CEO alpha: A new approach to generating private equity outperformance
CEO alpha: A new approach to generating private equity outperformance
https://www.mckinsey.com/industries/private-capital/our-insights/ceo-alpha-a-new-approach-to-generating-private-equity-outperformance
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To create and sustain high performance, private equity sponsors must make building distinctive PE CEOs a priority. Here’s how.
Private equity (PE) sponsors and portfolio companies continue to view operational improvements as a crucial lever for realizing outsize returns.1 But there is another important enabler of PE value creation—what we call CEO alpha, or the value created from CEOs’ outperformance. If the PE portfolio company CEO, who calls the shots and makes the strategic decisions, lacks the right leadership capabilities, targeted operational improvements are less likely to be sustained or may never materialize.
McKinsey research shows that top-quintile CEOs have historically delivered total shareholder returns that are 9 percent above industry peers in each year of their tenure. In industries such as financial services and automotive, these high-performing CEOs have achieved excess total annual returns of 16 percent on average.2
Against this backdrop, it’s clear that CEO alpha is an idea whose time has come—or is maybe even overdue—in the rapidly evolving PE industry. Private equity sponsors generally agree. They increasingly cite leadership as an important source of EBITDA growth and value creation alongside the usual performance levers (the targeted operational improvements as well as technology innovation, financial leverage, and multiple expansion). Indeed, in a 2022 survey of general partners, 94 percent say they believe PE portfolio company leadership contributed an average of 53 percent toward investment returns.3
In our own conversations and work with PE CEOs and sponsors, all acknowledge the importance of CEO alpha and agree that they could, and should, do more to build PE portfolio company CEOs’ capabilities to realize outsize returns. Industry research suggests the same. For instance, among the general partners polled in the 2022 survey, 8 percent say they are committing money, 27 percent say they are deploying resources, and 36 percent say they are putting in the time to optimize PE portfolio company leadership.4
What’s more, playbooks for intentionally building leadership excellence in private equity have been scarce, which represents a huge missed opportunity: investing in human capital now can pay off over the longer term.
To achieve CEO alpha, PE portfolio company CEOs need distinct capabilities—those that go beyond typical leadership traits found among the best public company CEOs—and that account for PE-specific time horizons for investment and exit and speed to impact. In this article, we provide an overview of those capabilities and the ways to achieve them. Whether the CEO is new or an experienced leader, an expert practitioner of PE, or someone with a more diverse background, the essentials of CEO alpha can be customized and adapted to meet their unique context and opportunities.
Why CEO alpha matters in private equity
PE portfolio company CEOs face unique challenges in an already complex role. The level of autonomy in decision making, the degree of focus on EBITDA, and the way that boards govern are different in PE portfolio companies than in other companies. “There is less freedom within strategy setting,” the CEO of a PE-owned healthcare company told us. “Where to compete is also more tightly defined, because of the time-bound nature of investments.” Another PE executive, based in Canada, noted that EBITDA is a central theme in all conversations among the portfolio company CEO, the board, and the general partners.
Changes in the global economy and the broader business landscape have only made the job of these CEOs harder. Private equity is not immune to cyclical economic challenges such as the elevated risks of a US recession, high interest rates, and inflation. It also faces digitization, sustainability, the changing geopolitical order, and other disruptive trends that are likely to have profound and lasting consequences on the investing ecosystem. These headwinds, coupled with the volatility in financial markets, slowing IPO activity, and falling tech valuations, are weighing on PE deal flow, fundraising, and performance.
In addition, PE portfolio company CEOs tend to come from varied backgrounds. Some may have a science background or previously led public companies. Often, company founders grow a small business to a certain level, take in private capital, and suddenly find themselves leading a midsize company with very different organizational needs, which they may not have the necessary expertise, experience, and PE-specific core competencies to navigate.
Most leadership development programs are not tailored to the unique needs of this community of CEOs. In fact, in our experience working with PE CEOs, we have not encountered many such programs that have been widely adopted in the industry. The few programs that do exist are usually the result of an enterprising sponsor that is beginning to build a unique capability.
