Finding the perfect fit for a private equity firm’s portfolio company Chief Executive Officer (CEO) is a laborious process. Most potential hires have impressive resumes and backgrounds that initially make them seem like a good fit. Nevertheless, this rarely works out, evidenced by the high turnover among private equity CEOs.
According to AlixPartners’ Annual Private Equity Survey, companies replace 73% of CEOs during the investment lifecycle, and 58% leave within two years. This heavily contrasts with traditional CEOs, who hold office for much longer. For instance, the average CEO tenure at S&P 500 companies is nearly ten years.
These statistics represent a significant loss of value, but the risks can be reduced by careful assessment and selection.
Now more than ever, PE firms need transformative leadership to help them navigate the uncertainties and disruptions occasioned by the pandemic and its several variants. Therefore, the recruitment process must cater to emerging complexities and prioritize skills and traits essential for PE investment success in these times.
The ideal private equity CEO will have the ability to create a vision and strategy that meets private equity company thinking and is realistically executable. This requires excellent pattern recognition and a knack for finding and unlocking value in complementary products and establishments. It also requires thinking about the overlap between businesses and figuring out how to build the proper alignment to make the parts of a new business work together and scale effectively.
You should revamp the recruitment process to unearth compatible candidates, and assessments should go beyond typical competency match interviews. As you begin your private equity firm CEO recruitment, here are essential points to keep in mind.
The core traits that a private equity CEO would need have evolved and continue to evolve. For instance, many managing partners of PE firms admit that they now pay a lesser amount of attention to traditional attributes such as track record and experience. Instead, they tend to prioritize proven soft skills.
In any case, your company must ensure that it considers the growing trends in the industry against the backdrop of your specific context and business needs. Here are two emerging skills that stand out.
The ideal candidate will have to demonstrate performance during disruption. They need to be strong but adaptable. Resilience is a trait you must not compromise. As this Harvard Business Review report puts it, you want to see that a candidate has faced setbacks, made errors, and run adrift—yet lived to fight another day.
The prospective candidate must have a leadership presence, which is hard to quantify but immediately apparent.
For example, when you engage a candidate, do they have that special sparkle, aura, or power that sets differentiates them in charisma and overall presence? To caveat, this does not mean you require an extrovert. Still, it is a trait needed to harness portfolio organizations and inspire confidence.
According to the 2021 AlixPartners Annual Private Equity (PE) Leadership Survey, effectively managing human capital is vital to sustainable growth during these periods of disruption.
A solid leadership presence will encourage and support other talents to transform an existing workforce. A unique feature of private equity is that its portfolio company boards comprise financial gurus, most likely veteran industry advisors, who would want to be actively involved in the process. You need a CEO who can inspire confidence in these stakeholders and pilot their actions.
In addition, you should also look out for competencies in communication, strategic thinking, relationship development, empathy, and compassion. In today’s world, these skills will greatly assist in resolving emerging complexities by building new relationships, fixing burnout through compassion and empathy, and instilling resilience through inspiration.
Hiring an executive search firm with expertise and an outstanding reputation may be prudent. If you are an investor leader or top exec, you have an excellent idea of what you are looking for in the executive talent needed to deliver your goals. However, these ideas need to be funneled through a standardized process that ensures the opinions are not the obstacles. Remember, you are an investor, not a recruiter.
The right executive recruitment firm will complement your efforts. Importantly, their professionals will have the experience and knowledge to know what lines to pursue to uncover exceptional talent or expose weakness quickly. For example, some essential soft skill sets may only surface through deep-dive personality assessments, which will require intuition and evaluations supported by your professional search partner.
Case studies have emerged as an effective tool for evaluating potential candidates’ decision-making prowess. Essentially, it involves a hypothetical ‘Confidential Information Memorandum’ (CIM) relating to a company the private equity fund could invest in. Candidates will be expected to value the company and develop an investment proposal. However, they could also decide not to put together the proposal if they determine that it is not worth it.
Case studies allow the candidate to demonstrate their thought process under the watchful eyes of evaluators. This reveals how well they can think on their feet and how structured and articulate they can communicate. It also shows their ability to respond well under pressure, differentiating investors from theoreticians. The more sophisticated the study, the more likely it will offer elements of differentiation between candidates.
Sometimes, the formal assessment stages do not reveal latent issues. In this instance, having diverse feedback streams can go a long way in helping with crucial information. For example, speaking to people who know the candidate well can provide insights into how well they may fit into the firm.
Also, conversations with the candidate’s references can help with feedback on their traits and motivations. The feedback also gives you insight into how they get things done and what leadership attributes they possess, all of which contribute to a more robust assessment of cultural fit.
Additionally, trusted advisors to the private equity firm and its portfolio companies can assess a candidate’s existing knowledge of the firm. These advisors have a unique vantage point to evaluate the candidate’s fit and performance potential. Key people within the firm’s portfolio companies may also provide feedback on a candidate’s potential cultural fit.
Despite the intricacies, hiring the perfect fit for the private equity CEO role is not unachievable. Committing to a comprehensive and iterative process can improve past failures in identifying candidates with a high probability of success.
Comprehensive assessment processes are invaluable to bring out significant personality traits and indications of how the candidate might perform under pressure and whether personal goals align with the present and future aspirations of the firm.
Commit diligently to the process, and you’ll find a mature, professional CEO who will drive towards your aspirations and find that right fulcrum in the balance to meet the achievable goals of your firm.
Our hands-on executive recruiters have experience working with private, public, pre-IPO, and non-profit organizations. Clients are typically $50 million in revenue to Fortune 1000 companies or have assets between $500 million to $15 billion.
Successful placements span the entire C-Suite and include CEOs, Chief Operating Officers, Chief Financial Officers, Chief Sales Officers, vice presidents, general counsel, and other director-level leadership roles.