How Talent is Driving Private Equity Success

Assessment, selection, and coaching are the levers that help PE firms achieve their investment thesis, says Bespoke Partners CEO Eric Walczykowski. And though the uncertain economy has cast a pall over many companies in recent months, business remains brisk in his firm’s wheelhouse of PE software and SaaS. The most frequent request? Evaluation of executive teams.

February 28, 2023 – Eric Walczykowski, chief executive officer of executive search firm Bespoke Partners, is bullish on talent. Recently, he recalled a professor he had in business school, a veteran of two PE deals as an operator, who would stand before the class and in a booming voice demand, “Do you bet on the horse, or do you bet on the jockey?” This educator’s feelings on the matter were emphatically clear: “You bet on the jockey, all day, every day, because great operators will figure out how to get great returns.”

“But if you look back at that time, in the late ‘90s, private equity was very focused on proprietary deal flow and financial engineering as the mechanism to create value,” said Mr. Walczykowski, whose San Diego, CA-based firm serves private equity-backed software and SaaS companies. “When you start looking at today, and the future, talent has become the strategic driver around the investment thesis. And I think we’re at our infancy in terms of where that talent thesis is going, and how private equity firms effectively assess, and then develop, their executive team and the investment thesis.”

Optimizing talent, however, can be notoriously tough. In the early days of private equity, organizations simply sought individuals with strong qualifications to lead a company or a function. But today, of course, everyone is digging deeper, deploying an ever-growing array of assessment tools to pinpoint who is the best leader for each role. Assessment, selection, and coaching, says Mr. Walczykowski, are the levers that help executive teams reach their full potential. “And I think it’s an ever-evolving process as you’re going through your hold period,” he said, “in which you’re constantly evaluating, ‘Do I have the right team to go from where I acquired the company to where I’m going to exit?’”

These are critical decisions, with high stakes. In an effort to help private equity partners and the leaders in their portfolio companies to understand essential talent market trends from the sector, researchers at Bespoke Partners spent last year reviewing the past six years of private equity transactions of the top 50 or so PE software firms. This includes deals in which Mr. Walczykowski and his team played a part, giving the study the firm’s imprimatur of first-hand experience.

Bespoke monitored and analyzed thousands of datapoints related to the trends and economic factors affecting private equity talent, resulting in the recently published “Private Equity Talent Benchmark Report 2023.” The firm describes its new market intel study as “the industry’s first analysis of executive compensation trends, upleveling practices, turnover trends, and related data.” And though Bespoke itself specializes in software and SaaS C-level talent the general trends it uncovered can apply to other PE investment sectors as well.

A Revealing Study

In mapping executive turnover and how the process of optimizing teams unfolded, for example, Bespoke Partners uncovered some revealing patterns. “In terms of assessing a management team when the asset was acquired, we looked at that, and then how the turnover happens over the hold period,” said Mr. Walczykowski. “And as we got into the numbers, we found that the CEO and CFO were often the first roles to turn over in a new portfolio company, and if there was going to be turnover in either one of those seats, it happened in the first 18 months. And then we also discovered through that analysis that the sales officer—whatever flavor that may be, the VP of sales, chief growth officer, chief revenue officer—that role actually turned over the most frequently in the investments.”

Examining Executive Talent Trends in Private Equity
In this episode of Talent Talks, Hunt Scanlon Media host Rob Adams is joined by Eric Walczykowski, CEO at Bespoke Partners. As an experienced operator, investor, board member and consultant, Mr. Walczykowski brings a multidimensional perspective on building high impact executive teams that deliver superior results. Over the past decade Bespoke Partners has brought exceptional leaders to private equity backed portfolio companies in the software and SaaS sector. In this podcast, Mr. Walczykowski examines the trends that shape the talent market for these companies. Listen now!

Also noteworthy, the study found that the tight talent market has driven executive cash compensation packages of salary and bonus to just short of the half million- dollar mark across the C-suite for private equity backed software firms. CEO cash compensation has grown faster than any other C-suite members in the past five years.

“The primary driver was the tight market for private equity talent,” said Mr. Walczykowski. “Folks that were proven in their role could command a premium. The portfolio companies that we work with know that talent is the driver for these roles. And so, to get the top talent, they absolutely paid up during these times. And with inflation and the history of inflation in these roles, the compensation we’re seeing now is leveling out a bit, but we don’t see it going back down to pre-tight labor market levels.”

“The other thing that we’re seeing right now, and in this market today, is that proven CEO compensation is also up,” he said. “The No. 1 role right now that we’re seeing private equity firms evaluate is that CEO seat and to get a ‘wartime’ CEO that understands both growth and profitable growth, the ROI, and thesis of every investment that is made. So those proven CEOs are commanding a premium in today’s market.”

These days, with cloudy economic skies and persistent talk of a looming recession, the big question for Bespoke, and others who play in the private equity space, revolves around the state of the labor market and private equity software in general.