Achieving CEO alpha in private equity
At the heart of the concept of CEO alpha is the belief that leaders can systematically develop the capabilities required to achieve outperformance. Indeed, PE portfolio companies should design their capability-building programs with the essentials of CEO alpha in mind (see sidebar, “The essentials of private equity CEO alpha.”)
A focus on three essentials of CEO alpha, in particular, could help PE portfolio company CEOs address some of their toughest challenges and realize even greater impact: talent management, PE performance management, and strategic planning.
1. Talent management: Building a fit-for-purpose team
Talent management is a top concern within private equity these days. This reflects, in part, the ever-changing competition for talent, but it also reflects the unique executive profiles that PE portfolio company CEOs are targeting, as well as the number of roles they must fill. For example, one PE portfolio company told us that 37 roles among thousands of employees in the organization drove 80 percent of its EBITDA, which prompted senior leaders to change time allocation, managerial focus, and apprenticeship priorities for employees.
Much more than public company CEOs, PE portfolio company CEOs must build their management teams to execute a specific investment thesis. They must find and hire leaders who are execution focused, decision oriented, financially astute and motivated, and able to make consequential decisions quickly. What’s more, PE portfolio company CEOs often have to build and rebuild their teams. For example, on average, they are responsible for filling between 30 and 40 percent of level-two positions (heads of divisions) and 50 to 65 percent of level-three positions (vice presidents).
As one PE executive said in an interview, “Outside of M&A, people decisions are most important, and getting them right is critical.” McKinsey research supports this point: CEOs who frequently reallocate talent are 2.2 times more likely to outperform their peers, and those that get talent right in the first year achieve 2.5 times the return on initial investment.5
How can PE portfolio company CEOs begin to build capabilities in talent management? Keeping the investment thesis and time horizons in mind, they’ll need to identify the roles that will create the most value for the portfolio company and then match talent to value (whether from inside or outside the company). As one PE leader advised, “Do it fast, and early in your tenure.”
PE portfolio company CEOs will also need to institute performance management processes that set “reverse hockey stick” targets (rapidly making decisions that drive the greatest financial benefits the soonest) and make it easier to monitor organizational performance and address unfavorable variances. For instance, a PE portfolio company may expect 60 to 80 percent of all run-rate benefits targeted over a three-year period to be captured within the first six to 12 months. The performance management process must allow for private-equity-style consequence management and provide upskilling opportunities for leaders.
2. Cascaded performance: Using financial and operational dashboards to run the business
PE portfolio company CEOs must be on top of every performance metric at a level of detail unfamiliar to many public company CEOs. Given the short time horizons for meeting value creation goals, they are expected to continually monitor performance, spot variances, and pivot quickly as needed. It’s important, then, for PE portfolio company CEOs to set up robust performance dashboards (and rules for using those dashboards) that take both people and purpose into account.
At a minimum, the dashboards should enable standard reporting, risk management, and identification of key opportunities. They should yield detailed and dynamic performance reports that take pricing, safety, quality, speed, satisfaction, efficiency, and integrated economics into account. The teams using these dashboards should be clear about their roles and operate within the scope of those roles. And CEOs should ensure that dashboards are used in all decision-making discussions across the organization.
This detailed, holistic approach can yield positive results: one PE portfolio company was looking at controlling high labor costs, but a closer look at the company’s integrated performance dashboards revealed that a lack of world-class safety was actually a big factor in the increased labor costs. With this information, the PE portfolio company CEO was able to successfully divert resources to address both safety and cost issues.
