A Look at the Talent Needs for Today’s Private Equity Firms

All signs say the tight market for experienced PE talent will continue for a while, says Bespoke Partners in a new report. Outsized returns over the past couple of decades in high profile deals have caused a wave of new capital to rush into the sector. “In a sense, the private equity sector could almost be viewed as a victim of its own success,” says Bespoke’s CEO, Eric Walczykowski.

May 2, 2023 – Private equity firms are saying that talent is the most important factor in driving growth. This sentiment explains why the market for private equity leadership talent remains tight despite the sharp drop-off in deal volume in the sector, according to Bespoke Partners’ newly released Private Equity Talent Benchmark Report series, which delves into the trends that shape the talent market for private equity firms. The report is designed to provide PE deal partners, talent partners, and portfolio company executives with data and analysis not found anywhere else.

Despite efforts to widen the candidate pool and ease the tight market, Bespoke’s findings indicated that demand remains high for leaders who have deep experience in driving capital-efficient growth. These are leaders who understand how to optimize the use of resources to generate profit and grow revenue at the same time.

The Bespoke report says ongoing turbulence in public markets, a stagnant IPO market, and depressed deal flow in the last quarter of 2022 and in the first quarter of 2023 eased the tight market overall. “But turnover rates and compensation trends indicate that demand has remained historically high for seasoned executives in companies with private equity sponsors,” the Bespoke report said.

Executive turnover trends – tracking which leaders change in portfolio companies – is a good proxy for leadership demand, according to the Bespoke report. Turnover is most frequently correlated with deal flow in the sector as private equity firms make leadership changes as part of the investment thesis.

Bespoke gathered data on 1,570 instances of private equity executive positions turning over in 2021 and 2022 across the U.S.-based software and SaaS portfolios of 31 private equity firms. The firm found that the roles turning over the most in this period were those in the go-to-market roles of sales, marketing, and customer success, and the operational category, in which Bespoke places chief people officers, chief human resources officers and chief operating officers.

The high turnover in HR and operations roles is also notable. An increasing number of those turnover instances are in the HR domain. Bespoke said this is evidence of the rising importance of HR leaders and the emergence of the chief people officer. This trend underscores the widespread recognition of the role of talent management in achieving the investment thesis. Bespoke said it expects that trend to continue as demand grows for chief people officers.

Tight Market for PE Talent

“All signs indicate that the tight market for experienced talent in the private equity sector will continue for the foreseeable future,” said Eric Walczykowski, Bespoke Partners’ CEO. “In a sense, the private equity sector could almost be viewed as a victim of its own success. The outsized returns generated over the past couple of decades in high profile deals have caused a wave of new capital to rush into the sector.”

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“New capital means new competition and, with talent now the most critical factor for the investment thesis, that means competition for the best leaders with proven track records in private equity,” Mr. Walczykowski said. “Cracking the code for talent means being able to hire quickly and get moving as soon as possible on the value creation plan. But it also means getting the right talent, the executives who have the skill-sets and leadership acumen to drive growth and expand EBITDA. The challenge is doing both at the same time – hiring fast and hiring right – and that is what we help our clients to navigate every day. Overcoming this challenge requires a curator of talent in software who understands the total market and can pinpoint candidates who are available and actionable at a given time. Getting access to those candidates can provide a competitive edge for winning the talent war.”

Patterns in C-Suite Gaps

An effective leadership planning approach is to consider the composition of a portfolio company’s executive team when benchmarked against comparable firms, according to Bespoke Partners.

Related: Transforming Portfolio Companies and Driving Value Creation via Human Capital

“Every company addresses finance, sales and marketing, human resources, product and technology leadership in some fashion,” the firm said. “The question is when you need to hire a C-suite level leader in the area, or whether a more junior executive is enough to lead the function given your company’s stage and growth plan. Of course all companies are unique and operate in different circumstances, so there is no hard-and-fast rule on C-suite occupancy.”

In the last edition of this report Bespoke shared data on the approximate timing in a company’s growth when most firms in its dataset of middle market and growth firms round out the C-suite. Expanding on that research they have calculated averages across the full data set, to provide a benchmark for C-suite composition. Bespoke studied 687 growth and middle market stage software and SaaS portfolio companies to arrive at the mean occupancy rate across CEO, CFO, CRO, CMO, COO, CTO and CPO positions. The average size of these firms was a headcount of 825.7 employees.

Bespoke found that the only C-level positions that consistently were occupied in the majority of firms were CEO, CFO, and CTO. The average firm had 2.2 vacancies in the C-suite roles they looked at. It’s noteworthy that close to half of the firms had CROs and CMOs. Bespoke’s prior research showed that the majority of firms gained these C-suite GTM leaders as they grew between 500 and 1,000 employees. “The average provides a more granular datapoint on the timing of these hires and, in particular, when the GTM domain splits into CRO and CMO headed functions,” the report said. “This bifurcation of a function into multiple C-suite roles is a key indicator of company maturity during a growth phase.”