“The market was very employee heavy or executive candidate-driven over the last 12 to 24 months,” said Mr. Walczykowski. “Today, I think we’re seeing a bit more balance in the market. That said, for proven executives who have very strong track records of making money for private equity firms, there’s still demand. And what we’re seeing is they’re being very selective in this market in terms of what roles they’re interested in, what roles they might step up and actually take. For us, getting those candidates on the phone really comes down to our having a strong reputation in the industry of working with the best of the best.”

Evaluating Executive Teams

To a large degree, the market right now is bifurcated, says Mr. Walczykowski, with venture capital firms, in particular, facing strong headwinds. Bespoke Partners, however, is well situated, focusing as it does on private equity software, with extensive work in mid-market growth and buyout. “Our executive network actually plays very well in the venture and growth market today because firms that have this growth-at-all-costs strategy have now switched from, ‘How quickly can I grow ARR?’ to ‘How can I grow profitably?’” said Mr. Walczykowski. “And that is a main thesis within private equity software mid-market growth and buyout, which has been one of our sweet spots. So we see that our network applies directly to the evolving early stage growth and venture market as well. I think we’ve seen some softening in the public markets as well and that has been driven by the layoffs that are happening. Folks are really contemplating roles, going to a zero-based budgeting approach, which I think is leading to less volume of activity in that market.”

In Bespoke’s core market of private equity software, the firm has been very busy. “What we’re seeing is that while new platforms are down, folks are continuing to do add-ons, but then they’re also evaluating executive teams, and trying to assess whether they have the right executives to make it through the potential soft days ahead and in fact, grow through that market,” said Mr. Walczykowski. “We’re very bullish on mid-market private equity software and folks hitting their investment thesis.” But, the bulk of the activity Bespoke is seeing is the evaluation of current executive teams.

Related: Kristie Nova to Lead Bespoke Partners’ CEO Practice

Mr. Walczykowski says a number of roles are ascending. One that he is most excited about is the chief people officer, especially as an adjunct to a private equity firm’s talent leader. “The talent leader of the future is a true strategic mind that can assess talent or have at their fingertips resources that can assess talent, and then truly drive the talent thesis for the portfolio companies across the entire private equity portfolio,” said Mr. Walczykowski. “And that includes everything from a broad-based strategy, the organizational strength of the portfolio companies, the assessment of the ELT, the gap analysis, the ongoing organizational health, the sense of belonging, that these organizations have, the diversity, and then, in fact, preparing them for exit readiness.”

“And the observation that I’ve had in working very closely with a number of these private equity firms is these strategic talent leaders need a strategic peer in the portfolio companies,” he said. “And so, the chief people officer is going to be a critical role as we go forward in the next 10 years, as we’re looking to really upgrade our attract, develop, retain, and belong within these portfolio companies to achieve their investment thesis. And notice that I say chief people officer, and not CHRO or VP of HR, because the connotation there is that those folks are very tactical vs. a chief people officer being very strategic and driving the investment thesis.”

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!

Customer success officer is another position that is on the rise, and will be essential for years to come, says Mr. Walczykowski. Demand for this role, for its part, is fueled by the maturation of the software industry and an understanding that customer success goes beyond mere tech support and in fact comes down to knowing how to help the customer be successful using one’s product. “If you’re looking to grow in this market, your current customer is your best customer,” he said. “So really understanding how you retain those customers, but then driving additional growth within those customers is paramount.”

Finding the Right Fit

Not to be overlooked in all this is the role of executive search consultant, whose contribution has only grown more strategic and integral to clients, in private equity and beyond. “A qualified executive is the bar,” said Mr. Walczykowski, “but what you’re really searching for is a qualified executive that fits within the executive leadership team, and who can understand and execute the investment thesis within their role. And that’s something that applies when you look at Bespoke Partners—over the last five years, we’ve transitioned from finding just qualified executives to really assessing ELTs and understanding how those executives fit within the executive leadership team. This is where the industry is going.”

Bespoke Partners is so committed in this regard that at the beginning of the year the firm extended its search guarantee from one year to two years on executive placements for clients who utilize Bespoke’s FIT Profile behavioral assessments to assess leadership candidates and executive leadership teams. “The reason behind this is that we found when we do a full assessment of the executive leadership team, our placement success is over 99 percent,” said Mr. Walczykowski. “And that’s not us placing the executive – that’s actually the executive being in their chair for two years, which for us means that they’re impacting that company in a very positive way on the investment thesis.”

Looking forward, Mr. Walczykowski remains encouraged about the private equity software market. “I’m not going to prognosticate what the second half of the year looks like, but the tea leaves that I’m reading suggest that our largest clients are sitting on the largest funds they’ve ever had,” he said. “We’re excited for what’s to come not only in our market, but as we start to look at this talent thesis within private equity, what we can do to support the future of that talent thesis.”\

Related: Bespoke Partners Receives Strategic Investment from AEA Growth

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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