3. Strategic planning: Achieving far more in far less time
All CEOs must help to define their company’s vision and strategy, but the process is different for PE portfolio company CEOs. The PE sponsor typically performs rigorous due diligence on a portfolio company, often over a six- to 12-month time frame, and formulates a specific investment thesis. The PE portfolio company CEO is then hired to execute the sponsor’s thesis in a timely manner. That CEO must partner with the PE sponsor and the board on strategy, ensuring that any changes made will create value within the industry’s typical three- to five-year time horizon for value capture. To achieve CEO alpha in strategic planning, PE portfolio company CEOs must embed strategy into their day-to-day work—that is, in every discussion with sponsors, teams, and other key stakeholders, and in every review of performance outcomes and financial and operational results. Strategic actions in this context must be bold, actionable, and executed quickly. “Public companies build aspirational, long-term, often vague visions,” the CEO of a private debt firm told us. “But PE companies need to have clear, tangible short-term decisions. As a PE CEO, you are almost always given the strategy as part of the value creation plan and expected to refine and execute.”
With the essentials of CEO alpha in mind, sponsors can review their portfolios against their value creation plans to identify where the biggest opportunities and capability gaps are and create fit-for-purpose capability building programs for PE portfolio company CEOs.
The prevailing research and our work with hundreds of PE company sponsors suggest that an increasing number of PE firms are doing just this. They are prioritizing CEO development and leadership effectiveness as the means to generate outperformance. They are starting to put just as much emphasis on recruiting, onboarding, peer learning, succession planning, and performance management as they do on other key levers of value creation.
In short, they are beginning to target the essentials of CEO alpha. And the sponsors that get it right can build portfolio companies that attract and develop topflight CEOs and seed the industry with even more high-end talent for the future.
Cruise Companies Are Finally Getting Strict About This Over-the-Top Behavior
Debbie Ann Powell/Shutterstock
https://www.fodors.com/world/north-america/usa/experiences/news/cruise-companies-are-finally-getting-strict-about-over-the-top-door-decorations
Check policies before you pack decorations.
Cruise lovers have a unique way to express their happiness at being at sea: door decorations. Cruises allow passengers to get creative with their stateroom decor, but the trend has gotten out of hand recently, with travelers encroaching on hallways and ceilings. In response, Disney has updated its policy to rein in the celebrations.
Disney says it allows passengers to be creative with “tasteful” magnetic signs to celebrate or have fun. However, tape or adhesive should be avoided, as they can damage the door. Sound or video elements should not be included in these decorations, and walls and ceilings in the corridor must be left bare. Over-the-door hangings are also prohibited, as they can scratch the doors. “Guests who damage doors in violation of these guidelines will be assessed a $100 fee per incident to cover the cost of repairs.”
Door decorating is a fun way to celebrate the journey. Passengers also decorate their stateroom doors on large cruise ships to find their rooms easily when the hallways all look the same. But with social media, the practice has become more competitive, and people plan elaborate themes with string lights, audio items, and hangings. Not only can these ideas damage the ship, but they also present a safety hazard.
It’s also a scenario that causes disputes on board when decor is stolen or vandalized. Disney reminds passengers to avoid using valuable items when decorating their doors. “Disney Cruise Line is not responsible for damage to or loss of these items.”
The guidelines also specify that verandas and railings can’t be decorated. “To maintain the ship’s appearance and safety for all Guests, flags, banners, signs, light strings and other hanging items may not be attached or otherwise displayed from any part of the ship, including stateroom verandahs. Additionally, seasonal and/or celebratory light bulb strings or other hanging items are not permitted.”
Disney is not the only cruise company with policies regarding stateroom door decor. Royal Caribbean sent a letter to passengers sailing on its Symphony of the Seas in May to emphasize some rules: no lithium-powered lights, no covering the peephole, no touching the door frame, and no items that pose a fire risk. “Pro-Tip: Magnetic decorations are an easy and fun way to adorn your stateroom!”
Carnival Cruises only allows fire-retardant decorations, it explains elaborately on its website. “Please note that items sprayed with fire-retardant spray are not acceptable.” Decorations can only be placed on doors, and adhesive and string lights are banned. The cruise company also does not allow decor on balconies or light fixtures. It adds that the decor needs to be respectful to guests and should not contain any hateful or offensive messages.
Virgin Voyages, on the other hand, is firm on its door decor policy: it is not allowed. “We think our lady ships look fabulous as they are, and door decorations inevitably lead to unsightly damage,” the website informs cruisers.
