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Talent as a Value Driver: Private Equity Firms’ Role in Shaping the Talent Agenda for Portfolio Companies

Talent as a Value Driver: Private Equity Firms’ Role in Shaping the Talent Agenda for Portfolio Companies

November 2023


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The private equity landscape is rapidly changing, and keeping up with the pace of change is crucial. 

Despite the type of deal, talent and leadership remain universal challenges facing all PE firms.

What Private Equity Firms Need to Know About Talent Management

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: 

  • Encouraging the development of a clear strategic direction 
  • Identifying areas for improvement to enhance performance 
  • Improving communication channels between the leadership team and the firm 
  • Fostering a culture that aligns with the values of both the firm and the PortCo 
  • Ensuring the company has a well-prepared succession plan in place for future leadership transitions 

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. 

What Private Equity Firms Need to Know About Recruitment

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: Advantages and Disadvantages

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. 

External Recruitment: Advantages and Disadvantages

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. 

The Role of Executive Search Firms in Private Equity Leadership Acquisition

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. 

Who Should Make Hiring Decisions for PE Portfolio Companies?

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. 

How Should Private Equity Firms Approach Leadership Management?

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: 

  • Establish clear governance structures with well-defined roles, responsibilities, and channels of communication. 
  • Appoint external chairpersons, subcommittees, or non-executive directors (NEDs) to bring fresh perspectives and enhance accountability. 
  • Build a management team consisting of both old members and new joiners to ensure better integration, clear communication, and alignment of objectives. 
  • Provide regular feedback, performance reviews, and targeted skill development initiatives to enhance the effectiveness and resilience of the management team. 
  • Strike a balance between oversight and giving managers enough autonomy to effectively run the business. 
  • Make timely interventions in leadership, particularly early in the investment hold, to ensure that the management team is aligned with the PE firm’s objectives. 

By undertaking these measures PE firms can navigate the leadership challenges they face and achieve their investment objectives. 

How to Find and Cultivate Better Leadership for PE-Backed Companies

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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