The Making of a Private Equity Portfolio Company CEO
CEO turnover within private equity portfolio companies 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.
The Team Comes First
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.
Resilience Required
Resilience is made up of five pillars: self awareness, mindfulness, self care, positive relationships & purpose. By strengthening these pillars, we in turn, become more resilient. 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.
Strong Communicator
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 Executive Search
Cowen Partners is a national executive search and consulting firm. Our clients are both small and large, publicly traded, pre-IPO, private, and non-profit organizations. Clients are typically $50 million to multi-billion dollar revenue Fortune 100 companies or have assets between $500 million to $15 billion. Successful placements span the entire C-Suite and include VP and director level leadership roles.
Cowen Partners Executive Search has particular expertise in the following areas: accounting and finance, IPO preparation, SEC reporting, corporate tax, financial institutions (banks and credit unions), enterprise software sales including technology, SaaS, and managed services, and rapid growth private equity/venture capital backed deals.
In addition to executive search, Cowen Partners Consulting offers CEO succession planning and CFO consulting for middle market companies on an interim, project, and fractional basis. CFO consultants provide forecasting, financial cashflow, treasury, software implementation, and M & A services. Cowen Partners maintains a multimillion dollar payroll service for even the largest of client consulting and staffing engagements.
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.
Retained Executive Search Firm
Check out our industry-leading resources to see why Cowen Partners is a 5-star retained executive search firm in New York City, Chicago, Seattle, Dallas, Los Angeles, and beyond:
Chief Financial Officer: The Ultimate Hiring Guide
Chief Revenue Officer: The Ultimate Hiring Guide
Executive Search & Recruiter Case Studies
Recruiting and Hiring in the Age of Covid-19
How to Choose an Executive Search Firm
Moving From Theory to Practice When Recruiting for Executive Diversity
Are You Ready For a Private Equity Investment?
Cowen Partners is a national private equity executive search firm. Working with startups and pre-IPO companies, Cowen Partners has vast private equity and venture capital experience. Whether you are the CEO/founder of a startup or an older, privately held business, there may come a time where you and your colleagues are seeking outside capital. In an ideal world, you are doing so to grow and scale a business due to demand. On the flip side, you may be seeking capital to satisfy short- and long-term cash flow issues.
Whatever the case may be, your campaign to raise outside capital will undoubtedly involve sophisticated investors — like private equity investors — deeply scrutinizing your current finances and potential to offer an attractive return. Essentially, if you are considering outside capital from private equity investors, you need to ask yourself one critical question:
Are You Ready For a Private Equity Investment?
As the president of a national executive search firm, I regularly come across scenarios where private equity firms are exerting significant pressure on their portfolio companies to conform to higher performance standards. They retain us to seek talented finance and accounting staff to improve their finances in both quantity and quality. Many of these scenarios require us to replace the existing CFO with a private equity experienced candidate.
So why do private equity firms do this? As alluded to by Buffett, it is to protect their investment. Especially if the private equity firm is investing eight or nine figures into your business, the stakes are extremely high.
Here, I’ll explore this phenomenon in more detail. Specifically, I will discuss some significant changes — in terms of reporting standards and personnel — that private equity firms require of portfolio companies.
Private Equity Raises The Stakes
Regardless of the funding source, companies that obtain outside capital are playing with raised stakes. Lax compliance standards or incomplete financial statements are simply out of the question. Portfolio companies become stewards of capital, and they must ensure that outside investors are clear about how that outside capital is being allocated.
Often, portfolio companies provide this clarity through more detailed financial statements. In fact, this increased level of detail may be a compulsory part of the fundraising round. As just one example, many private equity firms require their portfolio companies to have a hard close every month. Many private companies forego this practice every month, instead choosing to do it every quarter or every year. While they may prefer a soft monthly close because it places less of a burden on their accountants, private equity firms will disagree. If the portfolio company does not have the resources to quickly implement a monthly close, it may create some significant challenges within the organization.
Along with a monthly hard close, private equity firms often institute stringent financial planning and analysis (FP&A) requirements. These FP&A requirements might include things like cash flow projections, EBITDA (earnings before interest, tax, depreciation and amortization) bridges and more. Again, the ultimate purpose of these stringent FP&A requirements is for the private equity firm to have a granular level of detail on the business. It wants to ensure that the portfolio company is on track to achieve certain key performance indicators, which will appear as a sufficient return on invested capital.
Finally, audit requirements may be a rude wake-up call for portfolio companies. A good number of private companies may not have completed a comprehensive audit. When taking on private equity capital, however, these companies will have to invest a significant amount of time and money into adequately completing the audit. While this is especially true for the first audit, ongoing audit requirements are not insignificant.