Check the policies before you order or pack decorations, or it may lead to a fine or confiscation. You can also order special decor from the cruise gift shop, or find your way to Etsy and Amazon if you want to add a bit of a personal touch. It may be fun to be whimsical, but keep it under control—safety first.
The 10 Most Budget-Friendly Big Cities in Europe
Anton Aleksenko/iStock
https://www.fodors.com/world/europe/experiences/news/photos/10-most-budget-friendly-big-cities-in-europe
Start planning the trip where you come home with change to spare.
Europe has a reputation for emptying wallets and, in fairness, a long weekend in Paris or Venice can do exactly that. But that reputation only holds if you keep going back to the same handful of cities.
Step slightly off the well-worn track–or in some cases, just east and south of it–and you’ll find proper, full-sized cities where your money goes two or three times further without you giving up a single thing that makes a city trip worth taking.
I’m not talking about sleepy towns where it’s cheap because there’s nothing to spend money on. These are big, loud, brilliant places with grand architecture, world-class food, layers of history you can walk through for free, and nightlife that runs till dawn.
What makes them wallet-friendly is the good stuff: cheap eats that locals queue for (not tourist traps), walkable centers that keep your transport costs near zero, and a daily lunch deal culture that lets you eat like royalty without the price tags to match.
Here are my ten favorites for stretching every dollar, as well as the budget tricks worth knowing and one affordable spot to eat or stay in each. Read on, and start planning the trip where you come home with change to spare.
PHOTO: MARC OSBORNE/ISTOCK
1 OF 10
Budapest
WHERE: Hungary
Budapest is the perfect place to start: a grand city of Danube views, palatial thermal baths and ruin bars tucked into crumbling courtyards, where a brilliant trip asks little of your budget—a typical day runs around €35-65 ($39-74).
Getting around is easy and cheap on an extensive tram, metro, and bus network, though the handsome center is walkable enough that you may not need it much. Plenty of the city’s best moments are free or close to it: strolling across the Chain Bridge, wandering Margaret Island, and watching the sun set over the river.
The famous Széchenyi thermal baths, set inside a former palace, run about a €20 ($23) day pass—they’re well worth it if you arrive early in the day.
And eating well is part of the everyday rhythm here: look for the weekday “napi menü”, a two or three-course daily lunch for roughly 2,000-3,500 HUF ($6-11) chalked outside small canteens, or join the locals at Belvárosi Disznótoros, a standing-room counter serving Hungarian sausages and grilled meats for a few euros.
PHOTO: TOMAS SEREDA/ISTOCK
2 OF 10
Kraków
WHERE: Poland
Kraków packs a remarkable amount into a small, walkable footprint, which is half the secret to doing it cheaply–the medieval Main Square, Wawel Castle and the atmospheric Kazimierz district are all within an easy stroll, so transport barely figures, and when you do need it, the trams are inexpensive and simple.
Much of the pleasure here costs nothing: gazing at the Renaissance and Gothic architecture, climbing the Krakus Mound for views over the city, sitting out in the square watching the world go by.
Budget accommodation is plentiful too, from stylish hostels to modest hotels that suit a short stay. And food stays refreshingly accessible thanks to the milk bar–the “bar mleczny”, a cafeteria-style institution kept affordable partly through government support so that everyone can sit down to a proper hot meal.
Pierogies run about €3 ($3.40) a plate, and you’ll likely share a table, which is half the fun. Bar Mleczny Krakus over in Podgórze is the real thing; Milkbar Tomasza near the old town is the easy central choice.
PHOTO: BRASILNUT1/ISTOCK
3 OF 10
Sofia
WHERE: Bulgaria
Sofia layers 2,500 years of history into one walkable capital—Roman ruins underfoot, golden-domed cathedrals, leafy parks, and Vitosha Mountain rising right behind the city for a day’s hiking that costs nothing but the effort.
Public transport is cheap and reliable, and many of the headline sights–the churches, the parks, the open squares–are free to enjoy. A tip-based walking tour is a lovely low-cost way to get your bearings, and Balkan Bites runs a free food tour that takes you round five or six local spots for tastings.
