having us do the work. And that was a really fantastic initiative and also hits on my passion for teaching. I was an adjunct faculty member at Babson College for a while as well. And then that moved into what we're calling CEO Alpha, which is our private capital initiative to really look at the differences in private capital CEOs, what makes them successful, how to onboard into that role, and then also how to build the next generation of CEOs in the private equity, private capital context, which we can talk a little bit more about how different that is. I also spent time at Lotus and Lotus IBM developing some products in the early internet days, which is such a long time ago, but always fun to really think about. And then spent a lot of time at Babson where I did some adjunct teaching. I'm a graduate. I chaired the board for a while, and I still remain a trustee American. Pete Vera, Exit Algorithms: Awesome. Yeah. l I'd love to go in a little bit further, yeah, on exactly what that what that looks like. What did top PE backed CEOs do well that other business owners, CEOs are are not? Marla Capozzi: Yeah, it I mean it's a great question. And let me just go back one step to where we started in this journey. Because a couple years ago, three or four years ago, we asked ourselves the question, is this role really fundamentally different? And we also started noticing that at the time they weren't getting a lot of attention. They weren't getting capability building. They weren't, you know, attending leadership programs. There was a little bit out there, but it seemed to all be the same. So we started really trying to understand what is different about this role and why does it matter so much? And the research, when we started, private companies outnumbered public two to one, now it's three to one, and the difference is only getting greater, which also leads us to believe that if you want to be a CEO in the future, you need to learn how to be a private capital CEO because the likelihood that you'll be a private capital one versus a public company one is really high, given. Just given the numbers alone. So when we looked at what was fundamentally different, we saw a couple things. One, not surprisingly, it will not surprise anyone, is the speed and the pace within a holding period. Everyone understands, you know, a private equity firm owns a company or an asset for a certain period of time. A next one might buy it, it might go public, it might have an exit of some kind, right? And then you're always seeking, as your audience is, what is that exit and how do I get ready for it? And how do my I make myself really attractive for that exit? The second thing we noticed is we all talk about prioritization, everyone needs to prioritize. But what we saw in these CEOs was a level of ruthless prioritization against strategic priorities that was very, very different than others. We also observed governance differences, and we also observed that these CEOs are operators. They're not just great strategic thinkers, but their success or failure really hinges upon execution, their ability Pete Vera, Exit Algorithms: Mm. Marla Capozzi: to understand the details, but not micromanage the business. So that was just a little bit of the context that we learned about and that led us to say, okay, we think this is very, very different. So what do the best do versus everybody else? Which gets back Pete Vera, Exit Algorithms: Yeah. Marla Capozzi: to your starting question. Of you know, so what do those best ones do that's really fundamentally different? So let's talk a little bit about those and then maybe have you dive into some of the questions that you think your audience might be really interested in of these. So I'll start with the first one: is the best CEOs are always looking at the full potential of their business. They're reassessing the internal marketplace, the competitive landscape, traditional, non-traditional competitors. The external factors like geopolitics and things that they're not in control of. And they're constantly saying to themselves, Am I achieving the full potential that this business can achieve? Not am I meeting my targets? Those are two different questions. It's really easy to say to yourself, Am I meeting the targets that I said I would meet? Versus, am I really achieving the full potential that the business has in the landscape right now? So that's the first thing, that they're always looking ahead to that ambition. The second one is they have a real granular understanding of what the unit economics are of the business. Oftentimes people assume the CEO is flying at 30,000 feet, but private CEOs have to understand the real detail. And they need this to make great decisions on finding bad revenue, driving profitability, and the like. So they don't micromanage, as I mentioned before, but they understand the details. Really significantly. Pete Vera, Exit Algorithms: Mm. Marla Capozzi: The third is, and this surprised me a little bit, to be honest, when I started conducting my interviews, I didn't assume that most of the CEOs would really be out to develop a sustainable long-term business. Private equity has an image of flip three years, five years, flip, get out, Pete Vera, Exit Algorithms: Mm. Marla Capozzi: move, etc. We all know the you know the conventional wisdom of it. But that has really changed. These CEOs are very