Private Equity Spotlight: Doron Grosman on Shaping Success Across Sectors

everyone, and welcome to the Karma School of Business. I am Reena Phrakht, Managing Director and Head of Client Coverage here at Blue Wave. Today. I am thrilled to have with me a distinguished figure and a dear friend who is well known in the realm of private equity, Doron Grossman. Doron, it's fantastic to have you on the show.

Could you start by introducing yourself to our listeners?

I started my career at Bain, and then I spent 11 years at GE. I'm also an engineer with an MBA. The second phase of my career, I then spent about 20 years in private equity as an operating partner at Court Square Capital. They're a middle market private equity firm with fund size of $3 billion. Then I've been a serial CEO and interim CEO of Portco's at Global Container Terminals, Physiotherapy Associates, DISA.

Most of these businesses, Reena, have EBITDA ranging, say, from $50 million to $500 million. I've worked for many years with boards, the nominating committee, the audit committee, compensation, et cetera, et cetera. At this point in my career, the third phase, I'm mainly doing private equity board work and investing on my own account in startups through venture capital and angel investing.

That experience allows me to be very comfortable with educating and coaching and mentoring and guiding management teams. Certainly, from a leadership perspective, I think leadership is all about followership. You create a vision, you set standards that are realistically aspirational, you paint a future with hope, and then you drive execution to create distinctive value. I've always tried to lead with empathy and compassion, but holding people accountable. I tend to be rather consensus-driven, but only to a point.

I try really hard to be an active listener who holds my thoughts to the very end. Now, that's from a leadership perspective. From a collaboration perspective, you can't really succeed today, Rina, without having collaboration as a behavioral attribute. Every leader will fail without being collaborative, because collaboration is required with customers, suppliers, partners, the board, the management team. To me, collaboration really means transparency, honesty, attentive listening, and then constructive debate and effective, data-driven decision-making.

When I tend to think of the management of private equity, the important thing there is to figure out what the private equity metrics are. They're EBITDA, they're multiple expansion, they're free cash flow, and then get those metrics cascaded within an organization all the way down so that every person in the organization understands what they're going to contribute and also make sure that their bonuses are associated with these financial metrics, maybe 70% financial metrics and 30% behavioral metrics. That's how I tend to guide and lead management teams and portfolio companies.

There's M&A work being done constantly. You don't have quarterly earnings, so that's not a target for private equity and certainly not in the public. But you really have to be disciplined and focused on cash, with a rolling 13-week cash flow forecast to make sure you don't breach covenants. Constantly, I have to be engaged with the board, focused on EBITDA and speed to value, and that's more prized than meticulous planning. Now, in the public domain.

as a CEO, only about 25% of fortune companies provide earnings guidance, and there's no exit. that's needed to be achieved. What you're really doing there, in my judgment, is managing the equity analyst's expectations and relative competitive positioning of your company versus your competitors. You obviously have to be engaged with the board and focused on governance and ESG and DEI, succession planning, certainly, the audit, the risk. But there's very little operational engagement that a public board has.

The boards tend to be rather formulaic and check the box. Sometimes they can be a little bit stuffy, but the focus there is entirely on earnings per share.

I have tended to find that the equity investors know the private equity firms that own other portfolio companies in the space, from whom maybe you'll do a buy of an add-on to your company or maybe you'll sell to. I think that tends to be the focus of the equity investors. Now, if I turn my attention to the independent board members, that's rather different. They create more of a balance between management and the equity investors. My experience has been they're more pragmatic.

They set an appropriate speed and cadence. They have a very good balance between what needs to get done immediately and what can be left for next year or three years' time, so that things tend to be more smoothed out. They're certainly very strategic. Some bring deep domain expertise, so it could be within an industry that your business is, or maybe in a function, like the chair of the audit committee, could be a serial CFO, independent director, and some of them do bring operational value. So that's how I tend to think, Reena, about the difference of the board role between the equity investor and the independent board member.

as soon as we've got the full complement and strength of the management team in place, we'd start a piece of strategy work. It could take four weeks to eight weeks, not longer. Sometimes we'd use a consultant. Sometimes we wouldn't. And we would finalize the five-year strategy plan based on the investment thesis that was created.

But then we would translate that five-year plan into an operating plan, a financial plan, and a cash flow plan. So you've now got a strategic plan, an operating plan, financial and cash flow plans. And then we update those, let's say, every 12 months or so. From a governance perspective, I think it's very critical that the board, especially a private equity board, is involved in governance in a meaningful way. I like to be a little bit more formalized and scheduled on governance, with clear and transparent objectives and agendas.

I tend to find that's an easier way to lead the company as a CEO and also manage the board. And that's true for the board and its committees, regardless if we're talking about the audit committee, the HR committee, the ESG committee, or whatever. And I like to coach the CEO and the management team to assist them to be at their very best in terms of priorities, the content, and their delivery for board meetings. So I tend to divide the board agenda into three parts. One is for information only.

So take a quick look, ask a few questions, let's move along. The second is really for discussion and input. But we don't have to make a decision at this board meeting. We'll come back to the board later on for decision making. This is for discussion and input.

And then the third is, OK, we're ready to have the final decision made here. Let's discuss it and let's make a decision and then move along. So that's how I tend to think, Rina, about strategy and governance.

