CEO turnover within private equity firms is shockingly high. According to a 2017 survey by AlixPartners, as many as 58 percent of private equity CEOs are replaced within the first two years of acquisition. Switching CEOs after two years can be detrimental to a PE firm’s return on investment given that most PE acquisitions are only held for five to seven years. Attempting to introduce new leadership in the middle of a PE investment life cycle can be damaging to the company’s success and ultimately the profitability of the company.
PE firms often experience high turnover because the CEOs hired or brought on during an acquisition do not meet the firm’s expectations. It is difficult to select the right CEO candidate for a private equity or venture backed company. Most candidates come from impressive backgrounds and have the first-hand experience that initially makes them seem like a good fit. However, if you really want to make sure you’re bringing on the right person to manage your investment look for a candidate who has the below qualities of a successful private equity CEO.
CEOs need to be able to create a high-performing team, and a big part of that includes being a team player. Arrogant, self-involved leaders do not fare well in PE firms because they have a hard time motivating people to strive for the company’s goals. In some cases, an overbearing leader can even drive away top talent from the company.
A private equity CEO should be able to empower direct reports and make sure everyone is on the same page when working toward company goals. This means a CEO is willing to delegate tasks to the team without micromanaging the process. A strong leader also knows how to promote talent development. Key jobs within the firm can be improved through skill development and training. A team player is more equipped to notice areas of improvement because they’ll be more familiar with the department duties and be more willing to listen to concerns from those under them.
A few warning signs that indicate a candidate might not be the best team player include arrogant behavior and using “I” too much. If a CEO candidate is talking about past accomplishments and not giving any credit to his/her previous team, it’s an early warning sign that the person isn’t a team player. The number of colleagues a candidate can pull into their current venture also speaks volumes. If people who previously worked with the CEO want to stay on his/her team, that’s always a good sign.
PE firms are bound to face a few setbacks and roadblocks when turning around a company. The CEO needs to be able to face these challenges and take them in stride. A candidate who can give examples of overcoming past errors and setbacks is able to demonstrate their resilience. A firm can have confidence in a CEO who knows how to take a negative result and work toward a solution.
You should be skeptical of candidates who have skated from success after success, or who at least try to make it seem that way. A CEO candidate who can talk about setbacks and how they overcame problems will give you a glimpse into how that CEO can adapt and work for your firm.
A CEO needs to have excellent communication skills to succeed. Open, straightforward communication can motivate team members and ensure everyone is on-target to reach company goals. It’s also imperative the CEO knows how to effectively communicate with other PE executives. Some CEOs do an excellent job managing their teams but struggle to convey information and needs to investors. In other circumstances, the opposite is true. The CEO works well with PE investors, but struggles to create a team environment within the company. A good CEO should be able to demonstrate an ability to communicate across all levels of management.
When selecting a private equity CEO, executive recruiters also really pay attention to how a candidate will fit in with the PE house culture. PE executives don’t realize how important culture fit is when hiring a CEO for one of their portfolio companies. Executives have to take the culture into consideration for a number of reasons. If the current culture has been doing well for the company then sticking with the current CEO could be beneficial, but if the culture needs to be altered to produce the desired results then looking into other candidates is best. A clear understanding of the culture shifts that need to happen for the company to reach its full potential will help you make the right choice when selecting a private equity CEO.
Choosing the right CEO for a portfolio company can make the difference between a profitable exit and stagnation. A CEO who demonstrates strong collaboration, resilience, and communication qualities will ensure your private equity investment is in good hands.
Cowen Partners is a national executive search and consulting firm. Our clients are both small and large, publicly traded, private, and non-profit organizations.
With our proven processes and guaranteed results, we have successfully placed hundreds of candidates in industries including technology, commercial real estate, healthcare, financial services, sales and finance.