focused on. One said to me, sure, you know, it's a it's an interesting idea to, you know, cut my workforce by a third, but I'm in a community and I'm in a community that I care about. And I'm not going to do that because I'm going to find other ways to build a sustainable business. And so those types of comments really led us to believe we need to understand more about how we're they're thinking about developing great organizations. And so that's another thing. They're just really thinking about the sustainability long past themselves. The third Pete Vera, Exit Algorithms: Mm. Marla Capozzi: thing I'll say is they're very good at assessing their leadership teams. As I'm sure everyone in your listening, in your audience knows, it's really hard to hire and fire quickly. Everyone regrets the pace at which they move. But the best CEOs do have a really good understanding of what is needed and when they're willing. And have to make a change on their leadership team. So they think about that in the short term and the long term and have the courage to make those choices. And long term is really one to two years at this point. So we're not that Pete Vera, Exit Algorithms: Hmm. Marla Capozzi: long term, but one to two years. The fourth thing I'll say is they execute relentlessly as operators. So private company CEOs are very operationally driven and focused. Great strategic thinkers, but again, really, really focused on. The three to five KPIs, communicating those to the entire organization, and making sure everyone is driving towards that alignment on those KPIs. And the last thing I'll say and pause after that is they really manage their time like capital. They are so disciplined Pete Vera, Exit Algorithms: Mm. Marla Capozzi: about their time. And when we talk about the leadership team, we can talk a little bit more about how they choose to spend their time and some of the debates right now, but they're very ruthless about their calendar. protecting their energy, protecting their thinking time, and making sure that they're spending their time on the right things. Pete Vera, Exit Algorithms: Yeah. love it. Yeah. Focus on the focus on the a few things that matter most, it it sounds like. Marla Capozzi: Yeah. And while that's easy to say, we all know how hard that is to do. And that's part of the challenge here. And that's why I always come back to the operating and the execution side of things, because, you know, we can easily talk about, I can say, Pete, you need to prioritize, pick your three things. And you're like, yes, okay, I get it. I get it. But that doesn't mean it's an easy thing to do. Pete Vera, Exit Algorithms: Yeah, absolutely. Yeah, the well, there's a lot of different routes we could take this. how about we focus first on building a a team, a leadership team? we talk a lot about on the show is is owner dependence, eliminating key man risk if if you know, you're passing the bus test if the owner leaves for 30 days. do Marla Capozzi: Yes. Pete Vera, Exit Algorithms: you have any advice for small business owners? who wanna build a a business that that runs without them. How do you advise they train their managers to step up? Marla Capozzi: I love the question. I also really like the framing of, you know, what if something happened? Could this sustain me without me for 30, 60, 90 days or whatever that would be? That's a real, that's a great sign of amazing leadership, is when the team can operate without the escalation, without the constant checking. And so some of the things that we see the absolute best CEOs do is put a regular cadence in place to think about where they are against. Value creation and strategy. Is the team delivering? Do I have the right expertise? Do I need to enhance, change, or do something different? So one part of it is fit for purpose to the strategy, right? Do I have the right expertise that I need? But you can't stop there because if you do, you could have the perfect expertise in a team that is completely dysfunctional and not working together well. So the second dimension is what is our operating model? Do we trust each other? Are we innovative? Are we really working towards the same goal? And do we have complete alignment? So when things are dysfunctional and there's not trust, or somebody walks out of the room and says, yeah, that was an interesting meeting, but I don't agree with it, versus saying it in the room, that's where the problems start. And so CEOs need to figure out how to have the healthy debate, how to make sure that all the conversations happen in the room. I have one CEO that said they eliminated the phrase. And I recently heard this. I think the new CEO, Spotify, did the same thing, where let's take that offline is not allowed to be said in the room. Pete Vera, Exit Algorithms: Mm. Marla Capozzi: Then there's no offline. It's all in the room, in the team, versus all the side conversations. And then the other part of the third part of it is making the operating model a discipline. So is the CEO and are the all the team members having those honest conversations about what's working, what's not working, how do I do how do we all operate better? And oftentimes what I see is a team of leaders, not a leadership team. Pete Vera, Exit Algorithms: Mm. Marla Capozzi: Team of leaders who are running different parts of the business come together to talk about it versus a true leadership