Improving the Selection of Leaders for PE Portfolio Companies
February 17, 2021 – Making the most informed choices of senior-level talent to drive and lead your organization is a process, and every step in that process is critical to maximizing the outcome for success. “The selection of your potential leaders is the most important decision you can make,” said John Marshall, co-founder and chief executive officer of JM Search, in a recent conversation with Hunt Scanlon Media. “It is always important to remember that these choices affect the lives of so many and in so many ways—from your investors and the employees of the company, to the placed executives and his or her families.”
Too often, he said, executive recruitment firms begin a search without an in-depth knowledge of where the equity sponsor stands with their particular investment. Many questions need to be understood to help attract the caliber of candidate that will be necessary to create shareholder value. “To start, understanding the motivation of the sponsor that led to the investment in the company is essential, along with the ideal timeline to exit,” said Mr. Marshall. “It is also imperative to understand the current state of the company – from its management and culture, financial status, industry reputation, and competitive set to market issues and dynamics. All these are areas that need to be clearly understood.”
Among the questions Mr. Marshall said that search firms should be asking are: What are the growth expectations and time parameters that the sponsor is expecting from the management team? Are they realistic in today’s environment? What has contributed to the company’s success and failures in the past and do they exist today? Where does the company stand in their current fund? Does the sponsor have the resources for additional funding and, if so, what will be their appetite for this particular investment?
Do Your Research
Any C-suite executive will appreciate knowing as much as they can about the company’s equity sponsor. “It is critical that recruiters do their research on the sponsor and understand their reputation in the industry and what are they like to work with,” said Mr. Marshall. “I have always found it useful to speak with CEOs from their portfolio companies, past and present, to gain this insight. For example, learning how to best work with a particular partner from an equity sponsor is helpful to not only try and align chemistry when interviewing candidates, but to also talk with the candidates about what to expect in this important relationship.”
Other considerations are the reputations and experience level of the lead partners who are managing this portfolio company. “Candidates are increasingly interested in past outcomes of PE investments so they can gauge their potential waterfall when there is an event,” said Mr. Marshall. “Knowing the historical outcomes of previous funds and the size of their current fund helps executives understand in greater detail the potential of this individual outcome.”
It is critical to spend the time with any potential candidate and your search firm to review all aspects of your investment, he added. Your deck will cover the majority of the historical aspects of your portfolio company, but the “soft” questions cannot be ignored. “How you view the current leadership and your transparency around your views on the team will be critical to the candidate in discussing the opportunity with them,” said Mr. Marshall. “Openness around your perception of the culture, your viewpoint on what has worked or hasn’t worked, and what talent level is below the executive level are all questions that should be understood by all parties.”
The most successful outcomes from a retained executive search come when all parties have taken the time to first understand the needs of the business and then match the search requirements against them. “Not to oversimplify, but if you understand the needs of the business, and what the business needs this new executive to do to hit its objectives, one can then identify the required hard and soft skill-sets and experiences needed,” said Mr. Marshall. “To get this process started, we use a highly detailed search launch questionnaire that addresses many aspects discussed above relating to the sponsor and portfolio company, in addition to capturing high level detail about what is needed in the candidate personal profile to successfully fill this role.”
Gauging Success
It is also critical in the spec to discuss the role, scope of the position and expectations of this leader from a timing standpoint. “Several other items that should be addressed are the reasons for this opening, background experience of the candidate, industries that the candidate should have experience in working and compensation parameters,” said Mr. Marshall. “Compensation is an increasingly integral component for discussion and the search firm and client must be on the same page as to what is realistic in this competitive environment for talent. As a rule, you get what you pay for.”
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“Finally, there should be a detailed conversation around what success will look like over certain periods of time,” he added. “Three months, six months, a year, two years is a good start.”
When it is time to begin reaching out to your network and potential candidates all participants in the search process must be working off the same playbook. At this juncture, everyone involved should understand the role you are searching for, and the pros and cons of what you will be potentially dealing with as you begin your search efforts. “You should also have a clear understanding of timing, compensation, and have reviewed how you are going to present this particular opportunity to the market,” said Mr. Marshall. “Too often, recruiters and sponsors have not discussed ‘the pitch’ in detail. Both parties should be telling a very consistent story about the company, the position requirements and the market opportunity.”