To add further insight into the trends, Bespoke looked at the averages across multiple years to see how they change after a new company is acquired.

“The vacancy rate trend over years implies that the industry recognizes talent as a key area of value creation that is central to the investment thesis,” the Bespoke report said. “While we cannot derive the comprehensive vacancy rate for companies at the exact time they were acquired in 2020, we can see that today they have matured and have broader C-suite representation than their equivalents being acquired today. These firms are finding and hiring CFOs, CPOs and, to a lesser extent, CROs and CMOs to drive growth to the next level.”

Also of note, according to the study, was the increasing emphasis on COOs, which were more likely to be present in the companies acquired in 2022 than in 2020. Bespoke takes this as a sign – which is backed up by anecdotal evidence from our client engagements – that firms are increasingly focused on operational efficiencies.

The Bespoke report also found that operational efficiency and capital-efficient growth are central to today’s value creation plans implemented by private equity sponsors. “The rise in C-suite experts who can optimize operations and maximize the efficient use of resources is clear evidence of this trend,” the report said.

Founder Transitions

A founder transition is a complex and delicate process. When companies grow to a particular stage, often late venture or early growth, many investor sponsors decide it is time to bring in seasoned management to drive the company to the next level, according to the Bespoke report. Bespoke notes that this often means a company founder who has been serving as CEO for the company’s entire history to that point must be replaced by a more experienced CEO with a different type of growth track record.

Bespoke has helped to orchestrate dozens of founder transitions over the past decade for private equity backed software and SaaS companies. These instances offer some insights on when and how these transitions take place. The Bespoke report found that the average revenue at time of founder transition are $104 million with the average headcount at time of founder transition at 440. Lastly, 61 percent of incoming CEOs were sourced from same or adjacent vertical market.

Related: How Talent is Driving Private Equity Success

“The data indicates that companies going through founder transition do so at a revenue level of a little more than $100 million, with per employee revenue generation of $236,000,” the Bespoke report said. “That compares to the revenue per employee average of $271,000 across the broader set of the portfolio companies we have worked with over the last decade. This under-performance of about 13 percent can be an indicator of the growth issues that may have spurred the private equity transaction and subsequent founder transition in the first place.”

Building the Best PE and VC Leadership Teams in 2023
When choosing new leaders, companies should be wary of focusing too much on experience. Best athletes must also be ambitious, direct, disruptive, and a game-changer, says a new report from Chapel Hill Solutions. “Leaders that have the most impact in portfolio companies must be persuasive and confident and be able to build consensus and buy-in across every stakeholder level,” said the study.

Further, Bespoke found that the majority of the incoming CEOs replacing the founder come from private companies and to a lesser extent public companies and those with private equity sponsors. “Only a very small fraction were sourced from venture-backed companies,” the report said. “As might be expected, the majority come from the same vertical market or a closely adjacent one.”

Bespoke says these origins reflect a desire for incoming CEOs to have presided over successful capital-efficient growth in their prior companies. “This recruiting trend has become increasingly popular in the past year as companies seek to grow profitably in the face of market headwinds and uncertainty,” the firm said. “This skill-set represents a departure from the grow at all costs strategy often pursued by start-ups seeking to break into a market, a strategy that may in fact have been the focus of the original founder CEO.”

Looking Ahead

The Bespoke report concluded that capital-efficient growth is the theme of wide-ranging leadership decisions in many sectors today. The data collected and analyzed for this report provides snapshots of how this trend is affecting the leadership talent market for private equity backed portfolio companies in software and SaaS. In particular, Bespoke’s research indicated that executive team composition changes, the trends in GTM and operations leader recruiting and compensation, and the goals of founder transitions all feature profitable growth as a key focus area. “Despite the deal-flow drop-off in 2022, the market for seasoned talent remains tight and experienced leaders continue to command premium compensation packages,” the Bespoke report said.

The firm’s data showed this to hold true across both cash compensation and the equity packages granted to executives as longer term incentives. The report found that the average cash OTE continues to average at or above $500,000 across the C-suite and equity represents on average around 11X to 14X depending on the role.

As private equity talent leaders consider mid-hold-period talent changes in their portfolio companies, Bespoke says it sees little evidence that the seller’s market will be changing soon. The firm’s research into the practice of considering “step-up” candidates did show that this approach can counteract some effects of the tight market. “However, it is critical to ensure these candidates are thoroughly vetted through techniques such as backchannel referencing and behavioral assessments,” Bespoke said. “These methods can reduce the risk of hiring a leader who has not served in the role before.”

To read Bespoke Partners’ full Private Equity Talent Benchmark report please click here!

Related: Redefining the Search Sector for PE Leaders

Contributed by Scott A. Scanlon, Editor-in-Chief; Dale M. Zupsansky, Managing Editor; and Stephen Sawicki, Managing Editor – Hunt Scanlon Media

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