team where I say, I'm willing to make a trade-off, Pete, so your business can be successful and let's make this choice together in service of the enterprise as opposed to in service of my unit or your unit. And so I would have them think about those three things the fit for purpose expertise, how are we operating as a team, and how are you constantly evaluating how you're operating? As a team, and then being willing to make those changes along the way. And the healthy debate is huge. Most people don't understand how to truly debate. There is a practice. Like there is a way to have a great objective debate, but we often don't put those things into practice. Pete Vera, Exit Algorithms: Yeah, love it. Yeah, and having that as part of your culture I I think is really important. Marla Capozzi: Yeah. And every other team member will continue to do it. If they observe the senior team doing it, they will do it and so on and so on. And they'll know that it's okay, that they don't have to ask permission to do those types of things. And there's lots of debate, interesting debate going on right now that I'm having where do you have one on ones with your team or do you not? Interestingly, this is a huge debate, right? Because some of the, you know, great CEOs out there have Wide-ranging differences on number of direct reports. People say that's not best practice. On Pete Vera, Exit Algorithms: Mm. Marla Capozzi: the other hand, people will say I have one-on-ones every week. Others will say I don't do that because it doesn't allow for alignment. So I guess my last piece of advice on the fit for purpose team would be to have each CEO really think about what works for them. Don't copy the best practice because if somebody senses that you're not authentic, then they're gonna notice it in a minute and they're gonna think you're Pete Vera, Exit Algorithms: Yeah. Marla Capozzi: copying something else versus doing what works for you. And also just being honest about it. This is what's working for me. Let's try it out. Give me your feedback and we'll go from there. Pete Vera, Exit Algorithms: Yeah. great advice. Yeah, and I you also mentioned choosing the right KPIs to track track your unit economics. I'm curious, you know, there's there's some businesses that that might be tracking the wrong KPIs. What what are some ways to make sure you're focusing on the right metrics that that drive your business forward? Marla Capozzi: That's a great question because oftentimes we want to pick the metrics that we know we can hit, or pick the metrics that are relevant in some contexts but not the others. And this is where that alignment piece, especially for you know your audience members that have boards and also the team, because this is a way to get alignment. These are the three KPIs. Let's really push on these. Does it drive the business? Does it drive value creation? And does it get us where we want to go? It's very easy to track things that are on an upward trajectory that may not result in that sustainability or get you towards the exit. A lot of times we see and we talk with CEOs about plan for exit on day one. Imagine it's day one of the business and you have to plan for your exit, however many years out. What are your scenarios and your options to get to that exit? Work yourself back to today and then ask yourself: okay, interesting. What would I do differently? You can't pre you can't plan the exit, you can't predict the exit, but you can be prepared for multiple scenarios. Pete Vera, Exit Algorithms: Yeah, love it. Begin with the the end in mind. yeah, I'd like to double tap on that, preparing for an exit. What are what do you see is common in in businesses that have a a successful sale or partnership with with private capital, private equity? Marla Capozzi: Yeah. One of the things that's really important, surprisingly, and it's not going to sound very exciting, but it is the equity narrative. We hear from the private equity sponsors when they are learning about new assets and diligencing new assets that the exit story and the narrative and the equity narrative is just not inspiring or not hanging together or I'm not getting what I need out of it. And so I would really encourage CEOs to think about what is my equity narrative? Why is this an attractive business? Why would somebody want to take the next step towards an exit? And an exit really isn't an exit. We call it an exit, but it's really the next phase of the business, whether it goes into another private equity, a strategic or public. The reality is you're building towards the future. And if people reframe exit as how do I build towards a great sustainable future, you might think differently about the exit model and what your options are and what you do now. I think that's an interesting way to just reframe exit, because if we're thinking of exit, cash out, leave, leave it on its own, that's one thing. But what I have found is most leaders aren't interested in doing that. They really want to build a great sustainable business, even if they're not leading it, they want somebody else to lead the next phase of that great business, especially the founders. I mean, imagine you know the founders really care about the brand and the business. And oftentimes I tell like new CEOs or people who want to become CEOs, if you can't love the brand like a founder, you should really think about