How to Identify Leadership Potential in Private Equity Acquisitions

March 31, 2025 – Private equity firms excel at finance and technology but too often lag in talent strategy, particularly in portfolio company management. While many private equity firms already assess leaders through interviews and track record analysis, these methods can miss critical predictors of success, according to a new report from Hogan Assessments, a global provider of personality assessment and leadership development. Unsurprisingly, more than half of private equity leaders surveyed by AlixPartners in 2024 said the most critical challenge in portfolio management was the quality of senior leadership and succession planning. They aren’t wrong.

The same report found that approximately six out of 10 CEO replacements in portcos occur within the first year following the acquisition. ^”This troubling statistic highlights significant gaps in the amount of consideration private equity firms give to talent and leadership before making investments,” the Hogan report said. “Clearly, understanding exactly how to identify leadership potential is a pervasive challenge in private equity portfolio management.”

As the top firms already know, personality data help identify leadership potential and predict executive team performance, according to the Hogan report. “Firms that gather personality data during due diligence know how a potential portfolio company’s leaders are likely to handle stress, communicate, manage conflict, make decisions, establish vision, drive results, and more,” it said. “Strategic analysis of executive team personality can convey meaningful advantages to forward-thinking private equity firms facing increasingly volatile industry challenges. Plus, these nuanced insights also help create a basis for future leadership needs.”

“Personality assessment is crucial in the executive selection process, adding value from due diligence through exit,” said Erin Lazarus, senior director of business development at Hogan Assessments.

Challenges in Private Equity Portfolio Management

Among the many challenges in portfolio talent strategy is getting the right executives in place—and keeping them there. Research from National Bureau of Economic Research found that more than 70 percent of portfolio companies hire new CEOs under private equity ownership. But these CEOs don’t seem to last, even when selected by the private equity firm. Private equity executives aren’t always satisfied with their own choices, either. They attribute poor portfolio company performance to leadership weakness, such as lack of focus, urgency, and adaptability.

“Although private equity firms may think they know how to identify leadership potential in executives, their portfolio management track records say they don’t,” the Hogan Assessments report said. “That high replacement rate within the first year suggests the need for a better method to identify strategic leadership competencies during due diligence. Nuanced personality data detailing strengths, challenges, and values can predict whether an executive will effectively lead a high-performing team in a demanding environment—or falter under pressure.”

How to Identify Leadership Potential with Personality Assessment

In portfolio companies, CEO turnover isn’t planned more than half the time, according to Harvard Business Review. Assessing leaders during due diligence can not only prevent executive turnover but also predict how leaders are likely to behave in various circumstances.

“Incorporating personality data offers insights into leadership style,” Ms. Lazarus said. She explained that personality can reveal how someone handles conflict, whether they adopt an individual- or team-based approach, their decision-making preferences, and whether they seem calm and measured or urgent and competitive. With this data, firms can get a sense of a leader’s likely role in executive team dynamics and in relationship with fund managers or other stakeholders.  This knowledge can support evaluation of a potential portco’s existing leadership and the direction of an executive search, if needed.

Behavioral Strengths

“First, personality predicts leader performance better than traditional metrics used in PE,” the Hogan Assessment report said. “Current efforts to evaluate leaders during due diligence typically rely on IQ, industry experience, public company experience, and interview performance. Unfortunately, none of these elements reliably predicts leadership success in a portfolio company (or anywhere). Executives evaluated on only these criteria may lack the leadership skills that are particularly essential following an acquisition.”

Forces Shaping the 2025 Dealmaking Boom

The latest EY Merger Monthly forecasts an uptick in U.S. M&A activity, driven by favorable macroeconomic conditions, regulatory shifts, and an increasing appetite for strategic deals. “U.S. M&A activity is expected to build further momentum in 2025,” the report notes, “driven by falling interest rates, strong economic expansion, substantial uninvested capital, and the imperative for business transformation.” Despite concerns over regulatory scrutiny, EY predicts that dealmakers will benefit from a clearer policy environment. “With dealmakers having better clarity around the monetary and regulatory dynamics, there has been a significant rise in CEOs’ appetite to engage in M&A,” EY analysts concluded.

