A Look at Key Trends in Executive Recruiting for Private Equity-Backed Companies
October 24, 2024 – A long-awaited interest rate cut in the U.S. finally arrived in September. Bespoke Partners’ Second Half 2024 Private Equity Talent Report asks will it thaw the deep freeze gripping private equity deal-flow and exits? Signs were that prospective deals in late Q2 and early Q3 had already priced in the expected rate cut and deals were indeed picking up. PitchBook reports that first-half middle-market deal flow across all types of private equity deals was up 10 percent year-over-year.
Will the flood gates for deal-flow and exits open? “Massive amounts of dry powder is waiting to be put to work,” the Bespoke Partners’ report said. “Portfolios that have swelled with more companies than usual. Limited partners are clamoring for distributions. Still, challenges persist.” What will the remainder of 2024 and 2025 hold in store? Will the slow return to deal-flow continue or be nipped in the bud by resurgent market headwinds? As Bespoke noted in an earlier edition of this report, the only certainty is uncertainty.
The Bespoke report found that turnover is on the rise or remains elevated for key enterprise leadership roles, including CEOs, GTM leads and, in a new development, leaders in operations roles. Turnover for other senior leadership roles remained flat or decreased, which indicates some stability and caution about making changes at this time.
CEOs, in which Bespoke includes presidents, GMs and others with P&L responsibility, experienced a major surge in turnover in the first half of 2024, with the average rising 46 percent from the prior period. But the jump in turnover actually brings the index score closer to the average of approximately 4.0 that Bespoke has tracked since Q1 of 2021. CEO turnover was depressed for much of 2023 in large part because of the slowdown in exits, which are typically the trigger that leads CEOs to be open to new roles, the report found.
Bringing Companies to Exits
Anecdotally, CEOs have been “heads down” to focus on bringing their companies to a point where an exit is possible, the Bespoke report explains. “A chief strategy for this effort has been to grow a company in a capital-efficient manner to enhance the EBITDA margin in line with a sponsor’s investment thesis,” the report said. “But as new platform deal-flow has slowly recovered, new opportunities are drawing some CEOs away and turnover is gradually returning to the normal level. Bespoke sees this surge reflected in compensation data as well.”
The first half of 2024 showed persistent elevation in turnover for GTM leaders, which includes CROs, CMOs and CCSOs. This continued the trend from the end 2023 which saw a 34 percent jump in GTM turnover from Q3 to Q4. While the quarterly average in the first half remained at this level, data from 2Q2024 shows a drop-off in turnover that may indicate a peak was reached in late 2023 through early 2024, Bespoke noted.
“Of course, GTM is traditionally the most volatile of the leadership roles, with frequent changes and the shortest average executive tenure,” the firm said. “A strategic imperative driving much of the GTM turnover over the past two years has been an increasing emphasis on capital efficient growth and the need to drive both top line revenue and bottom line profit at the same time.”
4 Recruiting Best Practices
Since 2011, Bespoke Partners helped hundreds of software and SaaS companies to secure the leadership talent. “Along the way, we have seen a range of best practices in leadership recruiting,” the firm said. “In particular, our specialization in recruiting private equity backed companies has yielded some insights that are especially valuable for the private equity context.” Bespoke captured several of the factors to consider:
1. Talent Road Mapping. Talent road mapping in executive search is a proactive strategy that aligns a company’s leadership needs with its long-term business objectives and especially the value creation plan in line with a private equity sponsor, according to Bespoke Partners. “This approach involves identifying future executive talent needs based on anticipated company phases and growth stages,” the firm says. “In the private equity context, leadership talent is essential for driving growth and achieving the investment thesis. Talent road mapping that looks out years to encompass the expected hold period helps anticipate leadership transitions and fill skill gaps, ensuring the right executives are in place to drive success.”
Opportunities and Challenges in Private Equity Recruiting
Private equity firms are saying that talent is the most important factor in driving growth. While financial engineering, inorganic growth, and market expansion remain important tools in the private equity toolbox, talent continues to emerge as key to growing companies and achieving the investment thesis, according to a report from Bespoke Partners. Yet unlike strategic assets, intellectual property, or other resources that fuel growth, talent can be notoriously difficult to optimize. In fact, the biggest challenge for the PE sector is getting talent right, according to Nat Schiffer, managing partner at The Christopher Group. “PE firms often compete with other financial services firms, technology companies, start-ups, and other industries for the limited pool of qualified talent with the necessary skill-sets and experience for the PE industry,” he said. “The intense competition for top talent can make it challenging to attract and retain qualified candidates who may have multiple options.”
