How Recruiters Facilitate Founder-PE Firm Agreements When Sourcing New Talent

PE companies are saying that people are the most important factor in driving growth. Yet unlike strategic assets, intellectual property, or other resources that fuel growth, finding the right senior leaders can be a challenge. A new report from Blue Rock Search’s Ruben Moreno provides a look at the value executive search firms can bring to PE outfits.

May 1, 2024 – In the high-stakes world of private equity acquisitions, aligning the strategic visions of PE firms and the founders of the companies they acquire is pivotal for achieving aggressive growth targets and operational excellence. However, this alignment often encounters its first significant hurdle regarding talent acquisition—a critical component for scaling operations and enhancing value, according to a recent report from Blue Rock Search’s Ruben Moreno. “It is here that the intrinsic value of an executive recruiter becomes irrefutable,” he says.

Mr. Moreno explains that as PE firms endeavor to transition their newly acquired entities into market leaders, the nuanced challenge of hiring the right talent to drive this transformation can lead to unforeseen friction between the PE firm’s forward-looking strategies and the founder’s deep-rooted knowledge of the company and its legacy team. “Executive recruiters stand at the crossroads of this dynamic, acting not just as facilitators of talent acquisition but as strategic mediators and trusted advisors,” he said. “Their external vantage point and expertise in understanding the market’s demands and the unique DNA of the company make them uniquely positioned to bridge the gap between a PE firm’s aspirations and a founder’s vision.”

In scenarios where the discussion around the skills and people needed for the company’s next growth phase becomes contentious, an executive recruiter’s role transcends the traditional boundaries of talent hunting, according to Mr. Moreno. He notes that they emerge as an impartial beacon, guiding both parties through a balanced consideration of new talent that aligns with strategic goals and cultural fit without being swayed by the founder’s bias or the PE firm’s push for rapid transformation.

There’s plenty of evidence that external hiring pays serious dividends for PE-acquired companies. Fortune reported on a study by researchers from the business schools of Harvard University, the University of Chicago, and Georgetown University, which found that 75 percent of PE-owned portfolio companies install a new CEO after acquisition, and 75 percent of those CEOs come from outside the company. Additionally, the research team discovered that companies that installed external CEOs in the first year had the best performance in terms of increasing equity value, beating companies that didn’t bring in external leadership by 27 percent.

Private equity pros understand this phenomenon. A survey by Hunt Scanlon Media found that 92 percent of PE dealmakers say top talent directly correlates to their ability to hit growth targets.

Ruben Moreno leads the Blue Rock HR executive search practice specializing in the identification, assessment, recruitment, and onboarding of chief HR officers and their teams. As a subject matter expert and specialized executive recruiter, he has been dedicated to partnering with his clients to identify, assess, and recruit the best human resources leadership talent available for over 12 years.

“Yet, identifying and attracting top talent with industry-specific expertise that aligns with investment strategy can be uniquely challenging,” said Mr. Moreno. “Founders and existing company leaders might not see the forest for the trees or hesitate to turn over control to PE leaders. In those moments, a recruiter is the person who can point out these kinds of statistics and track records, smoothing the way to those necessary hires – without putting undue stress on the overall professional relationship.”

Value Creation: A Strategic Approach

Value creation is, of course, the raison d’être for private equity dealmaking, and the approach to talent strategy must be oriented in this direction, Mr. Moreno explains. A 2023 study published in the Journal of Business Strategy suggests a successful approach focusing on four elements to consider when it comes to recruiting “value creation staff” for the company:

1. Structural approach to value creation: The organizational make-up of the value creation team: how value creation is staffed, whether there is a dedicated team, and whether the deal team or another group is charged with value creation.

2. Profiles of value creation staff: Consider the backgrounds of prospective hires. These might include a business-focused or consulting experience, mixed experiences, or banking and investment backgrounds.

Related: Avoiding Bad Hires for Private Equity Portfolio Companies

3. Seniority of value creation staff: Some firms might hire only very senior people for value creation roles, while others focus more on developing junior staff who can grow within the firm.

4. Incentive structure: Consider how the incentives for value creation (and deal-making) are aligned with the overall operational model.

“Deciding on a strategy for value creation must come before any hiring plans,” said Mr. Moreno. “From there, a recruiter who is experienced with the intricacies of the PE world can help pinpoint the right types and sources of talent to fill the required roles and meet the decided-upon goals.”

A Recruiter’s Strategy for Success

A savvy executive recruiter can mediate conflicts between a founder and a private equity firm over leadership styles and philosophies by understanding both parties’ perspectives, facilitating effective communication, and acting as a neutral mediator, according to Mr. Moreno. He says that in effect, they are the “reality check” for both parties, reminding them that they are all working towards the same goals.

Keys for First-Turn Portfolio Companies Using Executive Search Firms
Ensuring a seamless search process is essential for first-turn portfolio companies and PE firms, many of which are new to partnering with search firms. Through interviews with private equity firms invested in first-turn portfolio companies and their founders, Russell Reynolds Associates outlines key lessons learned and tactical recommendations on how to ensure a seamless search process that aligns stakeholders and empowers founders.

What can recruiters do specifically? “Each case will be different, and an experienced recruiter will need to use their skills to assess how best to approach the parties involved in a specific situation,” Mr. Moreno said. He notes that some common themes, though, might include:

• Emphasizing mutual benefits.

• Identifying compromise points.

• Providing expert insights on industry standards and successful leadership approaches.

• Assisting in leadership assessments.

• Evaluating cultural fit.

• Encouraging long-term planning.

• Setting clear expectations for the new leader’s role.

“Ultimately, these actions have one overarching goal: building trust and fostering the kind of collaborative environment that can drive true success for the company and the PE firm,” Mr. Moreno said. “An executive recruiter with PE experience can bring that sense of calm, comparative data, and industry insights to situations where there is a conflict or other challenge. Recruiters come from a place of understanding business owners and PE equally and knowing how to leverage relationships to bridge that gap. With the support of expert recruiters, PE teams and founders alike can coalesce around a talent-centric approach that helps everyone come together around what they have in common: wanting the company to have the talent it needs to succeed and thrive.”

Blue Rock Search is a 100 percent minority/female-owned executive search firm. As a member of the SRA Network, the firm is also a Hunt Scanlon HR/Diversity Recruiting Power 65 recruiter. The firm’s consultants specialize in the targeted identification, assessment, and placement of executives across five distinct practice areas: Private equity, human resources and diversity, franchise, higher education, and CX. Blue Rock’s processes, technology, tools, and search methodology are designed to flex to the needs of its clients.

Related: Why Investing in Top Private Equity Talent is Key to Future Growth

Contributed by Scott A. Scanlon, Editor-in-Chief; Dale M. Zupsansky, Executive Editor; Lily Fauver, Senior Editor – Hunt Scanlon Media

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