Private equity, venture capital, and the curating of executive talent have an inherent synergy between them. All of these groups know that human capital represents the key driver of long-term value creation and financial performance. As private equity grows to all-time highs by any metric one chooses to use – closed deals, new funds, number of portfolio companies, and dry powder – the need for a “deep bench” of talent has never been greater.
Private equity understands this truth intimately. When they invest in portfolio companies, the foremost goal is to establish key leadership positions and a firmwide culture. Private equity knows this is the best way to create value for their investments.
With an even higher emphasis on EBITDA growth to justify these history-defining (company) multiples, PE firms have had to be even more selective, hands-on and engaged with the executives driving value creation in this environment.Alison Woodhead, senior partner at Kingsley Gate Partners
The competitive environment remains fierce across venture capital, startups, and private equity. Incrementally more money is chasing incrementally fewer deals, and this leads to more competitive, tighter bidding, and slimmer margins for financial success. Sourcing the best talent that provides the best fit?
This is the competitive advantage that will define the decade for private equity and venture capital.
The 13 years since the Great Recession have been very good to private equity, and broadly all of the aggregators and allocators of capital. We’ve seen interest rates fall to generational lows and an accommodative government & regulatory environment. We saw a slashing of the corporate tax rate in 2017, which supercharged already hot PE and VC markets.
These forces culminated in private equity having its first trillion dollar year in 2021, with over $1 trillion invested by private equity into portfolio companies. Successful exits of portfolio companies are also soaring, wth 2021 exits rising over 100% on value, and over 50% on volume (source). This success has led to even higher new PE fund sizes and dry powder to chase the next deal.
As private equity fundraising continues to hit records, the resources needed to devote to due diligence of portfolio companies and potential targets is also rising. This has led to investment professional assignments starting to overtake operating and managing partner-level assignments in recent years.
Key due diligence functions like an assessment of the current management team, company remuneration and incentive structure, and the overall values of the potential target are all critical functions for venture and private capital, as well as their traditional expertise in analyzing financial statements and overhauling business segments and offerings.
In addition, once a stake is taken in a new portfolio company, the PE firm will send one or more of its key personnel to the new board to monitor strategy and management overhauls. All of this in a growing PE industry puts incredible impetus on a wide and diverse flow of new executive talent.
There are several powerful tailwinds we’ve seen crop up in recent years driving up the competitive pace of talent search. And riding on the back of those tailwinds are secular trends that continue to shrink the pool of top talent that’s available. Let’s examine these further:
C-suites, boardrooms, and senior/managing partner level executives of the Baby Boomer generation continue to retire in droves, leaving a pointed gap in these mission-critical executive positions. Some of this brain drain is heading into family office formation to manage generational wealth plans, adding another viable pull for top investment talent away from venture capital and private equity.
The post-pandemic recovery thus far has been marked by severe labor shortages, and companies making permanent changes to where and how its employees work. We have seen a wave of high-profile sector leaders make remote work a permanent option, and this will lead to changes across organizations of how groups are managed and business success is measured.
Special Purpose Acquisition Companies (SPACs) have leveled up in recent years, going from the back alleys and small deals to multi-billion liquidity events. SPACs have found IPO markets to be reliable source of capital, driven by high-profile sponsors and the backing of the upper echelon of institutional asset managers. In 2021, SPAC-generated merger & acquisition activity topped $400 billion, a nearly 200% increase from the $139 billion in M&A generated in 2020. (source). This is a simply astonishing feat, and has only added to the positive reinforcement cycle driving capital into new private equity funds, as there is a new avenue to a successful exit of a portfolio company.
Mix shifts in the U.S. economy are driving more growth and capital toward specific sectors and industries, with technology, biotechnology/life sciences, and financial services benefiting most from these shifts. This intensifies the competition for experienced managers within these fields.
Strategies for Attracting Talent in the New Decade
Top tier talent is getting bombarded with a wide array of opportunities. We know that the labor shortages feed into this reality, as is the overall depth and liquidity of the capital markets. After years of low cost of capital, strong post-IPO performances and SPACs, the prospect of working for a startup is increasingly a viable option from board-level talent who may have previously shied away from riskier ventures.