One quick note: Bulgaria adopted the euro this year, so you’ll now be paying in euros, with a satisfying day sitting around €45 ($51).
Bulgaria’s rich agriculture means real quality shows up at accessible prices: a flaky cheese banitsa makes a €1-2 ($1.14-2.28) breakfast, a bowl at the cheerful soup bar Supa Star is around €3 ($3.40), and a generous spread of traditional dishes at Manastirska Magernitsa, built on 19th-century monastery recipes, won’t stretch the budget much further.
PHOTO: TAKASHI IMAGES/SHUTTERSTOCK
4 OF 10
Bucharest
WHERE: Romania
Bucharest is a city wholly itself with grand boulevards, an enormous Palace of Parliament (around €7, or $8, to tour), and a 14th-century old town, so it’s an easy place to explore well without spending much.
The metro is cheap and efficient (grab a rechargeable travel card), ride-hailing is inexpensive for anything further out, and the cobblestoned Lipscani quarter is best covered on foot anyway.
The free pleasures add up fast: rowing a boat on the lake in King Michael I Park, wandering the botanical gardens, or losing an hour in Cărturești Carusel, one of the most beautiful bookshops in the world. A mid-range day comes in around €40-60 ($45-68), with a local beer or coffee as little as $3.
The food scene prizes substance over polish, and the lunch-menu tradition keeps midday meals great value — at the spectacular 1879 beer hall Caru’ cu Bere, with its stained glass and vaulted ceilings, ask for the lunch menu (it isn’t offered by default) for a three-course meal that can land around $8.
PHOTO: NEIRFY/ISTOCK
5 OF 10
Athens
WHERE: Greece
Athens delivers world-class ancient history alongside some of the lowest day-to-day costs of any European capital. The metro is a flat €1.20 ($1.37) and reaches most of what you’ll want to see, while the historic core–Plaka, Monastiraki, the foot of the Acropolis–is wonderfully walkable.
Several archaeological sites are free on certain days, and the city’s hilltop viewpoints, like Lycabettus and Filopappou, cost nothing for some of the best views in Greece.
Island day trips are surprisingly affordable too: the ferry to Aegina and back makes a full day out for around €30 ($34). When hunger strikes, souvlaki is the everyday backbone of eating here–a warm pita of grilled meat, tomato, onion and tzatziki for €3-4 ($3.40-4.55)–and bakeries everywhere sell a sesame koulouri for under €1 or a cheese pie for a couple of euros.
For the definitive wrap, Kostas just off Syntagma has been grilling pork souvlaki since 1950, around €3.50 ($4) a go; it’s lunch-only and sells out, so head there early.
PHOTO: TRABANTOS/SHUTTERSTOCK
6 OF 10
Belgrade
WHERE: Serbia
Belgrade is a city that knows how to linger: over coffee, over a long lunch, over a riverside evening that always drifts past midnight–and it’s an easygoing, accessible place to do it.
The lively Knez Mihailova boulevard and the green ramparts of Kalemegdan Fortress are free to wander, the Tesla Museum is a modest few euros, and in summer the splavovi (clubs and bars moored on the Sava and Danube) keep the night going at gentle prices.
Getting around is cheap on the city’s trams and buses, though the center is well worth walking. The kafana, the traditional tavern, is the heart of the social scene–a full meal of grilled meats, salads and bread with a drink or two runs between €10-15 ($11-17), and nobody rushes you off your table.
The atmospheric kafanas of cobblestoned Skadarlija, like Tri Šešira (open since 1864), come with live Balkan music; for bigger portions and better value, a neighborhood spot a few tram stops out is the local move. Serbia uses the dinar, so carry some cash and skip the blue Euronet ATMs, which charge steep fees.
PHOTO: PROSLGN/SHUTTERSTOCK
7 OF 10
Porto
WHERE: Portugal
Living just down the coast, I’ll always make the case for Porto: winding medieval lanes, blue-tiled facades, and sunsets over the Douro that, in my eyes, are priceless. The city is steep but very walkable, and an inexpensive metro and historic trams cover the longer hops, including out to the beaches at Foz.
