Private equity firms are seemingly always on the lookout for high-quality C-level executives, more so than most organizations because they have multiple companies in their portfolios all seeking to find ways to grow or transform.
As a result, when private equity firms acquire companies, they tend to change a significant portion of the management team.
They look for opportunities to improve the company’s operation and financial performance, which are closely tied to company leadership. They know what they want in their leadership and need the search process to move quickly to find the right fit.
“Finding the right person to lead these companies is so critical because shareholders are expecting a return on investment within a certain timeframe,” says Baillie Parker, a Partner at ON Partners. “They may need the right person to turn around a company that’s in distress, or they may need someone to rapidly drive growth. A private equity firm’s success is directly tied to the person leading the company.”
Smart Business spoke with Parker about how private equity firms can increase their chances of finding the right executive.
What, generally, are private equity firms looking for in executive candidates? What challenges does that pose?
Candidates who understand what it means to work with private equity firms are most desirable. It’s even better if they’ve led a private equity backed company through a successful liquidity event. Experience accessing and executing strategic acquisitions are sought-after traits.
Private equity firms expect candidates to move quickly, which can be dangerous. They want decisive leaders, but they also need someone who listens and has experience developing a strategic plan once consensus is gained.
In some cases, candidates are chosen more for their leadership DNA than specific industry experience.
Firms may recruit a CEO that’s new to that industry, which means they need to understand new products, services, or the market in general from the ground up.
The downside to the sense of urgency that is inherent in these hires is the new executives often make assumptions about what they need to do, they have goals and a timeframe in which to achieve them, and then they run on those assumptions from the start without a full understanding of the people, products or customers.
How can private equity firms increase their chances of success in this capacity given their unique hiring/search process and candidate criteria?
Both the search process and vetting need to be thorough. Historical behavior is a good indicator of how someone will perform in future. However, it takes expert assessment to separate what’s real and what’s noise — determining the impact the candidate actually had on the business versus a candidate coming from a company that was successful regardless of the candidate’s contribution.
Similarly, excellent candidates that make positive contributions may have the misfortune of being at the helm of a company during a tough market. Separating that out is critical. A company must be able to balance the candidate’s experience with the other data points to get the whole picture. All of this can be verified through reference checks early in the process.
Some of the important vetting questions are: Does the executive hire well when building leadership teams? Have people they know recruited them? And does their team follow them when they move on to the next opportunity — good leaders can bring a team with them.
The challenge in finding the best candidate, someone who can thrive, is being able to look across all the important traits to get a sense of the candidate’s ability to function in such a unique environment. Private equity firms have very specific goals and outcomes that they need their executives to accomplish. These firms have a strong grasp of the financial side of companies, but they’re not operating experts. They’re relying on their executives to run their businesses.
It takes experience to find the right hire for these unique situations. Search firms have worked extensively with private equity firms, know what they’re looking for, and have a database of candidates that have operated in these situations. They can be an important part of a private equity firm’s ability to realize returns. ●
Insights Executive Search is brought to you by ON Partners