Demand for Top Talent in the Private Equity Sector Continues

While talent has become an integral lever in how private equity does business, optimizing it can prove tricky. In a new report, Bespoke Partners boils down key data to provide essential talent market trends for both its PE partners and leadership of their portco companies.

January 25, 2023 – 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.”

The Seller’s Market

Deal volume in private equity reached a peak in 3Q and 4Q of 2021, according to PitchBook. This meant that any executive with experience in running a successful private equity portfolio company was besieged by offers from recruiters. As the “sellers” in the talent market, candidates were clearly in the driver’s seat as demand exceeded supply and the price of talent rose, said Bespoke Partners.

“But the tight market was also affected by significant changes in the work world brought about by the COVID-19 pandemic,” the firm said. “Location has effectively been eliminated as a factor in hiring talent for most software and SaaS companies. Most companies are more concerned with time zone compatibility than requiring executives to live in a specific geographic location. The pandemic effectively accelerated the adoption of remote working practices that already had been underway. In fact, the adoption of remote working merely cemented the practices already in place at many technology firms.”

The result, says the report, is a much larger pool of candidates available to draw from for any given role. “While this wider pool might help ease market tightness for an employer seeking talent, it also means any candidate’s options for new offers rise dramatically as well,” the report said. “The period of the pandemic business disruptions also saw a shift in the acquisition strategies of many private equity firms. Some deals contemplated before the pandemic were put on hold and many firms turned to evaluating distressed assets as opportunities.”

In addition, Bespoke Partners notes that very low interest rates enabled private equity firms to secure cheaper and more abundant financing in their pursuit of larger and larger buyouts and the IRR calculus behind the scenes grew ever more favorable. “These factors caused huge masses of dry powder to be put to work in the latter half of 2021 when it became clear that monetary policy was tightening and aggressive rate hikes were beginning,” the firm said. “The influx of capital spurred a surge in hiring and, in some parts of the software and SaaS sector, a grow at all costs mentality. The result was a dramatic spike in demand for seasoned talent and tightening of the talent market.”

Talent as the Growth Lever

Bespoke Partners explains that the keys to successful private equity firms and their investments used to be financial engineering, proprietary deal-flow, and access to favorable credit terms and structure. “The methods of financial engineering underpinning successful investment theses of the past have now become table stakes,” the firm said. “Every firm does them and financial engineering is, at a minimum, the starting point for a value creation plan. Proprietary deal-flow is increasingly rare thanks to competition, widespread availability of information, and maturation of private capital sectors. In a zero percent interest rate environment, the playing field for credit terms is essentially level.”

How does one get the edge on the competition? Enter the talent war. The Bespoke Partners’ report explains that it soon became apparent industry-wide that the strongest value creation lever available was to upgrade your management teams and bring in world-class talent.

“As interest rates increase and more of a premium is placed on profits and relatively less on growth, a new type of executive is in demand, those with experience in profitable growth and capital efficiency,” the report said. “In other words, the executive for today is one who can do more with less and who has experience in placing successful return-on-investment bets. Choosing the right path forward now requires a greater appreciation for the necessary capital investments and expenditures to achieve the desired outcome.”

“Human capital and leadership have long been an essential part of any company’s value creation plan,” said Eric Walczykowski, CEO of Bespoke. “But today the other traditional levers of growth are largely at parity thanks to competition and broader information availability across the private equity sector. This means finding and deploying the right talent has never been more important.”

“Looked at another way, your thesis for a portfolio company may involve the most sophisticated financial engineering and deal structure,” Mr. Walczykowski said. “But without the right leadership in place to execute, the odds are against the company achieving the best outcome and maximizing its value.”

Turnover Trends

The average executive team turnover per new portfolio company deal in 2018 was 6.8 positions. Bespoke Partners notes that this means on average almost seven members of the executive leadership team turned over in the four years following the acquisition. “If we assume that the expected hold period for a portfolio company is often around four to five years, we can expect that the full executive team will be turned over if the hold period extends much longer than that,” the firm said.

For acquisitions that occurred in 2022, turnover so far on average is 2.1 positions. This implies that on average across the board, companies can expect four or more positions to turn over from the acquisitions made in 2022 over the course of a four-to-five-year hold period, said Bespoke Partners.

Of course, not every company has the same needs or circumstances, and all are subject to unique dynamics. But if the investment thesis includes growing from $75 million in annual recurring revenue (ARR) to $200 million in ARR then a proactive evaluation of the talent required becomes a logical part of the value creation plan and executive, said the report. Anecdotally Bespoke Partners said it sees this occurring more frequently and, in fact, executive team changes and identification of potential new team members is often occurring during pre-deal due diligence.

