Emerging From the Pandemic, Private Equity Recruiting Takes Off

October 28, 2021 – Private equity firms have been pulling strongly in a direction
all their own, not only bucking the challenges impacting other businesses but clearly passing key inflection points for growth. According to Dominic Lévesque, president of Tatum: “We’re seeing huge reserves of dry powder on tap, and along with it, sky-high valuations,” he said. “Small wonder, then, that the 2021 Private Equity Outlook from Pitchbook teems with hints of broken records.” Mr. Lévesque says to consider forecasts like the following, for instance: PE fundraising is on track to surpass $330 billion in 2021, an all-time high; overall deal value for carveouts this year could reach the highest levels ever recorded; at least 20 PE-backed companies are expected to enter public markets in the U.S. by way of reverse mergers with special purpose acquisition companies.

So it is no wonder that private equity firms today are paying more attention than ever to having the right people in senior roles at their portfolio companies and developing their executive leadership teams to drive growth. Talent and culture are the key areas that Bain Capital Private Equity focuses on when considering potential acquisitions. But that is just the beginning of what Susan Levine, a managing director and head of talent for the firm, describes as a journey to building strong portfolio companies. Truth be told, ahead lie many months of assessment, development, and for leaders and their teams, self discovery. “We need to ensure that once we figure out what companies to buy we really spend a lot of time to trying to make sure that we have the right CEOs and C-level leaders,” Ms. Levine said in a recent interview with Hunt Scanlon Media. “And furthermore, making sure the team, not just the CEO but the whole executive leadership team (ELT) is working together in a strong and high performing way.”

The results, she says, are obvious. “When you see that happening it is pretty extraordinary,” said Ms. Levine. “You see the teams working and gelling together more quickly. In those investments where that has happened, we have definitely seen greater returns. It sounds like motherhood and apple pie, but it takes a lot of work to get there. Our main focus once we buy the companies, even starting in the investment period, is ‘What is the kind of person who is going to be able to lead this investment and what does the team need to do?’ There is a very close connection between talent and maximizing talent so we can achieve greater equity value returns.”

“Competitive” is how Alison Woodhead, senior partner at
Kingsley Gate Partners, described the executive search market for PE talent. “It is a very hot market for talent right now,” she said. “Across industries, functions and disciplines, strong executives
are bombarded with recruiter calls. Candidates who are open to exploring new opportunities are often presented with multiple offers. Momentum and speed of decision making are crucial for attracting the best talent.”

Despite the fact that 2020 was imbued with uncertainty, the year ended on an upswing with unprecedented deal flow and higher purchase multiples in the U.S. than ever before,” Ms. Woodhead said. “With an even higher emphasis on EBITDA growth to justify these history-defining multiples, PE firms have had to be even more selective, hands-on and engaged with the executives driving value creation in this environment.”

The most direct way a search partner can help PE/VC firms looking to build out management teams is obviously to identify, attract, and introduce strong talent, according to Ms. Woodhead. “However, the true value of a strong search partner lies a level deeper—in the unique perspective and pattern recognition that comes from speaking with the most successful and influential players in a given space,” she said. “A search consultant is well positioned to help craft and execute on a talent strategy that aligns with the vision behind the investment thesis.

Sometimes a search consultant can even surface opportunistic investment and acquisition opportunities.”

“As always, CEOs and CFOs are in high demand, but now more than ever,” Ms. Woodhead said. “Private equity environments demand executives who are data oriented, comfortable with ambiguity and have a bias toward action. The ideal candidate has these characteristics accompanied by prior experience in a PE-backed environment, with at least one successful liquidity event under their belt.”

Jason Hersh, managing director and CEO of Klein Hersh, agrees that recruiting executives has never been more fiercely competitive. “With the world hyper-focused on healthcare, we are seeing more biotech companies starting up than ever before, creating a significant supply and demand issue given the scarcity of tenured executives available to run these new companies,” he said. “And while all healthcare executive roles are extremely competitive to fill today, we are seeing the most competition around roles within the areas of finance, commercial, tech and operations.”

An Environment of Record Investment
“The 2020 economic climate fostered an environment of record investment into the healthcare sector, specifically the pharmaceutical development and manufacturing areas,” Mr. Hersh said. “Because of this, there is now significant financial resources to be deployed, but simply not enough companies/areas to deploy it. This misalignment has led to PE looking at growth, growth looking at venture, and venture looking at seed. This situation is compounded by record high valuations and companies raising extremely large sums of money mostly from PE/VC at a pace never seen before.”