And within organizations of all size and scope, we see disruptions to the skill sets needed by top executives. These disruptions are being driven by technological factors (like machine learning and AI), economic factors (increased offshoring and re-shoring activities) and societal factors, like DEI and ESG.
Diversity, Equity, and Inclusion have made a rapid ascent up the ladder from a fringe strategic focus to a mission-critical, ongoing process for any successful company. Leaders who understand and promote DEI will have stronger internal satisfaction among their employee ranks, and likely produce stronger financial returns as well.
A recent McKinsey study found that companies with a strong ethnic diversity were 35% more likely to outperform industry peers, while gender-diverse firms were 15% more likely to outperform. We feel that PE firms and venture capital that are front-facing with a strong DEI focus will have a strategic advantage in sourcing top talent in the years to come.
No longer anywhere near a fringe movement, Environmental, Social, and Governance policies are a mainstream driving force in today’s boardroom. Public companies that have embraced it have outperformed peers that have not, and a thumbs-up from shareholders is never something that PE and VC capital will ignore. A recent Ernst & Young study found that over 70% of private equity firms said they expect to capture an ESG premium in their next round of portfolio company exits.
Private equity’s needs for executive talent are now so great that they’re taking their relationships with executive search to the next level, and buying into the industry outright. In 2019, Kayne Anderson Capital Advisors and ROCA Partners took a $25 million minority stake in search firm Riviera Partners. And PE stalwart Carlyle Group recently took a majority stake in search firm HireVue.
Private equity will increasingly rely on executive search partners that are robust, agile, and focused on the unique traits desired at private equity portfolio companies. These traits include not just the intellectual capital boilerplates of domain and verticals expertise, but also emotional intelligence, intercultural leadership, and the ability to network in the modern digital landscape.
These uncommon traits require executive search professionals with not just a deep rolodex, but a strong technological and algorithmic search toolkit.
PE firms in search of elite talent need to create a value proposition that really speaks to their ideal candidates. This can and should involve more than just nominal compensation. In the post-COVID economy, companies will need a comprehensive, top-down rethink of how they appropriate remote work capabilities and job functions.
And in an era of maximum competitiveness, PE firms will have to consider compensation packages that include not only the typical carried interest for C-suite and managing partner-level positions, but carry for associate positions as well. And we may also see more co-investment opportunities – with leverage optionality – for associates on up, whether on a fund basis or deal-specific.
In terms of fee-related expenses, as you know, we have been making significant investments in talent and infrastructure to drive higher FRE growth and capture the next significant leg of growth we believe is attainable. We’ve made many great additions across our platform and continued to attract high-caliber individuals.As Marc Rowan, CEO of Apollo Group, noted in the company’s Q1 2022 earnings report:
While private equity, startups, and executive search firms may be tied at the hip, we are entering a new world where all of these actors are seeing their roles meld together.
Private equity strives to get the most out of their talent, and the attributes of the ideal candidates for C-suite, board-level, and upper management positions are changing along with new workplace norms and a rapidly shifting economic landscape.
Strong senior leadership is more important than ever, because the sheer wattage of what private equity can do is higher than ever. Mistakes and tactical errors will be more costly than ever before, as will the opportunity costs of poor fit hire.
Whether you work for a private equity firm, startup, or executive search firm, or you simply enjoy watching this space, Talent will continue to be one of the most — if not the most — critical assets for any organization.
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’s or have assets between $500 million to $15 billion. Successful placements span the entire C-Suite – CEO, Chief Operating Officer, Chief Financial Officer, and include vice president, general counsel, and other director-level leadership roles.
Cowen Partners delivers 3X more qualified candidates than the competition. Through our proven retained executive search process, we find, vet, and deliver the top 1% of candidates for positions across the C-suite. Our process works for all industries, including technology, healthcare, manufacturing, retail, real estate, financial service, private equity, and more.
Learn how we deliver top talent, no matter the need, with our industry-leading research and resources. Discover the strategy that made Cowen Partners the top retained executive search firm in New York, Chicago, Seattle, Atlanta, Dallas, Los Angeles, and beyond.