Recent months have witnessed various deals but a significant trend is the increase in large carve-outs from corporate parents. In Q3, carve-outs accounted for a third of the top 20 PE deals, compared to just 5% in Q1 2023.
Despite the type of deal, talent and leadership remain universal challenges facing all PE firms. Finding, retaining, and cultivating talent in portfolio companies (PortCos) is crucial for success.
On October 27th, he moderated an investor panel at the Benelux Private Equity Insights Conference in Amsterdam. The expert panelists shared insights on navigating exits in PE and discussed strategies for 2023. The panel included Brigitte Van der Maarel, Mels Huige, and Sebastiaan Van Den Berg. Jan-Bart Smits (Managing Partner at Stanton Chase Amsterdam, Regional Sector Leader for Technology in EMEA, and former Chair of the Board) was also in attendance.
During the Nordics Private Equity Insights Conference held in Stockholm on November 10th, Kevin presented strategies for hiring and managing CEOs and management teams in PE and related PortCos. Erik Berggren moderated the panel discussion, which featured Fredrik Korterud, Lorenzo Sormani, and Kevin as panelists. Mikael Stelander, Managing Partner at Stanton Chase Helsinki and Global Functional Leader for Private Equity, was also present.
In this article, we will share insights from these conferences to aid in value creation toward a successful exit.
It has been repeatedly proven that good leaders equal good companies. That’s why the ability to identify, recruit, and retain top talent becomes increasingly important in PE PortCos.
Determining the extent of a PE firm’s involvement in the hiring process of one of its PortCos is an important decision with far-reaching implications. The decision is typically influenced by factors like the company’s strategic objectives, the proficiency of its current management team, and the company’s size and industry dynamics.
PE firms can bring valuable expertise to recruitment, particularly when recruiting for CxO positions (Level N or N-1) within a PortCo. By collaborating with the PortCo’s existing executive team, they can help set the company’s strategic direction and identify top talent, ultimately contributing to the growth and success of the organization.
Although it is typical for PE firms to take a hands-off approach to hiring for their PortCos when the business is performing well, this doesn’t mean that the same strategy will work for everyone.
PE firms that actively engage in managing their talent tend to see higher returns on their investments. Highly successful firms allocate 150% to 200% more resources to developing leadership and organizational initiatives, which results in a 300% to 400% return on investment. This is not surprising when you consider that effective leadership in PortCos is found to have a 30% impact on market valuation and a 15% impact on financial performance.
Roughly 80% of PortCos with a strong focus on talent achieve their first-year targets and realize a 250% return on their initial investment. That is why over 80% of PE firms identify hiring and onboarding talent as a top-three talent management priority.
When a PE firm wants to take an active role in shaping the leadership of a PortCo, there are several strategic actions it can consider, including:
PE firms are also increasingly recognizing the importance of diversity and inclusion, and this can lead them to want to play a more active role in recruiting leadership for their PortCos.
A diverse and inclusive management team can bring a wider range of view points and experiences to the table leading to better decision-making and improved financial performance. Companies with more diverse leadership are 36% more likely to outperform their industry peers.
When a PE firm acquires a portfolio company one of the key considerations is the alignment of the current CEO and senior management team with the firm’s objectives.
If the existing leadership is found to be misaligned, focus shifts to identifying and recruiting new talent that can help drive the company toward its goals.
This presents an opportunity to strategically approach the hiring process, ensuring that the right balance is struck between speed, cost, and quality, to bring on board the best possible talent.
Internal recruitment can prove to be a valuable approach for companies looking to hire quickly and cost-effectively. While it may result in a smaller pool of applicants, it can also effectively leverage the knowledge and skills of your existing employees.
However, it is important to keep in mind that internal recruitment can sometimes limit the infusion of fresh perspectives and potentially exacerbate issues related to diversity and inclusivity. To avoid this, companies should focus on building a diverse and inclusive internal talent pool.
Internal recruits typically require less onboarding time, screening, and interviewing, which makes the process smoother. They also tend to exhibit greater commitment and loyalty to the company.
It is worth noting that PE firms usually intervene in leadership hiring for their PortCos only when there are significant problems with the current leadership. In such cases, companies must adopt a strategic approach to address the issues and explore other recruitment options, including external recruitment, to bring in new points of view and skills.
PE firms can benefit from external recruitment as it accesses a wider pool of candidates and can bring in fresh perspectives and ideas.
Though it may require a higher investment of time and resources, external recruitment is a popular approach in PE. In fact, over 75% of newly appointed CEOs in PE-funded companies are external hires. In comparison, only 28% of new CEOs in S&P 500 firms are recruited externally.
Executive search firms and recruitment agencies are two distinct options for PE firms looking to make an external hire. While recruitment agencies are equipped to fill mid to lower-level positions, executive search firms specialize in finding, assessing, placing, onboarding, and integrating senior-level executives with extensive industry knowledge.
Executive search firms’ searches are overseen by industry professionals and business leaders. This means they offer a higher level of scrutiny and assessment. These firms also employ science-backed methodologies to meticulously evaluate every facet of a candidate’s leadership capabilities, ranging from their skills on the job to their aspirations.
Executive search firms’ approach sets them apart from recruitment agencies by ensuring a thorough examination beyond surface-level assessments. This can be crucial for PE firms in making informed hiring decisions.
In order to make the best hiring decisions for a PE PortCo, it’s essential to involve the right people in the decision-making process. We recommend taking a collaborative approach, one that involves the PE team, as well as the existing chair and CEO of the PortCo. This approach can yield great results by leveraging each party’s unique insights and is known to enhance the overall quality of hiring decisions.
PE-backed companies experience a high CEO turnover rate with 73% of CEOs being replaced during the investment cycle. The need to replace senior managers commonly stems from company requirements or the PE firm’s strategic vision. However, this attrition rate can be greatly reduced through improved talent management practices.
Rather than waiting for a CEO or senior manager to become unsuitable, a proactive approach that ensures their value contribution from day one is far better. To effectively manage CEOs and senior managers, PE firms can follow the following steps:
By undertaking these measures PE firms can navigate the leadership challenges they face and achieve their investment objectives.
If your PE firm or PortCos are currently facing leadership challenges, you need the best support available. We can help. Our experienced consultants can provide the leadership your organization needs to thrive in this competitive landscape. Click here to connect with us.
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