October 13, 2021 – The global private equity sector is more than three times bigger than it was just 10 years ago. How can PE firms ensure that they are attracting the best talent to lead their portfolio companies? Despite a COVID-induced 22 percent downturn in private equity fundraising and deal volume in 2020, the broader multi-year trend is that the sector is extremely healthy, growing fast, diversifying and becoming much more competitive, according to a new report by NGS Global. Global capital raising has ballooned in the last decade, growing from $155 billion in 2010 to $503 billion last year. The sector now employs 8.8 million people in the U.S. alone.
Within this context, Lee Brantingham and Jonathan Nosal of NGS Global spoke with 10 private equity company founders and executives about their key suggestions for how to source and retain the most talented PE leaders. Their raw insights and perspectives paint a complex and evolving picture.
Resurgence of Competitive Activity
2021 has seen a resurgence in deals and activity, particularly in the second and third quarters. Investors appear to have a higher risk appetite than they did when the global financial crisis hit in 2008, advantaged this time by the low cost to debt and the fact that certain industries are primed for hyper-growth.
According to data from Pitchbook, the U.S. private equity industry is storming through 2021, smashing records as investors take advantage of a bullish climate and they remain undeterred by the possibility of inflation and interest rate hikes. In fact, U.S. PE dealmaking through Q3 has already broken 2019’s annual record for deal value, at more than $787 billion. Q4 is expected to close the year on a strong note.
“The amount of liquidity and activity in the sector is no less than astonishing right now,” said Mr. Brantingham. “Up and down the scale of funds, whether it’s private going public or public buying private, specialized vs. generalist, everyone is competing for deals. On top of this, sovereign wealth funds have tweaked their investment philosophy which has made the environment even more competitive.”
“Historically, state-owned firms invested in things like infrastructure, real estate and ports—low risk, large dollar value investments that are relatively safe, and provide low but consistent returns,” said Mr. Nosal. “In the last decade the dynamics have changed, and the majority of them are now looking at much more concentrated bets that are higher risk with the consequent higher reward. This means they are competing for deals with more traditional private equity firms and investment banks.”
This climate means that the war for the best private equity talent is getting ever-more intense. According to a partner at a U.S.-based PE firm, the success of a particular venture is integral to the talent that you have driving it.
Lee Brantingham is managing partner, Greater China at NGS Global and is based in Hong Kong. He’s spent the past 24 years working across the region in Shanghai, Taipei, and Hong Kong. Mr. Brantingham conducts senior-level search assignments and leads the firm’s technology practice in Asia. He has worked with a range of C-level leaders for a wide spectrum of PE-backed technology companies.
“The common perception is that PE funds are just predators that want to come in and dismantle and pick apart an organization, but this is false,” they said. “You make money by growing businesses, ideally organically, which gets you the best return. Some industries that aren’t growing organically mean they are doing so inorganically (usually through mergers and acquisition). Both scenarios are completely dependent on talent for success – and the talent knows it.”
Greater Fluidity/Dynamism of Talent
Many of those the firm spoke to highlighted that there is also a greater degree of fluidity in terms of hiring and movement within the sector at the moment, according to the NGS Global report. “Five years ago, it was far more common for executives to want to keep working for firms with similar profiles,” the study said. “Very rarely would someone from a Fortune 100 go into a sub-$20 million business. That is not necessarily the case anymore. They are seeing much more openness to PE leadership making quite profound career jumps, particularly with how compelling some deals are.”
The report also says that added to this is the multi-generational impact on the PE workforce. Much younger executives, aged in their late 20s to early 30s, are having an impact – they are mobile, agile and not afraid to take risks, which is a positive within the PE space (to a degree). If they fail, they tend to fail quick and pivot. Learning from a point of failure is easier for this more youthful demographic to grasp, as the world is changing just as fast around them.
Executive Packages Are Key
The group agreed that putting the most appealing compensation structure together is absolutely crucial when attracting the right talent. Good packages usually comes with two to three percent equity, although some offers for key CxOs can be as high as five percent vesting over five years.
According to the NGS Global report, some offers are performance based and some are time based. Most of those the firm spoke with said performance-based packages have bigger pay-offs. “By taking a performance-based offer, an executive has to believe in the vision, culture and market opportunity of the company to earn compensation based on success or failure,” said the search firm. “Along with the standard assessment metrics such as EBITDA, cash flow and gross margin, team building is another system of measurement, although this is harder to quantify.”
Jonathan Nosal is a partner at NGS Global and is based in the firm’s San Francisco and Newport Beach offices. He is focused on conducting executive search assignments for PE firms in the technology and professional services sector, but also has extensive experience working for clients in the automotive and industrial sectors.
Several executives that NGS Global spoke to emphasized that the profile and/or location of some portfolio companies made it harder to recruit top talent into them. Small manufacturing and value-added businesses, particularly those in secondary cities, lack prestige in the minds of some candidates and are therefore harder to fill. Compensation and reward structure is one way to at least partly mitigate these factors.
Team Assessment Strategies
According to a senior investment leader of a top 15 global sovereign wealth fund that NGS Global spoke with, the degree to which the incumbent team influences an investment in that company is usually dependent on the maturity of that business.
He explained: “In early stage (more VC) investing, the CEO and his/her relative knowledge and capability in a given space is hugely critical. One third to half of our investment decision is based around what we think of the CEO and his/her direct management team. If we’re investing in a fund, then we look at the executive group and want to understand the stability, how long they have worked together and what they have achieved. We would like to understand if they’ve established incentives and been able to drive the right behavior.”
“In much bigger deals with a business that is already at scale, the management team is important, but if you have to change out the CFO or bring in a new head of operations, that can be done with much less disruption,” the report found. “The CEO is still very important, particularly if he or she is a founding CEO, but for these later stage companies, the management team is more like 20 percent of that decision.”
Working With Talent Acquisition Partners
All of the firms NGS Global talked to use executive search partners for key talent placements across their portfolio companies. Some of the common denominators for success include:
- Selecting a firm that has extensive experience in the relevant sub-sector is crucial (e.g. “fintech” or “healthtech”). The more granular the experience the better.
- Ensuring deep communication takes place between the company and the provider, particularly at the beginning of the process, with many finding weekly updates to be the best practice.
- Some felt that the larger firms offer only formulaic search that bubble up the same candidates and have too many off-limits constraints.
- Bandwidth of the recruiters doing the work was also noted as a key factor in ensuring success. It’s important to find out how many projects the team you are contemplating engaging is working on before you grant the search.
- Consistency of engagement was also mentioned as crucial several times – the firm should regularly provide feedback, insights and drive the cadence of the search.
- Lastly, reference checking cannot be underestimated. A detailed assessment of a candidate’s accomplishments and why he or she may have left previous roles is worth the investment of time.
“The PE space is currently hyper-competitive on many levels: remarkable levels of liquidity exist, the investor appetite for risk is high and a huge number of different investment vehicles are competing for the same deals,” the NGS Global report found. “As a consequence, there is an unprecedented demand for leading talent. Establishing a good cultural fit, creating a performance-based compensation structure and ensuring you pick the right executive search partner are crucial elements for success.”
Contributed by Scott A. Scanlon, Editor-in-Chief; Dale M. Zupsansky, Managing Editor; and Stephen Sawicki, Managing Editor – Hunt Scanlon Media