New Management – CEO & CFO Replacements
For a small company with lax financial controls, the requirements mentioned above can be daunting. An inexperienced CFO may do everything they can to comply with the requirements, but it may not be enough. Private equity firms won’t hesitate to bring in more experienced financial professionals via a private equity executive search firm who can not only comply with these reporting requirements but help ensure that the portfolio company delivers the expected internal rate of return.
In the case of private equity firms seeking experienced CFOs for their portfolio companies, in my experience as a private equity executive recruiter, they generally look for candidates with strong technical accounting backgrounds who operate at a higher level. Not only that, but the individual must be able to execute the company’s growth plan, including mergers and acquisitions, and fit well within the culture of the company. As you can guess, it requires a talented individual to bridge the gap between a CEO/founder and the demands of their new private equity partner.
Get Ready For Private Equity!
Raising outside capital can be exciting for any growing company and its founders. It is easy for emotions to take over as company executives contemplate how that capital will take their businesses to the next level. That said, taking outside capital — especially capital from private equity firms — isn’t easy. There are certain reporting and compliance requirements that key executives may not anticipate.
Ultimately, when taking private equity capital, “What got you here won’t get you there,” as executive coach Marshall Goldsmith would say. Portfolio companies will need to implement comprehensive reporting procedures, FP&A and internal controls so that their private equity investors can closely track their investment. And if the existing management cannot do so, private equity firms will find someone who can.
Founders and executives must face this reality before taking on private equity funding. Setting appropriate expectations can avoid some nasty surprises in the future.
Private Equity Executive Search Firm
Cowen Partners is a national executive search and consulting firm. Our clients are both small and large, publicly traded, pre-IPO, private, and non-profit organizations. Clients are startups and pre-revenue to $600 million dollar private equity owned companies. Successful placements span the entire C-Suite and include VP and director level leadership roles.
Cowen Partners Executive Search has particular expertise in the following areas: accounting and finance, IPO preparation, SEC reporting, corporate tax, financial institutions (banks and credit unions), enterprise software sales including technology, SaaS, and managed services, and rapid growth private equity/venture capital backed deals.
In addition to executive search, Cowen Partners Consulting offers CEO succession planning and CFO consulting for middle market companies on an interim, project, and fractional basis. CFO consultants provide forecasting, financial cashflow, treasury, software implementation, and M & A services. Cowen Partners maintains a multimillion dollar payroll service for even the largest of client consulting and staffing engagements.
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.
How to Avoid Interview Fatigue When Hiring Executive Leaders
Interviews don’t solely benefit the company hiring for a position. Candidates also learn a lot during this process. They get an opportunity to see how your company works and receive a first impression of the business. When trying to hire top candidates, especially executives, it’s imperative to have a smooth hiring process. A significant part of a smooth hiring process is avoiding candidate interview fatigue.
Interview fatigue happens when a potential hire has been through so many rounds of interviews that they start to lose interest in your company. Some businesses actually have eight or more rounds of interviews when determining a final candidate to hire. That’s way too many interviews for one position. If you’re going through that many rounds, then you need to adjust your process to whittle it down to something more efficient.
How to avoid interview fatigue
Interview fatigue can lead to top candidates dropping out of the running, and it also leaves those people with a negative impression of your business. The interview process should be efficient, professional, and organized, so make sure you consider how to avoid interview fatigue when setting up the hiring process.
Limit the interviews to four
For most positions, you really shouldn’t need any more than three rounds of interviews to select your candidate. Executive-level positions, however, take a little more investment, so for this group you can extend the process to four interviews, max. Limiting the number of interviews you conduct has a number of benefits. First, you’ll get through the hiring process a lot faster. Timeliness benefits the whole hiring team because less of their time will be dedicated to interviews. Plus, the important open position will be quickly filled which will alleviate some of the workload that has been displaced on others.
Second, your interview team will be more diligent about their questions and remember each candidate. If your company is organizing too many interviews, the hiring team won’t take the first few rounds as seriously. When interview rounds are limited to four, managers are sure to dig into the most important aspects of the position and seek out specific qualities in a candidate. It also helps everyone remember each candidate more clearly. When you’ve interviewed six people five times each it becomes difficult to keep track of individual details.
Finally, four interviews is a perfectly acceptable number for candidates to go through during the hiring process. The hiring team will know exactly how much time they have to dedicate to the interview process and candidates won’t have to make an obscene number of trips to your office to cover information they’ve already discussed.
