Massive pressure to gain market share, decrease costs and expand EBITDA. Renewed emphasis on reaching performance targets, driving operational excellence and growing organically. These are among the central features of a new value-creation paradigm for portfolio company leaders in the PE space, one which has significant implications not only for the types of candidates and competencies firms are now targeting, but what strategies and approaches they should leverage to bring investment theses to life and see multiples at exit.
With that in mind, it’s worth taking a moment to reflect on where things stand at the moment: Specifically, what’s working from a C-suite talent acquisition standpoint for PE firms and their partners right now? At least as importantly, what isn’t?
Here’s a quick rundown of two chronic executive hiring challenges confronting PE firms today, along with ideas and insights on what might fix them.
talent acquisition goals conflict with succession planning
Three quick data points from a recent study illustrate the unique succession planning challenges facing PE firms today — and also underscore how completely different the talent acquisition and workforce managements dynamics at play here are compared to virtually every other sector:
- External talent is the most in-demand candidate pool for PE employers seeking C-suite leaders, comprising roughly three out of their four newly appointed CEOs, for example.
- A slightly smaller but nonetheless significant chunk of newly appointed leaders at PE-backed companies — around two-thirds of them — are also “complete outsiders,” meaning they’re new both to the company and the industry.
- By comparison, when S&P 500 companies are hunting for their next leaders, 72 percent of the time they simply tap someone who’s already on the team and transition them.
The stark contrast invites important questions for which there aren’t immediately compelling answers. For example: What does succession planning even look like if you aren’t advancing or grooming people from within? Where, when and how would that process begin? Can an employer realistically abandon succession planning and still hope to win the war for talent just by outcompeting on the job market?
These questions aside, the challenge posed by succession planning for PE firms cuts deeply in other directions as well, potentially exposing rifts and fault lines that the industry will be forced to confront sooner or later: issues of generational and cultural change for its aging workforce, for example, or how greater gender parity can be achieved given that women, however increasingly well represented in non-investment roles, are by and large scarce everywhere else.
How any of that might happen remains to be seen, of course, but if and when it does, it might unleash a much-needed cascade of talent, which in turn would substantially alleviate PE’s existing recruiting and hiring woes.
In the interim, at any rate, talent-strapped PE firms would be wise to either look for support from external partners or refocus on succession planning internally and experiment with new approaches. In that vein, it’s worth pointing out that even when PE firms commit to swapping out the C-suite of an acquisition, that shouldn’t foreclose the possibility of, say, formally grooming new recruits during a transition period in advance of the integration. Just think of it as modified “preboarding” for the executive class. Something to noodle on.
recurring spikes in demand dry up talent pipelines
What accounts for the fact that even industry-leading PE firms right now are reportedly struggling to fill anywhere from three-to-six active executive openings at a time? Many factors come into play, of course, including ongoing competition between employers from different sectors for an inherently limited pool of viable candidates.
But there are more fundamental reasons to think about, too, starting with the structural, or pipeline, challenge presented by PE’s recurrent hunger for C-suite replacements.
This happens a lot, as you probably know anecdotally, but research also confirms it: PE leadership decides to replace the senior management of acquired companies the majority of the time (58%), either before or after making the initial investment. Tatum's Central Region Managing Partner Chris Kearney added, "new PE owners sometimes have a rigid requirement for a revamped portfolio company leadership team that must have experience working at PE-owned portfolio companies, perceiving the fast pace and data-driven tendencies of PE firms to be more than some leaders can handle. However, quite often the requirement to have experience at PE-owned companies is needlessly narrow and prevents highly-qualified candidates from being "in the mix" for permanent, interim and project roles. Of course, requiring executives to have experience at PE-owned companies adds another challenge to succession planning efforts.” Faced with tight deadlines for increasing performance and delivering on investor expectations, this has now become SOP within the sector — with the obvious result that a line graph of PE demand for new executive talent would depict troughs for long intervals broken every so often by tightly clustered peaks.
Fluctuations in hiring demand are relatively commonplace elsewhere, of course — consider patterns of seasonal hiring in the manufacturing space, for example. But this is something else entirely, especially given the guaranteed scarcity of qualified upper-echelon executive candidates on the hiring market at any given time. As a corollary, too, sky-high turnover remains a persistent fact of life for portfolio company leadership, with average tenures among portfolio company CEOs getting cut two years earlier than their counterparts at publicly traded companies, for instance.
Is there any way around any of this?
Probably not, outside of strategic partnerships. However, even if replenishing dried-up reservoirs of talent with the freshets that strategic partners can provide remains PE’s best bet going forward, broadening job requirements around remote work — difficult as that may seem for top-level leadership roles — might be an additional measure to consider as well. Notably in that regard, one Hunt Scanlon survey found that only around a quarter of PE teams have been working remotely in the post-pandemic era, a percentage which is lower than the average across all professions and sectors.
Tinkering with this might reveal an impactful hiring lever, or at least an incentive to help combat the talent acquisition hiring crunches that surely await PE firms in the future. Time will tell.
key takeaways and next steps
Challenges like the ones above aren’t insurmountable, but they do foreground the unique value that executive search partners are able to offer PE firms. At Tatum, for example, we’re positioned to develop and deliver highly targeted talent strategies that not only mitigate critical talent challenges but enhance business performance, bring to life investment theses and more.
So why not identify frontrunners earlier, get them in the door faster and watch them engineer operational excellence sooner than before? Start that conversation with Tatum today.