Some of the best of Porto is free or nearly so, like crossing the Dom Luís I bridge on foot or wandering the riverside Ribeira. Across the water in Vila Nova de Gaia, several of the port lodges run tastings that are a bargain for what you learn and sip.
It all runs on a warm, working tasca culture that keeps everyday eating good value, anchored by the “prato do dia,” a Monday-to-Friday lunch special of a main, often a starter, a drink and sometimes dessert for €8-15 ($9-17).
Casa Guedes does a roast-pork-and-Serra-cheese sandwich for under €5, while Café Santiago serves a definitive francesinha, the city’s gloriously excessive signature sandwich, for around €10.
PHOTO: STEPANIDA POPOZOGLO/DREAMSTIME
8 OF 10
Valencia
WHERE: Spain
Valencia brings together Mediterranean beaches, a beautiful old town and futuristic architecture at a gentler pace (and matching gentler prices) than the bigger-name Spanish cities up the coast.
Its masterstroke for budget travelers is the Turia, a former riverbed turned into a 9-kilometer ribbon of free park that loops through the city, perfect for a low-cost day of walking or cycling. One thing to note: while the Valenbisi bike-share looks cheap, its frustrating return system means you’ll get a better deal renting a bike from one of the many shops around the city.
The beaches at Malvarrosa and Patacona are free, and the beautiful 1920s Mercado Central is free to wander–build a picnic of jamón, Manchego, bread and Valencian oranges there for about €12 ($13) for two and eat it under the palms.
Lunch is where the value really lands: the menú del día, a three-course set meal with a drink for €12-15 ($13-17), is the everyday meal that feeds the working city.
Inside the market, Central Bar by Ricard Camarena turns a Michelin-starred chef’s cooking into relaxed, well-priced bar food.
PHOTO: DZMITROCK/SHUTTERSTOCK
9 OF 10
Vilnius
WHERE: Lithuania
Vilnius is the most affordable of the three Baltic capitals and one of the most underappreciated cities on this list–a baroque, cobblestoned old town dating to the 14th century, compact enough to explore almost entirely on foot.
And so much of its charm is free: getting lost in the old town, climbing the Hill of Three Crosses for the view, or crossing the river into Užupis, a bohemian artists’ district that playfully declared itself a republic and posted its own constitution on a wall for anyone to read.
When you do need transport, it’s cheap and straightforward. The “dienos pietūs” lunch deal, a hearty midday plate for €7-12 ($8-13), sits at the center of Lithuanian dining culture–and hearty is the word, with two cepelinai (pork-stuffed potato dumplings under sour cream and bacon) enough for a meal.
Šnekutis, a rustic, unpretentious tavern, is where locals gather over cepelinai and a pint of local beer; for a quick bite, grab a kibinai (a flaky meat pastry) from, well, any bakery you stroll past.
PHOTO: PHOTOS BY PATRIK/ISTOCK
10 OF 10
Naples
WHERE: Italy
Naples is one of the most exhilarating cities in Italy–dense and endlessly alive, built over 2,500 years of layered history–and one of its most affordable, with a budget day coming in around €40-70 ($45-79).
The dense, historic core is a free-to-walk UNESCO site, and the savings are everywhere: more than 400 churches double as free museums, the Spanish Quarters (home to the giant Maradona murals) cost nothing to explore, and a €1.20 funicular carries you up to one of the best views in the Mediterranean.
Day trips are kind to the wallet too–Pompeii is reachable on the Circumvesuviana train for under €4 each way. And because this is the birthplace of pizza, the city’s most famous food is also its cheapest: a margherita at a legendary pizzeria runs €5-6, an espresso taken standing at the bar is €1, and a “pizza a portafoglio” folded into a wallet shape to eat on the move is about €3.
The institution to seek out is L’Antica Pizzeria da Michele, going since 1870 and serving just two pizzas; take a ticket, bring cash, and go at lunch to skip the queue.
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