The words, the body language, and the tone when delivering that message all matter a lot. The CEO often knows that she or he is not the right person to the job, and it's just that they have to evolve emotionally to accept that as an outcome. This is not an easy thing at all and certainly a very, very significant challenge. So I'd give that as one example, Rina. The other example is I had to go in as the interim CEO to a port co for six months while I hired and onboarded my replacement.

So I had been operating as an operating partner for that port co, but there needed to be quite a rapid and large swing in the minds of everybody of me being the operating partner to me now being the CEO. And people really needed to understand that and we had to avoid any confusion around that. So one example was I didn't use the CEO's office. I used the conference room next to the CEO's office so that everybody could see I'm not trying to play the CEO. I'm an interim person and I'm not sitting in that space.

But I also had to bring in a business psychologist into the office a couple of times over, let's say, a six-week period to work with the management team and myself so that there would be complete understanding of what the role is, what my expectations were of the management team now, as the interim CEO, what their role was, and how decisions would get made. So, in terms of most challenging aspects of working in private equity, I would offer that up as a second challenge that I experienced. The third challenge that I would offer up is, in a technology business, we had to kill a product line that was under development because there was no product market fit. And the CEO and the innovation officer and the technology officer, they were convinced that this product had merit, but they didn't recognize that this was a product that was based on the technology push and not really based on a customer needs solution. So we did some work with the focus groups that highlighted that the product really had no merit, and that enabled us to kill it.

But you can imagine how disappointing that was to the CEO and the innovation officer and the technology officer. Now, on the other hand, the revenue officer and the CFO were quite thrilled with that. We wrote off the investment and we pivoted away from what we were doing to other customer needs, and did that. So I offer those up as three challenges. There are lots of others and how we overcame those particular challenges.

And then finally, the skill just to execute to the best of your ability and motivate the team to do that are very important. So those are some of the skills. When I think about experiences, the life cycle of a business tends to go through three possible phases, the high growth phase, which everybody wants to have. Sometimes there's a turnaround. People don't really want to have to deal with that, but that's important.

And on rare occasions, how do you avoid going into bankruptcy? So I think that's an experience that's important. So understanding what happens at the investment committee, in the private equity shop is very important, how power and success is gained or lost within the private equity firm, how credibility is built, what portfolio successes sell well to limited partners when raising the next fund. Those are important, but clearly multiple repetitions of running a portco, which builds confidence and capability and acumen are very important. One doesn't have to necessarily have worked in all of those three phases of growth, turnaround and bankruptcy, but sometimes in two of them is worthwhile.

So, when I think about industry, I think it's very advantageous to have worked closely and deeply in two industries that are very closely related to one another. So it gets you better experience. I'm fortunate in that I've worked in numerous asset intensive technology enabled businesses like marine terminals or carbon fiber production or air conditioning or plastic. So that's, I think, an advantage that I have brought to private equity. From a function perspective, if I recall correctly, the successful Fortune 1000 CEOs have primarily come up through operations.

The number that sticks in my mind is somewhere around 25% through operations and about 22% through finance, and then somewhere in the high teens coming from innovation, technology, engineering, or sales and marketing. So I think this is equally true in private equity for CEOs, that they get this kind of diverse experience. Now, not many people are going to get experience in more than two functions. Most of my domain expertise is in operations and finance. And then, because I'm an engineer, I've had some experience in engineering and innovation.

So that can be helpful. And then lastly, that stage of the company, evolution that we spoke about before, the startup, the growth, and then the turnaround piece. I think ideally, a CEO should have had experiences in, let's say, two of these three, so that they know what's coming around the corner. I've not had startup experience, but I've had a lot of growth, productivity experience. And I've also had some turnaround.

And unfortunately, I've had some bankruptcy experience. I say that unfortunately for the company, fortunately, in that I learned from that experience, Rena.

Talk to a lot of people. Really. make sure you understand the firm that you're going to be associated with, the investment partners that you're going to be working with, who are going to be on your board. And really understand the port co, and what the investment thesis is, and what the exit strategy is, et cetera. So I'd offer that up as one.

I've been fortunate in that I've had some mentors along the way in my private equity career. And so I would encourage people to find mentors who have had repetitions in private equity and are willing to coach and guide them. My mentors have coached and guided me. And I think that has hopefully made me a better operating partner, a better private equity board member, and a better private equity CEO. I also think that learning is a lifelong thing.

So make it a priority. Learn about governance. Learn about ESG. Learn about artificial intelligence and how it's going to impact your business. Understand global economics and how it impacts your business.

Cyber security. You don't have to be an expert in all of these areas. Other people will be. But understand it well enough to ask insightful questions that will add distinctive value. Now, there are two other thoughts that I have on this question as well.

Keep building your network of expert advisors. I call it my kitchen cabinet. These people are critical. They're different than the mentor. But build your network and really have a kitchen cabinet of people that you can turn to.

And then maybe lastly, I'd say just be an attentive listener. Look the people in the eye. Listen thoughtfully to what they're saying. Ask subsequent questions so you really understand things well. Be a compassionate empathizer.

That's so important. It's so stressful today in everything that we're doing. Be an analytical strategist. And, at the end of the day, be known as somebody who gives back, that helps other people in their careers. I think that's important, Rina.

It's been a pleasure. Make sure that you subscribe for more insights from industry leaders. And, until next time, keep striving for excellence.

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