Avoiding Bad Hires for Private Equity Portfolio Companies

April 17, 2023 – Making the wrong C-suite hire is the biggest risk facing any portfolio company. Besides wasting compensation, a mis-hire in the C-suite can result in strategy mistakes, broken processes, and poor employee morale. But even worse for a private equity portfolio company, a bad C-suite hire consumes precious execution runway, the time that the company should be implementing the value creation plan. That means even one bad C-suite hire can increase the hold period or even derail the investment thesis entirely.

Join Bespoke Partners tomorrow for an interactive webinar led by the firm’s CEO Eric Walczykowski and partner and head of go-to-market practice Tess Fischer and supported by Hunt Scanlon Media.

“I liken the cost of a bad hire – especially a C-suite hire – to an iceberg,” said Mr. Walczykowski. “There are the obvious direct costs you immediately recognize like the part of the iceberg that is above water. It’s lost salary and benefits for a senior executive. The cost and time spent on recruiting them. The mistakes they might have made, like setting the wrong strategy and hiring in the wrong staffers. Then confusion and the drag on morale for the rest of the staff.”

“But it’s the rest of the iceberg below the waterline you really need to worry about,” he said. “These are indirect costs that you may not immediately appreciate. The impact on your brand and company reputation and the impact on the customer experience can be a major hit on your commercial operation.” Bespoke Partners works extensively with private equity firms and their portfolio companies and one bad C-suite hire can effectively derail the value creation plan and undercut the PE firm’s investment thesis for the company. “At a minimum, the time lost to dealing with a C-suite mis-hire and finding a replacement means the hold period will be longer and exit will be delayed,” Mr. Walczykowski said.

The impact of a mis-hire on your customers, brand, and reputation cannot be overstated, according to Ms. Fischer, who works extensively with recruiting go-to-market leaders who drive marketing and sales and customer success in B2B companies. “A bad hire in the C-suite leader for sales, for example, can have a lasting impact that can pull your growth plan completely off track,” she said. “A mis-hired sales leader can permanently damage your relationships with important customers. It can undercut your ability to win recurring revenue from these customers. In smaller markets, the word can quickly get around that your company is not delivery quality solutions and is dropping the ball. And this is not even to mention that a poor sales leader has also probably brought in and built out a sales team and those people also may not be the right fit. In short, a go-to-market mis-hire can severely damage your entire revenue plan.”

Bespoke Partners offer three best practices that the firm has found to be effective in mitigating the risk of a mis-hire. First, the firm conduct extensive backchannel referencing, typically 10 per C-suite hire. A backchannel reference involves seeking out the people who worked with the candidate in the past but who were not offered up by the candidate as references. Second, Bespoke uses state-of-the-art behavioral assessments for the candidates and for your executive team to gain insight into workstyles and personalities and determine how well the candidates will fit and execute with the team. “There is extensive management science for analyzing these factors and we use it with clients every day,” said Ms. Fischer. “Lastly, we work with our clients to implement the most effective interviewing techniques, such as case studies and scenario workshopping. These can really help you dig down and get behind the resume, see how the candidates think, how they operate under pressure, and if they are a strategic thinker.”

“I’d add that a huge part of making the right hire is to understand the talent market for your space,” said Mr. Walczykowski. “As we have reported in our quarterly Private Equity Talent Benchmark Report, the market for seasoned C-suite talent has been really tight in many sectors and especially for private equity leaders for the last couple of years.”

“So it is important to map the market and understand what type of leaders are available and get a sense for how compensation packages are trending,” he said. “Talent is a market like any other. When the demand outstrips supply, the sellers – that is your executive candidates – have the pricing power and compensation packages rise. We help our clients understand this with our continuous talent market research and updates with our talent report.” Bespoke also offers curated access to talent so clients can test the waters without committing to a full search.

Demand for Top Talent in the Private Equity Sector Continues
While financial engineering, inorganic growth, and market expansion remain important tools in the private equity toolbox, talent has emerged as key to growing companies and achieving the investment thesis, according to a newly released report from Bespoke Partners. Yet unlike strategic assets, intellectual property, or other resources that fuel growth, talent can be notoriously difficult to optimize. Bespoke Partners’ report is designed to help private equity partners and the leaders in their portfolio companies understand essential talent market trends based on granular data from the sector.

The private equity sector is on the downside of a historic surge in deal volume, according to the Bespoke Partners’ report. “The talent market for private equity portfolio companies has experienced profound impacts from that surge as well as the pandemic-induced disruption that immediately preceded it,” the report said. “As 2022 drew to a close, the Fed’s aggressive interest rate hikes and volatility in company valuations contributed to a sharp curtailing in private equity deal volume began to ease what was the tightest talent market in recent memory. These factors form the backdrop for the trends in the talent market for private equity portfolio firms in the software and SaaS sectors.”

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

Lastly, Bespoke urges clients to consider non-traditional talent to help broaden the talent pool. “So that may be step-up candidates who have held a lower executive role but who are ready to step up to the top job, like a VP of FP&A who is ready to become CFO,” Mr. Walczykowski said. “Or an accomplished CRO at a public company may jump at the chance to move into private equity and their skills will translate well. There are certain proven techniques to judging whether a candidate is ready for those kinds of moves and we use them to help our clients broaden the talent pool.”

PE Talent Trends

Talent is now the single most important lever for private equity firms to create value in the companies they acquire, according to Mr. Walczykowski. “In years past, firms relied on proprietary deal flow or financial engineering to create value,” he said. “But the sector has been flooded with capital so proprietary deal flow is hard to find. And financial engineering is table stakes. Everyone does it and it no longer creates outsized advantage.”

Ms. Fischer explains that in the go-to-market sector, the hot trend is finding leaders who know how to drive capital-efficient growth. “That’s driving top-line revenue with sales but at the same time efficiently using resource so you can grow profitably,” she said. “This is in contrast to the grow at all costs that has been common in some sectors, especially for a lot of venture backed start-ups. That strategy is around winning market share as quickly as you can – a land grab – and then worrying about how to turn a profit from those customers later. Now that market headwinds have set in and make landing customers more challenging, the idea of winning a customer at any cost is no longer really viable. Of course capital-efficient growth has been the focus for the private equity sector for a long time. So executives with private equity experience are especially in demand.”

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Speakers

Eric Walczykowski is CEO of Bespoke Partners and leads the firms’ commercial operations. As an experienced operator, investor, board member and consultant, he brings a multidimensional perspective on building high impact executive teams that deliver superior results.

Tess Fischer is partner and head of go-to-market practice at Bespoke Partners. She brings over 17 years of experience building and managing networks, clients and teams. Ms. Fischer has worked in and around private equity her entire career and is driven by an interest in people, organizations and the desire to build relationships that deliver results.

Michael Song is a managing director based in Providence Equity Partners’ Boston office, where he is focused on portfolio operations. He serves as co-chair of the firm’s ESG committee and is a member of the portfolio review and valuation committees. Prior to joining Providence in 2010, Mr. Song worked at RSA, the security division of Dell EMC. Prior to joining Dell EMC, he was a consultant with Bain & Company.

Brian Kasser is the talent partner for the Welsh, Carson, Anderson & Stowe technology team. Focusing on executive talent strategy and management, he is responsible for helping WCAS’ technology companies to build outstanding leadership teams. Mr. Kasser brings to WCAS more than a decade of executive search experience having placed hundreds of leaders in many of the technology industry’s top organizations. Prior to joining WCAS in 2019, he served as partner and head of executive talent for Lightspeed Venture Partners. Earlier he was a longtime partner at Russell Reynolds Associates.

Attendance is free. To learn more and register to attend, click here

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