Private equity sponsors have never relied more on stellar management teams to drive return on investment. Yet in their effort to acquire high-impact human capital, funds often unknowingly leverage outdated or inefficient processes that hinder their ability to land true “best athletes.”
Chief among these practices is a rigidity in the experience required for the role. The more qualifiers a sponsor adds to their search criteria for a portfolio company executive, the smaller the pool of viable candidates becomes. Many “non-negotiables” are rooted in traditionalism, yet private equity’s rapid expansion has made it so demand for candidates with proven PE-backed C-suite success far exceeds supply.
“Roughly ten years ago, there were about 4,000 private equity portfolio companies in the U.S. Today, there are more than 8,000. Factoring in retirement, the pool of traditional executive talent is not growing at nearly the same rate. We are seeing more portfolio companies being capably led by people who did not have prior experience in private equity or as a CEO or CFO,” says Falcon’s Rob Huxtable.
An over prioritization of candidates’ backgrounds compared to their skillsets is a common impediment to talent acquisition. Sponsors may become enamored with a single, specific candidate background during a search process. This fixation often unnecessarily shallows the pool of viable talent.
The trouble with a background-centric approach is it ignores what is most vital to value creation: the skillset. There are few executives who possess the unique blend of skills, traits and demeanor needed to create a compelling exit for sponsors. Sponsors who set rigid expectations around business model, end market and positional history risk eliminating capable candidates from consideration and winding up with a comparatively small pool of eligible executives. Sponsors who remain open to adjacencies in these areas ultimately position themselves for a stronger slate of final candidates who possess the horsepower, behavioral traits and skillset needed to accelerate return on investment.
For funds, the traditional pre-amble to initiating a portfolio company executive search may also be worth reassessing. The amount of diligence committed towards creating the initial spec is often disproportionate to the potential financial impact of the decision. Hiring a CEO is a decision that potentially impacts hundreds of millions of dollars in value creation, yet the amount of time spent aligning on target expectations is often inadequately thin. The resulting misalignment and shifting requirements throughout the search process make it more difficult to land a dynamic talent well-suited for the role. It also expands the timeline of the search, impeding the internal rate of return for the involved investment.
Portfolio company C-suite searches often kick off with sponsors listing “must-haves” and “nice-to-haves.” Yet this demarcation often blurs over the course of a search. Sponsors may change their ideal candidate profile as they are presented with options who they like but who are deemed not quite right for the position in question. This shift often manifests in the sponsor’s list of necessities expanding. Rarely do funds re-evaluate if certain factors originally included in the must-have category should be assigned lower importance. In addition to the stated qualifications, there exists a more ambiguous “X-Factor” that plays a crucial role in the fund’s determination of a candidate’s viability as a partner.
“Identifying the right people who will fit enough of those required elements and still have the other, X-Factor component is more of an art than a science,” says Falcon’s Lindsay Guzowski.
“There tend to be two or three critical proven skills a candidate must possess to thrive in a specific position. When the number of requirements exceeds that, identifying true best athletes with both the credentials and intangibles needed to succeed in the role becomes less likely.”
An open line of communication between the fund, the search firm, and the portfolio company management team also helps to ensure the spec aligns with the business’s true operational and cultural challenges. This open exchange of information is particularly vital when a company’s founder is still involved (whether in a CEO role or some other capacity), as those scenarios tend to present greater cultural complexities and/or resistance to change.
The Path to a Successful Search
Sponsors should first commit to digging in with search firm partners.
Before initiating a search in full, several hours should be spent debating and discussing the business’s needs, cultural core competencies or deficiencies, a profile of the present and future state of the rest of the management team, and critical skills for the executive profile.
If a sponsor realizes mid-process that their initial specifications are incongruous to acquiring the best possible executive, candidly communicating that fact to their search firm partners will empower a more decisive, productive pivot.
Second, sponsors should define the archetypes they are looking for and why they matter for the specific investment. Discussions around talent acquisition inside private equity are often laden with references to specific specialists – e.g., a “commercial” executive or a “turnaround” CEO. Yet definitions of these orientations often lack clarity and differ from fund to fund and executive to executive. Explicit discussions of their intended meaning allow for a more effective search process and ensure capable candidates are not eliminated based on an artificial standard.
Finally, when sponsors determine they can credibly envision success with a candidate, they should move quickly. While such a critical decision must not be rushed, unnecessarily drawing out the search process or negotiations around compensation drain IRR and can place early strain on the sponsor-executive relationship. Given that many attractive candidates are involved in multiple processes, delays can result in losing the candidate altogether.
Additionally, sponsors should not rule out a candidate for a current search simply because they entered a previous process yet were ultimately eliminated. This mindset dismisses the nuance associated with each portfolio company leadership position and often weakens the overall quality of the candidate pool.
Falcon provides C-suite talent solutions for middle-market private equity firms across North America. Follow us on LinkedIn.