PE/VC investments in healthcare organizations coupled with the incredible demand for return, it has never been more critical for PE/ VC firms to partner with true subject-mattered experts for hiring the right people, according to Mr. Hersh. “All C-suite roles are highly in demand within biotech and healthcare services and tech are in demand (CEO, CCO/CGO/CRO, CIO/CTO, COO, CFO, CSO, CBO, CMO, etc.),” he said. “Previous fundraising experience (public and/or private), external Wall Street facing experience, experience bringing drugs and technology to the market. Plus, tenured executives with a proven track record of growth and transactions are always needed.”

CFOs In Demand
For many PE firms, the CFO is their most common change-out
role either post-recovery after COVID and/or during an acquisition or post-acquisition they change the CFO role out, according to Bernard Layton, managing director and CEO of Comhar Partners. “We are experiencing critical shortages of capabilities of CFOs that have both domain experience around the particular private equity portfolio companies’ business line and having had prior private equity successful experience,” he said. “There is just an absolute limit. We are finding that the time from first interview to offer needs to be under two weeks. If it’s not, that candidate is typically encountering several offers and is inclined to go take something else. It is a critical shortage, a very big deal. It’s very topical in the market and in the environment that we’re in. This exists less so on other senior leadership roles including CEO roles, but it does occur and it is a tightening of the market in general but it is at critical levels as it relates to the CFO role.”

Mr. Layton thinks there is generally a little deeper dive in due diligence that has been going on since 2020. “Certain private equity firms focus in distressed environment and I think they are thriving and doing extraordinarily well,” he said. “Generally, the cost capital has remained at record low levels. The valuations as a result are particularly high. It, as stated, is more and more critical that PE firms do all level and many of due diligence to make sure that there is not any avalanches or pitfalls that would occur post acquisition. The due diligence is more critical, the level of deal volume remains very high. The valuations remain extraordinarily high and certain sectors that particularly involve commodities or imports of goods are seeing particular strain and struggle in terms of getting supply chain efficiency.”

“I think frankly that the issue is executive search firms need to fully understand the mindset of the private equity organizations that they’re working with,” Mr. Layton said. “There is just an inherent compatibility almost as if a dear friendship dynamic exists between consultants in the executive search world and their corresponding relationships with PE firms. There is an affinity there and if that affinity is working and there has been a successful track record with them, it’s very, very hard to see them deviate away.”

“A lot of executive search firms are chasing work,” he said. “They are in the private equity-VC world. As a result, some of the terms and conditions are getting frayed at the edges and people are willing to do things they really shouldn’t do. At the end of the day, the private equity firm suffers when they buy on price and not quality of service or quality of performance. PE firms that buy on price typically run through a lot of different executive search firms and then they always initiate relationships with, ‘Can you throw an executive my way and if we hire them, you’re then on our short list,’ and it’s a very inefficient and very surface evaluation of executive search firms and does a bit of a disservice frankly to the quality search firms that are out there.”

Challenging Market
“The current climate for recruiting executives in the private equity sector is incredibly challenging and I do not see this letting up any time soon,” said Matthew Shore, president of StevenDouglas. “Given the incredible bounce back in the economy, the explosion
of new PE firms over the last five to 10 years, historic low interest rates and over a trillion dollars of dry powder to be deployed, finding proven PE leadership will be challenging for some time.”

“I was recently at a conference with 75 PE firms in attendance
and the biggest issue they are all have is finding great talent for their portfolio companies, particularly in the CFO, COO, CTO and CHRO roles,” he said. “The consensus was that executive search mandates are taking longer than expected, compensation levels are going up, candidates are leveraging multiple offers and compelling counter-offers have become commonplace. It seems that these days, a search is not truly complete until the executive shows up for the first day on the job.”

With all that said, StevenDouglas and many search firms are having record years due to the unprecedented demand for talent created by the 2020 downturn and the dramatic expansion that is now taking place. Now more than ever, PE/VC firms are having to develop strong relationships with executive search firms, because the days of going through the Rolodex are over.

“PE firms are paying higher multiples than ever and VC firms are seeing technology valuations soar, which leaves less room for error in making the right hires,” Mr. Shore said. “The soft skills required for success are also getting more complex, because the expectations of the modern post-COVID employee base is much different than the past. Executives that are stuck in the past and expect all employees to be onsite five days a week, will have an incredibly difficult time attracting and retaining talent,” he said. “Hybrid and fully remote environments are the new normal and old styles of leadership will not necessarily work in these environments. Command and control has been replaced with servant leadership styles and our workforce has become more diverse in what they want out of their careers and work experiences, and our job as search partners is to help our clients navigate these waters.”