For instance, the report points to how personality data can indicate whether someone tends to take a careful attitude toward change or fearlessly pursue it. Both tendencies can be helpful in different circumstances. As another example, personality assessment can describe how a leader is likely to approach developing relationships with fund managers and aligning on performance expectations.

Performance Under Pressure

A mere 17 percent of portfolio company leaders have previous experience working directly in PE-owned companies, a report from Altrata found. “While previous exposure to a private equity environment doesn’t guarantee success, the unique demands can be a challenge for the uninitiated,” the Hogan Assessment report said. “Personality assessment describes how leaders are likely to perform under pressure, including their degree of emotional resilience, their approach to communication, and their problem-solving acumen. Personality assessment can provide a preview of how someone handles conflict—whether they tend to resist, withdraw, or give in. One leader might respond to conflict by withdrawing from the team, whereas another might become emotionally explosive. Personality assessment also describes how someone is likely to receive feedback. One executive might bristle when taking direction or criticism, while another might not even recognize a need to change. Talent insights like these can help firms stay ahead of unplanned C-suite turnover.”

Executive Team Performance

Finally, personality data also indicate whether a leadership team has the necessary strategic leadership competencies and values. “Today, private equity firms are executing more roll-up deals and extending hold time before exit. This accentuates the need for a strong leadership team to cast a vision, build culture, and execute effectively,” Ms. Lazarus said.

Related: How Search Firms are Winning Through M&A and Unlocking Value

To put this into context, consider one crucial value for portco executive teams to have: achieving financial results. Personality data can pinpoint the degree to which this motivation is present on a potential portco’s leadership team. In fact, Hogan’s data show that established portco leaders tend to score 14 percentile points higher than their enterprise counterparts in valuing commerce and realizing profits.

“An executive team missing this key value might fail to deliver the desired results,” the Hogan Assessments report said. “Without personality assessment, a gap like this one could go unnoticed until it’s too late. Similarly, excessive uniformity within an executive team could inhibit agility or innovation. Portfolio company executive teams with a complementary blend of behavioral strengths are most likely to accelerate productivity after the investment. In the best-case scenario, a leadership team’s competencies will include agility, change management, sustainable transformation, and a human-centered culture.”

Assessment during due diligence can help firms identify executive search needs, as well as individual and team development opportunities, according to the Hogan report. “Then, after the investment, personality results can accelerate executive team onboarding,” it said. “This is especially useful for platforms with roll-up strategies. Suppose an executive is accustomed to making decisions based on intuition, while their new executive teammates make decisions based on data. These leaders will all need to rely on strategic self-awareness and socioemotional skills to learn how to collaborate productively at speed. If they lack certain skills, personality can offer a foundation for coaching initiatives to support them in expediting value creation.”

The Cost of Inadequate Due Diligence

The cost of poor leadership assessment during due diligence is substantial, with most portfolio company CEOs being replaced during the investment cycle. These replacements typically come too late to prevent strategic delays and can cost up to 200 percent of the leader’s salary, according to Gallup. This high executive turnover may stem from flawed due diligence, onboarding, and executive development practices.

“Learning how to identify leadership potential among portco executives can be the difference between faster value creation versus expensive leadership transitions,” the Hogan report said. “With billions in investments at stake each year, private equity firms cannot afford to continue making errors. Private equity must implement personality assessment during due diligence—before further avoidable executive turnover undermines investment returns and wastes precious time in competitive markets.”

“In short, who you are is how you lead, and leadership style can significantly impact financial success,” said Ms. Lazarus.

Related: How Talent is Driving Private Equity Success

Contributed by Scott A. Scanlon, Editor-in-Chief and Dale M. Zupsansky, Executive Editor  – Hunt Scanlon Media