Related: How PE Firms are Competing for Talent During the Great Reshuffle

Another part of this strategic talent approach is planning ahead for leadership roles that may not be needed in the near-term but will become essential further along in the hold period, according to the Bespoke Partners’ report. “Working well in advance on an expected role leads to a better understanding of your desired archetype and ultimately a better outcome should you decide to conduct a search.”

CEOs in 2022 are under intense scrutiny and the result is appearing in a spike in turnover rates. Bespoke Partners’ team says the pressure on top leaders is indicative of today’s turbulent economic times. “Continually growing markets and corporate spending can cause even flawed leadership and mediocre strategy to appear to be successful,” the firm said. “But when the going gets rough and growth falters, the scrutiny intensifies on the CEO’s leadership and strategy. CEOs, presidents, and general managers that turned over in 2022 did so on average 0.8 years after their portfolio company was acquired.”

“The CEO plays the most critical role in driving portfolio company growth and achieving value creation objectives,” said Bespoke founder Kristie Nova. “Finding the most effective leader for that role has never been more important than in today’s challenging economic climate.”

“A key trend we are seeing is demand for CEOs who know how to orchestrate capital-efficient growth in their companies,” she said. “Strategies pursued in the past to grow at all costs are no longer viable when economic headwinds make capital more expensive and reduce access to funding. We have a network of CEOs with proven ability to lead companies to grow profitably.”

Emerging C-Suite Leadership Roles

Bespoke Partners has observed that three emerging C-suite roles are becoming increasingly common in private equity portfolio companies the firm works with: chief people officers , chief revenue officers, and chief information security officers . A C-level human resources or talent role is increasingly common, in the form of a chief human resources officer, CPO or other variations. Generally speaking, Bespoke Partners sees CPOs as playing a more strategic role in their companies than the traditional human resources leader.

PE Talent Can Drive Value in a Tough Market
The uncertain state of the economy as well as the ongoing war for talent, among other issues, pose major challenges for talent leaders and recruiters for private equity firms across the board. At Bain Capital, Susan Levine has the ideal seat for seeing the big picture as we move into the final quarter of 2022, from progress in diversity hiring to the rise of the chief human resources officer, that will take us into 2023 and beyond. August Leadership’s Christine Sobhani and Greg Gerson recently sat down with Ms. Levine to discuss the type of talent that will succeed in today’s uncertain market.

“While the latter is often focused on administrative tasks, the CPO plays an essential role in deploying talent and human capital as a means to achieve the investment thesis,” the search firm said. “This leader is often the primary driver of talent recruiting and team build-out, which are critical for executing on value creation plans.”

The CPO is charged with cultivating the corporate culture and shared values, training and enrichment, and other processes that will keep employees focused and executing, according to the Bespoke Partners report. “The concept of a deliberate or intentional corporate culture has become increasingly popular as companies recognize the importance of values and norms for maximizing employee motivation and performance,” the report said. “An adept CPO shapes and executes on that sort of strategy. CPOs also typically lead the company’s efforts in diversity, equity and inclusion. Adding a seasoned CPO can also enhance understanding and ability to respond to employee sentiment and morale, which can lower turnover rates and improve productivity.”

Another relatively recent addition to the C-suite the Bespoke Partners’ report found is the chief revenue officer, who oversees some combination of sales, marketing, customer success and other go-to-market functions. While the role itself can have flexibility in reporting structure, Bespoke Partners sees commonalities of oversight of not just sales, but customer experience and account management.

The ideal candidate is not only a sales expert but possesses strong analytical skills with a strategic mind to identify new sales channels and untapped markets. “The majority of software and SaaS portfolio companies in our analysis with a headcount of 500 or more have a CRO,” the report said. “The role is particularly suited for today’s SaaS companies because of the long-term nature of the commercial model. Because they exercise authority across marketing strategy, implementation and sales execution, the CRO can pursue a revenue model focused on the relationship with the customer as a continuum instead of a single sale.”

Cybersecurity has come to the fore in the last decade as a mission critical function for virtually all software and SaaS companies. As a result, companies are choosing to elevate the cybersecurity function to a seat in the C-suite, often as the chief information security officer.

“The CISO often works in conjunctions with a chief information officer or other leader that manages IT, communication, and operational systems for a firm,” the Bespoke Partners’ report said. “The CISO will focus on the protection of operating data that may be considered to be sensitive, such as customer data that is being processed via a SaaS application. The CISO also may focus on the integrity of the internal systems that support the firm’s operations. This may include staff training in proper information security techniques, periodic testing of security defenses and practices, and the implementation of tools and controls to protect sensitive data.”

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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