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Once the search firm and client have reached an understanding of expectations for an initial slate of candidates and now that you have been recruiting on the position, it is imperative to be on the same page as to the timing of interviews.
“In our pandemic world scheduling of Zoom interviews with candidates and the accessibility of all engaged parties has never been better,” said Mr. Marshall. “It is the search firm’s responsibility to move the process at the desired pace. Sponsors must realize that it is a competitive market for the best candidates, and they should already understand ‘what good looks like’ in whom they seek for the role. I have seen many clients lose candidates that they wanted to hire because of a lack of urgency in creating the necessary time to spend with your potential leader. It is important to realize this: Great candidates do not grow on trees. When you have thoroughly assessed, qualified, met with, and referenced a great candidate, you must move on it. More than likely it will turn out to be your best option, and there is certainly opportunity cost.”
Possible Roadblocks
The search firm should be providing extensive guidance as to where the candidate stands in their interest level and where they are in their search process. Said Mr. Marshall: “Are they looking at other opportunities in the marketplace? Do they have any concerns about the role, the sponsor, and the ‘set forth’ expectations of the sponsor? These questions have to be discussed on an ongoing basis.”
It is also critical to have discussed potential roadblocks for the candidate accepting the role. Mr. Marshall said it is critical to consider questions such as: Does the candidate have concerns regarding relocation? Is there a non-compete that has to be dealt with and, if so, can it be resolved? What is the timing around vesting of equity? Is there a pay out of an annual bonus and, if so, how much and what effect could this have on timing around a starting date?
The most important component of understanding the true capabilities of your future leader is completing in-depth back channel references and official references provided by your candidate. “Our clients are relying more than ever on these overviews and the skill-set of the individual who conducts these references has never been more critical,” said Mr. Marshall. “You can never speak with enough peers, direct reports, customers, previous equity sponsors and supervisors to get an accurate overview of the candidate.”
Making the offer tends to be one of the more emotional times during the process. The sponsor should have clearly outlined their expectation at the beginning of the search and, if their expectations were not realistic, make the appropriate revisions. “Sponsors must be aware of what the market is telling them, and this can be accomplished by recognizing what the search firm has presented in their candidate pool,” said Mr. Marshall. “Both the search firm and sponsor should understand the offer in thorough detail and be in sync before the offer is presented to the candidate.”
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To be effective in this conversation both parties should have discussed what points in the offer are negotiable, review the mapping of the waterfall and have expectations aligned, understand the highlights of the offer, and what will be the points that the candidate will push back on.
A High-Risk Investment
Bringing on a senior leader is a high-risk investment that comes with the demand for high returns. “It’s natural for sponsors to want some reassurance that they are making a wise decision,” said Mr. Marshall. “For the most part, sponsors turn to third party assessments to shine some additional light on a candidate’s strengths and weaknesses and, perhaps, to use that information to dig a bit deeper with references.”
To be truly useful, third party assessments need to give the sponsor and the final, selected candidate a clear picture of how to approach and accelerate value creation. “In other words, the real question isn’t, ‘Are we making a wise investment in this executive?’ but rather, ‘Given what we know about our firm, our goals and this executive, how do we accelerate returns on this investment and minimize its risks?’” said Mr. Marshall.
Answering that question requires that the candidate assessment take place in the context of the sponsor and portfolio company. “Assessments that rely entirely on a letter grade or ‘probability of success’ rating typically do not apply sufficient sponsor and portfolio company context to their ratings,” said Mr. Marshall.
Once all agreements are secured and the new executive is ready to join, the recruiter’s role transitions from search to support. JM Search and its clients work together to ensure the incoming executive has a clear and effective onboarding plan with specific goals related to all aspects of the transition. “We apply all information, from direct candidate dialogues and references as well as assessment to the important work of supporting a smooth transition,” said Mr. Marshall. “JM Search partners remain in contact with sponsors and the new executive to ensure a strong start.”
John Marshall founded JM Search in 1980 and has been helping companies build exceptional management teams for over 35 years. Under Mr. Marshall’s leadership, JM Search has grown to become one of the 20 largest retained search firms in North America and is considered one of the premier firms dedicated to serving private equity and venture capital investors and their portfolio companies.
Related: The COVID-19 Impact on Executive Search
Contributed by Scott A. Scanlon, Editor-in-Chief; Dale M. Zupsansky, Managing Editor; and Stephen Sawicki, Managing Editor – Hunt Scanlon Media