whether or not you want this job. Pete Vera, Exit Algorithms: great, great advice. Definit definitely agree. Exit can mean a lot of different things, but be at least having a target of of where you're going and you know, making sure Marla Capozzi: Okay. Pete Vera, Exit Algorithms: you're prepared for that, right? Marla Capozzi: And the scenario planning, interestingly, even though it's a very old tool, it still works. It's the best way to handle uncertainty, prepare for multiple options, prepare for unplanned futures. It still is one of the best ways to do that. And interestingly, what I also see is many of the organizations are prepared for the downside, but not the upside. So what if you are wildly successful? Are you prepared to deliver, whether it is your supply chain or your products or whatever happens to achieve the demand and the success versus just protecting the downside? And that happens in exit too. What if we are really successful, but we can't deliver? That will harm your exit opportunities. Because you're not Pete Vera, Exit Algorithms: Definitely. Yeah. Marla Capozzi: delivering at the commercial side of the business. Pete Vera, Exit Algorithms: Definitely. Yeah. I love it. Yeah. And and I know I was listening closely to your background. You you were working with McKinsey when the internet came around. I'm Marla Capozzi: Okay. Pete Vera, Exit Algorithms: curious how have how have you have you been able to compare some of the changes the internet brought on in business versus AI these days? Marla Capozzi: I think you could probably say there's a few similarities, but it's really different. It's really, really different model in terms of how it's affecting all of us and penetrating things so quickly. And it's interesting to think back then that we thought the internet came on really rapidly. Right? I mean, I was at Lotus when there were 500,000 Lotus Notes users and 500,000 Netscape users. And that was it. And we in the we were in the middle of the Venn diagram of using both of them. And it took a quite a long, quite a while to get to that full penetration. And it really was business focused. And what we're certainly seeing with our clients is AI has an emotional dimension that the internet didn't have. So many, you know, CEOs are dealing with organizations where on one end of the spectrum, People think AI is going to save the world. And on the other end of the spectrum, they feel like it's the end of humanity. And so there is some deeper emotional side of this and it's changing more how we operate as people, whereas the internet changed how we operated as a consumer. And that's, I think, the difference for leaders that they really have to think about. And we're starting to see that within teams and talent and is an agent a person. We weren't talking about this back in the internet. I mean, is e-commerce a no, you just people were debating whether or not we would all put our credit card online. I think we s we know how that ended. We don't know how this ended, but there still is the commonality is there will always be uncertainty. There'll always be something new. There'll always be something else. And it's a hard time from that standpoint to be a CEO, right? Pete Vera, Exit Algorithms: Yeah, definitely. Yeah, hard to predict. I'm I'm curious, have you how have you seen businesses successfully implement AI? Are are there any strategies around you know choosing the right tools and and change management? Marla Capozzi: On the tools front, I couldn't even begin to tell you. And I would love it if you found someone who could. I'd certainly be welcome to learn, learn from them. I have no idea on how that is going to shake out. On the change side of things, I think this is where it's really interesting because a huge part of it is awareness, fluency, adoption, what to do, how to how to get started. And if you think about just the leaders having to learn this as individuals, use it as a team, understand how it fits their business, all at the same time continuing to operate their existing business. It's very, very challenging from, you know, from that standpoint. But those that I have seen be most comfortable are the ones that have taken personal time to learn, which is not easy, and learned as a leadership team. So how are we as a team? Let's go on some visits together, let's learn together, let's bring coaches in, whatever that is as a leadership team, and share those ideas and opportunities and experiments as well. Pete Vera, Exit Algorithms: Yeah. that that makes a lot of sense. Yeah, I I've I ask a lot of my guests this question. So some people have told me choosing the right tool, while yes, there's so many tools out there and many of them might serve your purpose. it's it's about finding a a specific outcome that you want, a a KPI, some very s one like specific task that you that you want to do. and getting a a tool to do that rather than, you know, like the silver bullet fallacy of choosing an AI tool or suite that you expect to do everything. Marla Capozzi: Right. I think the use case is also going to keep changing, right? And you're going to keep getting things are going to get better and better. And as the saying goes, the AI we're using today is the worst AI you'll ever use because it's just constantly, you know, changing and evolving and along the way. I mean, I personally, you know, it it it it's up and