“Having been in executive search for 25 years, the current market is the frothiest we have ever seen in private equity, particularly for CFOs and other critical C-suite roles,” Kevin Hahn, CEO of Spectrum Search Partners. “COVID has transformed some leaders who were otherwise solid B players into C and D players with added complexities within their markets, cash flow constraints, supply-chain disruptions and other curveballs not ordinarily seen in most normal times. As a result, many PE firms have been focused on replacing those leaders with more nimble and agile executives who can thrive under these pressures. Most of the candidates we talk with are receiving several inquiries a week, which has made it difficult for some companies to stand out and cut through the clutter. Creating a compelling value proposition has never been more important.”

The COVID Bump
The 2020 climate has been polarizing for many portfolio companies, according to Mr. Hahn. “Those experiencing the COVID bump or increased demand in their products and services during COVID have begun to normalize and in many cases decline due to overbuying of their products (think hand sanitizer and wipes). Those experiencing the COVID dip have right-sized their businesses and are working through creative solutions and in some cases new channels to re-establish demand,” he said. “Many of those companies have also switched out their senior leadership teams in an effort to spur productivity and bring energy back to their business. Each of those scenarios have crated opportunity for PE firms.”

Currently, the demand for CFOs and CEOs have been spiking
at much higher levels than normal, Mr. Hahn said. “One really
good CFO candidate recently commented to us that he had been contacted by 15 search firms that week,” he said. “With candidates more reluctant to relocate, there has been a great deal of pressure on allowing better commuting scenarios, providing flexibility and finding ways to make situations work in ways no one expected 12 to 18 months ago. CFOs who are also strong leaders, capable of tight cash management and operationally sound have especially been in demand. CEOs who can drive new market opportunities, keep their teams focused and on track and lead through market fluctuations have also been highly sought after. There has also been pressure on driving sales for many of these businesses and CROs who understand both sales and marketing tactics have been increasingly targeted as the lines between sales and marketing and blurring in some industries.”

“Almost every company is reevaluating their current leadership needs, and there is a lot of new hiring activity,” said Diane Gilley, a partner with Odgers Berndtson. “With the significant increase in M&A activity continuing on the back of a resurgence that began after the first wave of the COVID-19 pandemic, the competition to hire C-level leaders right now is acute. Portfolio companies are looking to staff the C-suite with a special combination of skills and experience: they need forward-thinking leaders who can transform and progress their business, but they also need leaders who have the pragmatism to put strong finance, operations and IT processes in place to provide accurate forecasting and better understanding of key value levers.”

“Through a combination of extreme market tailwinds accentuated by historically low interest rates, 2020 saw record U.S. private equity dry powder levels,” said Richard Pooley, a partner with Odgers Berndtson. This has been translated into record levels of deal activity, amplified even further by pent up demand at the beginning of 2021 as pandemic fears loosened. The first half of 2021 has seen PE deal volume increase by over 30 percent compared with the same period last year.”

Search firms need to be agile and move fast to react to firms’ transaction-led demand for successful PE professionals (both interim and permanent), while also being thoughtful and making data-driven decisions based on the specific needs of the company, according to Ms. Gilley. “If a search firm isn’t offering an efficient but tailored approach to important placements like these, that should be a red flag for PE/VC firms,” she said. “When it comes to building out a management team, executive search firms can also help PE/ VC firms early on as they evaluate the talent within potential new acquisitions to their portfolio group.”

Changing Market Demands
PE/VC companies are in need of two particular types of executive leadership right now. “As companies emerge or pivot to react to changing market demands, they need visionaries and public-facing executives who can usher in strategic change and be the face of a company or brand in the marketplace,” Mr. Pooley said. “Thus, go- to-market positions like CEOs, division presidents, heads of sales, heads of marketing or hybrid-roles are in high demand. However, the past year and a half has brought with it unprecedented change and upheaval,” he said. “So in addition to more public-facing roles, there is a heightened demand for exceptional CFOs and chief technology officers. Companies want to fill these roles with pragmatic and experienced leaders who can put strong finance, operations and IT processes in place to help companies react to the destabilizing forces that emerged during the pandemic.”

“It’s a hyper-competitive landscape for the PE sector,” said Maximillian Stubenvoll, principal, consumer & industrial practices, Acertitude. “Great leaders have multiple opportunities, especially those with a track record of successful business transformations and exits. Compensation is also inflating as a result, at rates that could be 20 percent or more than prior years. In the consumer and industrial markets, we are seeing increased demand for board members and C-level executives with spikes in supply chain, restructuring, and digital as PE funds and portfolio companies aim to deliver on value creation plans amid supply-chain disruptions, changing consumer preferences and remote workforces,” he said. “Executive recruiters must stay exceptionally close to candidates and clients throughout the search process. It is important to make thoughtful but fast decisions – delivering insights in real time – to secure brilliant leaders with speed and certainty.”