Example Interview Structure
Executive Recruiter Initial Interview
Hiring Manager Review and Interview
Peer/ C-Suite Executive Interview
Final Interview With Hiring Manager
Board Approval if Necessary
Respect the candidate’s time
When a candidate hits interview fatigue, one thought they’ll likely have is that you’re not respecting their time. Executives in particular are incredibly busy individuals in high demand. Their time is a precious commodity and if you’re bringing them in for multiple “final” round interviews, they won’t be afraid to bow out of the running. Executives often have the ability to be choosy with their opportunities because they’re presented with a number of options. You need to make sure you’re not wasting their time by unnecessarily drawing out the interview process.
As you organize the hiring process, don’t forget to look at the timelines and interview rounds from a candidate’s perspective. An executive has to set aside several hours each interview day to commute to the interview, talk with hiring managers, and then get back to work. This is time and money lost that they’re giving up to speak with you. You also have to consider how a disorganized or indecisive interview process will look to an executive candidate. Too many interviews will make a high-level candidate think the company has too much red tape when it comes to decision making. It will also make an interviewee feel undervalued as they start to think they’re not quite what you’re looking for in a hire.
Clearly define the timeline
Before you even start the hiring process, you should have a clearly defined timeline. Determine how much time will be dedicated to each step of the process so your hiring team knows how much time they have to review candidates, schedule interviews, and provide feedback. Not only is a clear timeline crucial for your hiring team, it’s also important for your candidates.
A common candidate question asked during the interview process is about the hiring timeline. Candidates want to know when they will hear back from you after an interview and when they can expect the process to be complete. Telling a candidate you’re not sure how long the hiring process will take does not instill confidence in your company’s organization or decision-making abilities. On that same note, you also shouldn’t give a false timeline. If you tell a top candidate you will be moving on to the next round at the start of the following week but then set up interviews several weeks later, you’re still making a bad impression. Create your timeline in advance so you have hard deadlines for your interview team to follow.
Assign roles to the hiring team
One way to help cut back on the number of interviews is to assign a hiring manager who has ultimate authority over the hiring decision. Selecting a final candidate is not a democratic process requiring consensus. The hiring manager should gather feedback and input from the interview team and use those details to select the new hire. Allowing people to debate the merits of every candidate leads to indecision, which is often how companies find themselves inviting people back for another final round interview. The interview team can’t come to an agreement so they think another round of interviews will solve the problem. You don’t need another interview in this situation. You need decisive action from a team leader who can look at the interview questionnaires, the job requirements, and the candidate profiles and make the best decision.
Another role to assign is the point of contact. Clear communication with candidates is crucial for making a good impression and ensuring the interview process goes smoothly. Disorganized interviews and a lack of feedback can leave candidates with a poor impression and lead to high-quality candidates dropping out of the interview process. Make sure someone is assigned as the main point of contact for each candidate. This person should be responsible for scheduling meetings with the hiring team and following up with candidates after the interviews. Don’t leave potential hires hanging in limbo waiting for an answer. Be timely with a response to whether or not they’ve made it to the next round of interviews. A clear point of contact on the hiring team can help circumvent interview fatigue because candidates will have straightforward timelines and schedules for their interviews.
Hire an executive recruiter
An executive recruiting firm is an excellent resource for reducing interview fatigue. A recruiting firm has extensive experience with the hiring process and knows to limit interviews rounds to a reasonable number. The other benefit of a recruiting firm is it can also fill the point of contact role for your company. Managing candidate schedules, interview team availability, and process timelines can be a lot of work, but an experienced national executive search firm will be able to handle the process with ease. Contact Cowen Partners today to simplify the hiring process and avoid interview fatigue for all candidates.
Cowen Partners Executive Search
Cowen Partners is the nation’s executive search firm, enabling companies to harness the power of human capital to fuel their success. Cowen Partners gives our clients access to the top 1% of human capital to create opportunities that accelerate their growth and market share. With Cowen Partners, clients can grow at scale, create value, and drive results with world class talent.
Cowen Partners is a national executive search and consulting firm. Our clients are both small and large, publicly traded, pre-IPO, private, and non-profit organizations. Clients are typically $50 million to multi-billion dollar revenue Fortune 100 companies or have assets between $500 million to $15 billion. Successful placements span the entire C-Suite and include VP and Director level leadership roles.
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.
Cowen Partners Executive search provides recruitment services to all major and minor industries including:
Accounting, Advertising, Aerospace & Defense, Biotechnology, Banking, Board and CEO Services, Computer Hardware, Construction, Consulting, Consumer Products, Computer Software and Hardware, Education, Energy & Utilities, Entertainment & Sports, Finance, Financial Services, Food Products, Government, Human Resources, Health Care, Hospitality & Tourism, Insurance, Industrial, Internet & New Media, Legal, Journalism & Publishing, Marketing, Manufacturing, Medical Device, Non-Profit, Pharmaceutical, Real Estate, Retail & Apparel, Sales, Technology, Telecommunications and Transportation.
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