As economic pressure mounts, more corporate carve-outs are on the cards. These primary buyouts have been lucrative for private equity, but they require more work than SBOs, where processes and management have already been aligned for entrepreneurial governance.

Corporate managers usually have little experience with private equity and the implications of new PE ownership. Leadership skills and habits that got them to the top of the corporate ladder are not fit for PE’s entrepreneurship.

Corporate managers often fail to understand the risk profile of the PE owner, who looks for alpha and is willing to take calculated bets to achieve it. Increased risk tolerance has implications for strategy, with more crisply defined measures in a clear ‘value creation plan’.

This presents corporate managers who are used to pursuing many diverse initiatives with a dilemma they had never faced. They are forced to commit to delivering on a limited set of measures and achieve results, making choices and thereby potentially being called out as “wrong” - the most common way to end a corporate career in an environment where doing a bit of everything is the surest way to avoid doing the wrong thing.

Differences in risk profiles also have an implication for the speed and assertiveness of implementation. Corporate managers often move too slow in order to avoid perceived political or organisational risk. Making bold moves to re-organise, right-size or re-allocate resources runs a number of risks that could inhibit career progression or impair performance. Corporate managers therefore often hesitate to make needed internal changes.

These issues are heightened by the personal insecurities and gulf of mutual understanding between the management and deal teams. Knowing that most primary-buyout CEOs don’t make it to the exit, there is an understandable level of concern and an unhealthy desire to appear competent, even though many primary-deal managers “don’t know what they don’t know” about private equity. In the worst case, there is a breakdown of communication or even withholding information from the sponsor. Stresses can build in the relationship until they break and the management is replaced.

Carve-out risks can be avoided by investing more time upfront to clarify expectations about private equity governance in both directions. Remarkably, very few fund managers invest time immediately post-deal to level with management on what entrepreneurial governance means for them. The most robust approach utilises a neutral third-party like Humatica, to onboard new management and deal teams. Onboarding includes team-building topics like transparency on personality profiles, business-building and an introduction to the demands of entrepreneurial governance by successful portfolio company executives. Investing just a few days upfront for proper onboarding reduces the risk of delay and management changes by more than half over the life of the deal.