“The pandemic in 2020 was fundamentally different to the last significant market shift we saw in the 2008 global financial crisis,” said Charlotte Cederwall, partner, consumer practice, Acertitude. “To bounce back from that, critical change was required at an institutional, government and country level. This time around, no underlying flaws were creating a market slowdown that would take time to recover, so as soon as life has begun returning to normal, pent-up demand is being released, resulting in the boom seen in certain markets.”

“This, combined with continued digital and tech innovation and consumer conversion to online which was further accelerated by global lockdowns, and readily available and cheap funding, has propelled start-up growth and created significant opportunities for VCs,” she said. “For PE, the need for transformation in more traditional companies offers more and more opportunities for value creation driven by innovation and differentiated, creative leadership.”

“Through the numerous NED, CEO and CFO searches that we’ve led over the past 12 months, what we’ve found is that executives with the capability to set clear objectives and a path to achieving those is key,” said Ms. Cederwall. “In addition, there are technical competencies and experiences often desired by PE/VC firms including operational transformation experience, carve-out experience, demonstrable commercial growth, M&A. Functional expertise including digital, technology, cyber and ESG are also top of the agenda for most PE-backed companies when hiring in 2021. It is coming up in nearly every conversation that I have with investors and PE CEOs in the consumer sector — equally from those in the retail space to apparel and accessories to E-commerce, travel, leisure, food and beverage, and others.”

Driven by Technology
Roles in the PE sector are morphing based on the accumulated effects of changes driven by technology, regulations and consumer demands in portfolio sectors, according to Karen Swystun, president and CEO of Waterford Global. “Investors and stakeholders are increasing their focus on governance and accountability, leading
to changes in the operating model and thus in role requirements for senior leadership,” she said. “PE firms are increasing their focus on diversity, equity and inclusion, with more clients having a clear focus on their DEI goals and wanting their search partners to be supportive of their resultant hiring mandates. Far-thinking PE firms are recognizing the challenges related to diversity recruiting even in their early hiring programs.”

“Bolstered by a strong dry powder position, the trend of longer term investment continues,” Ms. Swystun said. “PE firms are taking a longer-term approach to buying and growing investments, putting portfolio companies in a better position to succeed in the markets they serve and in the economic climate they face. Many PE firms are focused on building a mutually supportive portfolio ecosystem, with some even opting for synergistic companies in their portfolio and creating an end-to-end platform. Industry sectors marrying technology and functional expertise are increasingly more attractive as an asset class for the PE and VC sectors, thus giving rise to strong investments in areas like fintech and medtech.”

As an industry sector traversing across industries, the PE sector requires candidates with unique expertise who are change agents for the portfolio organizations they lead, according to Ms. Swystun. “With the PE sector wanting to meet climate objectives through substantial investments in cleantech, technology, and other related sectors, project management expertise is a key competency required to balance product requirements and stakeholder interests,” she said. “Sectors such as fintech and medtech are looking for talent at the intersection of customer expertise and technical knowhow. Regulatory and compliance professionals are in demand by private equity firms looking to embrace the effects of stringent and tightening regulations around the world. Leadership roles in the regulatory and compliance areas balance compliance risks and the stakeholder need for transparency to ensure a strong model of governance for the firm.”

“The PE sector is hyper competitive and it’s an executive’s market,” said Bianca Moreno, a partner at SPMB. “Executives cross-functionally are fielding anywhere from five to 10 inbounds a week from recruiters on new opportunities. Needless to say, executives are extremely selective about which companies to engage with and what conversations to pursue. When they do engage, executives are typically already actively involved in interview processes across one to four searches.”

Competitive Situations
“Recruiters are also finding that final negotiations are coming down to competitive situations with candidates weighing multiple offers directly against each other,” she said. “These competitive processes are adding material lift to total cash compensation, equity, severance terms and change in control triggers. We are also seeing an uptick in the number of sign-on bonuses being offered as companies try to further entice executives into an organization. Furthermore, the competitive nature of the market has had a direct impact on search cycle times. Search cycle times have actually decreased as companies and boards are making hiring decisions at the executive level faster to avoid losing out on talent to other opportunities.”