down. I feel like I learned something, I go two steps forward, one step back, I try something new, and you know, I have a I have a lot of empathy for. the leaders who have to do it, do it with their team, drive their organization, build that fluency, all at the same time, they're doing everything else. Pete Vera, Exit Algorithms: Yeah. definitely challenging. yeah. So y you you do a lot of work in in talent as well. I'm curious, you know, how do you view talent management? and is it a driver for value? Or you know, a lot of businesses view it kind of as a cost center. So yeah, what are your what are your thoughts on that? Marla Capozzi: Love for people just to reframe talent. And instead of thinking about this as a cost center, think about it as a value creation lever. And if you reframed talent and said, my talent is a value creation lever to execute on the business, how would I think differently about it? How would my top team spend their time? Do I understand the talent of value roles across the organization? So which roles drive the most value? And now there's teams and agents, and where should I start putting that in order to think about driving value creation, which is both productivity and innovation, right? From that standpoint. The other piece is culture. And everyone has so many different views on culture. What the best private equity CEOs do because of the prioritization is they think about the one shift. That's gonna make the biggest difference and have the highest ROI, and they almost forget about everything else. It's easy when we get to culture to say there's five from two shifts and six values, and then we're gonna do this, and then we're gonna do that, and then shortly after that, nobody can even repeat what it was. But if you have one shift, everyone will remember that, and everyone will go in that same direction along the way. So they really focus on the one shift, and then it brings the entire organization along. I think the other value creation lever is succession. And a lot of times we think about succession as just who's going to fill my spot, who's going to take over chief marketing officer, who's going to be the next chief commercial officer. But succession is also a culture. And so with great succession planning, you have high potentials, you have people knowing they can achieve more. You think about that as a value creation lever of preparing. Both the talent and the strategy for the next generation and the next buyer and the next exit. One of the most creative CEOs that I've worked with really went after talent to prepare for exit and went Pete Vera, Exit Algorithms: Hm. Marla Capozzi: through all the levers and said, I want to be able to tell the story in my equity narrative that I have the next CEO picked. I have a top team that is ready for the next two years. I understand my talent to value. Here's where I'm putting agents. Here's my succession plan. Here's my culture. Here's where I have, you know, AI adoption. Here's what needs to be worked on. And he was able to make that part of his equity narrative an exit story. And what he was getting was a lot of traction because the next buyer who always has to deal with: do I change the CEO? Do I change the top team? Am I happy with the culture? What is the talent risk? Didn't have to worry about any of that. Pete Vera, Exit Algorithms: Hmm. Yeah. Marla Capozzi: So it was a real positive to say, not only have I thought through the business strategy, but I have really thought through the talent and culture and I've got that ready for you. Like it's, it's ready to go. You can change what you want, but here's what I've done to prepare. Pete Vera, Exit Algorithms: Yeah. wow. Yeah. Of course that adds a ton of value. Marla Capozzi: Немає. Pete Vera, Exit Algorithms: that's awesome. Great great advice. Wow, Marl, this has been an incredible conversation. I I know we're up on on time here. I just have one final question for you. Marla Capozzi: Absolutely. Pete Vera, Exit Algorithms: If you could pick one practical tip for business owners wanting to prepare for a successful exit, what would it be? Marla Capozzi: One practical tip. That's gonna be a hard one. I would really make sure that it was the equity narrative and alignment. Because alignment is hard to fix. And the exit, if you have full alignment and the everyone is moving in the same direction on both the strategy and the talent, I would probably pick making sure you have that. Because if not, it turns into a lot of surprises along the way. And being really great, Pete Vera, Exit Algorithms: Great advice. Marla Capozzi: that also connects with being really great at your board management and your stakeholder management. Pete Vera, Exit Algorithms: Hmm. Yeah. Awesome. Well, really good advice. You got some some great pointers here. I I think I'm gonna have to relisten to this this episode myself. loved having you on, Marla. Where's the best place listeners can find you? Marla Capozzi: LinkedIn is probably the best. I post a lot actively on private capital and CEO lessons and a lot of our work there. So that's probably the best place to find me and and message me from there. Happy to happy to connect and share more share more stories. Pete Vera, Exit Algorithms: Awesome. I'll leave that in the show notes. Thanks for coming on today, Marla. Marla Capozzi: Thanks, Pete. Great conversation with you.