How CEO Turnover Hurts Private Equity Investments | Private Equity Executive Search Firm

How CEO Turnover Can Hurt Private Equity Investments

When a private equity company chooses to invest in a growing company with potential, they often bring a new CEO on board to support their initiatives for the company. This move is intended to increase revenues and profits. 

A new private equity CEO is often helpful for guiding the company in a new direction designed to enhance its visibility and provide more efficient operations. 

The CEO also acts as a liaison between the company’s Board of Directors and its staff. The staff is expected to implement the new vision and strategies needed to drive success for the company and communicate them to the team.

However, recent studies have found that CEO turnover at companies held by private equity investors tends to occur quite often. Over half the time, CEO turnover is unexpected, leading to a gap in leadership that can derail the efforts of private equity investors. 

Loss of leadership can leave team members floundering and uncertain of the company’s direction or what they are expected to do. Companies with no CEO often struggle, with departments and teams operating in an incohesive fashion that doesn’t positively impact the bottom line.

What Causes CEO Turnover in Portfolio Companies?

There are a variety of reasons why CEOs leave companies. They may be asked to do so by the majority-holding members of the private equity firm. 

A CEO may decide the position isn’t the right fit for them and leave on their own. Some private equity companies may ask CEOs to join for a short time while looking for other options to fill the position on a longer-term basis.

However, any time an executive team member leaves, it has the potential to cause waves of unrest in the company. The vision the CEO established for team members to achieve may be lost or wholly changed. 

This loss of direction can be challenging to manage and lead to an underperforming company until someone else arrives to re-establish control of the staff and develop a new vision. 

Replacing a CEO takes time. The CEO is one of the most difficult of all roles to hire, and when searching for someone to take on the position, many factors must be considered. 

It’s not enough to review a potential CEO’s resume and hire them based on previous accomplishments. Private equity investors must ensure CEO candidates have the right skills to lead the company and the experience necessary to fit in well with its strategic plan.

What Skills Should Private Equity Investors Look for when Hiring a CEO?

A variety of skills should be considered when looking for someone to fill the CEO role. Some of these include:

An Understanding of the Company’s Products or Services

The CEO is expected to step in from day one with full knowledge of the company, what it does, and the products or services that it provides. 

New CEOs will need to work hand-in-hand with private equity investors to develop a strong knowledge of the company’s market and customers. Their knowledge development should begin behind the scenes during the interview process.

Frequently, private equity investors seek CEOs who have experience in the same or similar industries. Finding a CEO with industry experience can be quite helpful. For example, a CEO coming from a traditional manufacturing company may have difficulty understanding the inner workings of a software company. 

Someone with thorough knowledge of the software industry would be in a better place to understand the potential direction of the company and how to measure its success than someone with a manufacturing background.

A Willingness to Work with the Private Equity Firm

While the CEO shouldn’t actively follow every request of the private equity firm, they must understand the firm’s goals. They should be an active partner: willing to understand the firm’s intentions while helping develop an appropriate vision to meet the objectives. 

The CEO should use their experience and skill set to create methods designed to enhance the company’s value.

CEOs who disagree with the goals of the private equity investors will not be a good fit. While some disagreement can lead to better outcomes by considering factors that the private equity firm may not have thought of, too much disagreement results in dissatisfaction for both the investors and the CEO — and sometimes the team itself. 

Leadership Skills and Strategic Thinking

Private equity firms recognize the value of two of the most important factors when hiring a CEO — leadership skills and strategic thinking. However, these skills can be challenging to assess when searching for a new CEO. 

Rather than concentrating on the CEO’s resume and experience to determine whether a potential CEO possesses these skills, it’s best to put them to the test.

Many companies have implemented testing during the hiring process rather than relying solely on interviews. While interviews are essential to hiring, testing can provide more significant evidence of a CEO’s potential for leading the team and creating a compelling strategic vision. 

Private equity firms can design testing to understand better how a potential CEO would handle certain situations and provide direction to the team. 

What Impact Does the Loss of a CEO Have on the Business?

The loss of a CEO can be traumatic for the company’s performance and private equity investors. In one survey, unexpected CEO turnover resulted in a longer hold time for the private equity firm in 82% of all cases. Clearly, the financial impact of unexpectedly losing a CEO is high. 

The potential of losing a CEO makes the hiring process even more important, as private equity firms expect to earn a return on their investments. The last thing they want to do is find a new CEO to lead the company, resulting in more time and effort spent trying to locate someone with the skills required to optimize their chances for success.

Any unexpected loss of a CEO also impacts existing team members. If there’s constant turnover at the top, employees may feel less secure in their positions and the company’s direction. More turnover can lead good employees to leave, searching for another role in a more stable environment.

Limiting the Impact of Turnover

Understanding the impact that a CEO brings to a company is vital for private equity investors. Investors should ensure that the chosen CEO has the appropriate skills to lead the company and follow the goals that the private equity company has in mind for the business. 

An ill-chosen CEO can negatively impact potential profits and company vision, making the hiring process even more critical.

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