“This strategy can significantly reduce time to value, by having preidentified talent ready to step into critical roles,” the firm added. “It minimizes the time spent on executive searches during high-pressure moments and allows companies to quickly align leadership with the demands of the investment thesis, whether it’s scaling operations or driving innovation. Talent road mapping can accelerate leadership changes by ensuring your people development, talent acquisition team and recruiters are in sync on the leadership needs and timing.”
2. Scorecarding Executive Roles. Bespoke Partners is occasionally surprised to learn of search firms that do not generate documented scorecards for clients. “Generating an agreed scorecard is simply a must,” the firm notes. “It offers a streamlined, data-driven approach to ensure that leadership hires directly support the investment thesis in a private equity context. Further, a scorecard establishes clear metrics tied to key performance indicators (KPIs) and strategic goals, allowing for faster, more precise evaluation of candidates. By focusing on the specific competencies and leadership qualities needed to drive growth, a scorecard helps portfolio companies and sponsors to avoid costly hiring mistakes and ultimately speeds up the decision-making process.”
Related: The Market for Senior Roles Heating Up at Private Equity Firms
Bespoke explains that the integration of a scorecard also drives efficiency in managing leadership transitions. “By standardizing the criteria for executive roles, it ensures that each candidate is measured against the same strategic framework, which aligns both recruitment and talent development efforts with the company’s financial goals,” the firm says. “This reduces the risk of mismatches between the leadership team and the company’s evolving needs, minimizing the likelihood of expensive executive turnover and its associated disruptions.”
3. Avoid Recruiting During Demand Spikes. Leadership talent is a market. Hiring companies are the buyers and executives are the sellers, Bespoke explains. “It’s often surprising then that some companies looking to land the best talent do not respect the market law of supply and demand. Case in point: Bespoke notes that most companies run budget years concurrent with the calendar year. “That means budgets for hiring come online on January 1,” the firm says. “As a result, virtually everyone starts recruiting in earnest at the same time. As a result, you will compete for the same executives and likely have to pay much more to land them. You also are likely to have a considerably longer hiring cycle. The most successful companies we have worked with recognize the market dynamic and so time their recruiting to avoid high demand periods. Depending on the circumstances, this can require shifting budgets and hiring processes.”
4. Inadequate Referencing.
Surprisingly, there are many companies, search firms, and sponsors who do not perform in-depth referencing to gather a complete dataset and 360-degree view of a prospective candidate, according to Bespoke. “The hiring of a senior executive is perhaps the most critical decision companies and sponsors face,” the firm explains. “A mis-hire can derail the value creation plan and delay progress toward achieving the investment thesis. Referencing needs to include not only interviewing the named references but also backchannel referencing that engages people who worked with the candidate in the past but are not named references.”
Bespoke also notes that backchanneling can be controversial in some circles. It certainly can be uncomfortable for candidates. “Any executive who has had success in their career has had to make tough decisions that may have alienated some people,” the firm says. “This is why we recommend working with a search firm that understands the nuances and how to interpret the results of the delicate backchanneling process. At Bespoke we have conducted thousands of backchannel references that have enabled our clients to make the most informed decisions about leadership candidates.”
As the end of 2024 draws closer, the talent market for software and SaaS executives in the private equity sector stands at a crossroads, the Bespoke report concludes. “Anticipation of a flood of new deals and exits as private equity firms put dry powder to work and decrease portfolio bloat is dampened by uncertainty about the outlook for enterprise spending on software and SaaS,” the firm said. “Meanwhile, firms continue to uplevel talent with an eye toward driving capital-efficient growth on the eventual path to exit. Will 2025 bring more challenges and market headwinds, or will we see a return to more favorable market dynamics? Whichever trend takes hold, check back with us in our next market update to see how the talent market is affected.”
Related: How Talent is Driving Private Equity Success
Contributed by Scott A. Scanlon, Editor-in-Chief and Dale M. Zupsansky, Executive Editor – Hunt Scanlon Media