Overall, the private markets are experiencing an increase in fundraising (many funds are oversubscribed), a significant lift in deal volume and elevated multiples, according to Ms. Moreno. “We are seeing that PE and VC sectors have experienced quite a rebound and in many cases are outperforming the public sector,” she said. “Since the start of the pandemic, fundraising across PE and VC has remained strong as investors seem to be clamoring to get into the private markets given the higher potential returns. PE investors, in particular, are operating with a higher risk tolerance and they are doubling down and not pulling back like they did following the 2008 crisis. Hence, there are more opportunities to recruit and hire new executives.”

“Additionally, there has been an increased spotlight on diversity from all angles as research continues to show that companies with more diverse executive teams outperform those with less diverse executive teams,” Ms. Moreno said. “Investors and their LPs are hyper-focused on DE&I initiatives and metric. This has directly flowed into hiring and recruiting strategies at all levels, not just the C-suite, within PE/VC portfolio companies.”

Ms. Moreno notes that an experienced executive recruiter can provide a tremendous amount of value. “The best recruiters not only offer a deep network in the markets they serve, but also context and insights about past company strategies, both successful and unsuccessful,” she said. “Equally important, executive search firms are exposed to the most crucial talent information as it pertains to transactions, internal politics, upcoming events, value creation details and operating cultures. This information, paired with the ability to reference candidates with a variety of former colleagues and teams, allows the best search firms to provide a comprehensive narrative about a candidate’s experience and operating style.”

2020 was more active than many anticipated, but of course, a number of market segments were negatively affected by COVID, according to Keith Giarman, managing partner of the private equity practice at DHR International. “2021 has been even more robust with negatively affected segments emerging as vaccinations take hold and more people feel comfortable congregating, dining and traveling,” he said. “While the pandemic dampened hiring in certain segments in 2020, it actually accelerated hiring in many others, especially as companies focused even more resources on digital E-commerce, supply chain, and remote work forces.”

Mr. Giarman also notes that the 2020 economic climate has propelled the PE/VC sectors. And certain segments are benefiting even more. “Of course, life science, pharma and healthcare have been forever changed as the desire for more rapid development of vaccines, diagnostic tests, therapies, etc. has taken hold,” he said. “The younger generation’s fascination with wellness, fitness and health continues unabated, likely fueled by even more concerns about health underscored by COVID.

Other areas like food manufacturing, fulfillment and logistics tied to E-commerce, packaging, transportation, online food delivery, and other areas have benefited from the challenges we are experiencing as a society dealing with the pandemic. We are seeing a lot of PE capital chasing this hotter sectors. Same on the VC side and the software, analytic and AI related companies that underscore the IT infrastructure of these segments.”

“Generally speaking, CEOs, commercially oriented presidents and hands-on strategic business partner CFOs are in high demand – the latter especially,” Mr. Giarman said. “Strategic, analytic, operationally oriented CFOs that are not afraid to get their hands dirty, help problem solve and do the work, allocate capital surgically, and focus on cash flow and profit with a keen eye on ROI and FP&A tied to KPIs are sought after continuously right now. PE firms don’t typically pull the trigger on a deal unless they have a pretty good sense of what it will take in terms of the strategy going forward. While strategic thinking executives are always in demand, those who have proven execution skills who know how to drive and pivot as required are in the most demand given investor objectives.”

Life Science and Biotech Sector
The level of funding of the Life Science and Biotech sector has been robust, and the activity has come from private equity, venture capital, and the introduction of special purpose acquisition companies which emerged with a fury in early 2021, according to Steven Hochberg, founder and CEO of Caliber Associates. “Relative to SPACS, a vehicle formed to raise capital through an IPO, a total of approximately $4.7 billion has been raised through IPOs for biotech SPACS which are yet to find a target company. These funds should be deployed in 2022 and 2023.”

“Early-stage biopharma investors provided approximately 5 billion of cash infusions to fund Series A investments,” he said. “The funding for the sector has almost doubled year over year and the number of deals grew by approximately 30 percent when compared to the first two quarters of 2020. There has also been a significant level of activity in the IPO markets and most investors believe the IPO window will remain open going into the first half of 2022. Interestingly, with this robust level of capital infusion there has been much less activity within the sector with respect to mergers and acquisitions.”

“Additionally, during the past year with the increased focus and attention on diversity, equity, and inclusion, a great deal of activity has occurred in board of director searches,” says Mr. Hochberg. “These trends are expected to continue through the first half of 2022. The focus to find new treatment paradigms for Covid-19 has represented in a significant level of cooperation between government and industry. Collectively there are more than 200 vaccine candidates in development as well as a similar number of therapeutics to address the Covid-19 pandemic and variants. One of the key drivers for continued growth is fueled by innovation in the area of novel approaches to treat cancer.”

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