Inside the Evolving CEO Hiring Landscape in Private Equity

October 10, 2023 – The Economist wasn’t wrong in recently declaring, “Private equity is entering a new era.” Between ongoing inflation, rising credit costs, and lingering macroeconomic uncertainty, the near-term future for PE firms looks different, with fewer deals, more challenging exits, and longer holding periods. Having led more than 100 CEO searches for PE clients, Tony Hazen of Tatum is not surprised to see the CEO hiring landscape changing according. He explains that the new value-creation paradigm in PE calls for portfolio company CEOs who can drive operating performance, hold or expand margins and grow businesses organically, not just through acquisitions.

As a result, Mr. Hazen says that firms are willing to look at CEO candidates who might lack prior PE experience but have demonstrated expertise driving operational efficiency and effectiveness. “Traditional leadership capabilities — the ability to create culture, get in the huddle and drive the ball downfield — also matter a great deal,” he said. “Of course, experience identifying, acquiring and integrating new companies is still going to be highly valued, as is a history of full P&L ownership.”

In the following report, Mr. Hazen breaks down these points down in more detail, followed by some thoughts on important risk-reward calculations for anyone considering PE leadership. “There’s a new paradigm for value creation in PE, and the core strengths required of portfolio company CEOs are shifting in turn because of it,” he said. Here are a few data points to support this:

• In one recent survey, executives at PE firms said “leadership effectiveness” was their top priority for generating value.

• In the same survey, executives at PE portfolio companies, having clearly internalized the message, said “organic growth” was their top priority for generating value.

• In the same survey from two years ago, by contrast, fewer than one-third of respondents from either group said “organic growth” was their top priority for generating value.

Implications for the CEO Hiring Landscape

Leadership effectiveness is in the crosshairs for PE-backed companies at the moment, renewing the focus on improved product or service offerings, enhanced go-to-market strategies and pricing structures — all of the things that fall under the bucket of organic growth, according to the Tatum report. And with incumbent leadership at portfolio companies often failing to either fully professionalize the business or take it to the next level, it makes sense to look for replacements.

As the managing director of executive search at Tatum, Tony Hazen works closely with the C-suite and boards of private and public companies. He specializes in complex executive placements and frequently partners with PE firms to identify and secure C-suite, vice president, director and senior-level management to help transform, stabilize and optimize operations.

But how to find leaders who excel in the areas of operational effectiveness outlined above? “It’s an especially challenging question at a moment when some PE firms are struggling with as many as three-to-six C-suite vacancies, but increasingly the answer is: by opening the field to outside candidates,” said Mr. Hazen. “In fact, this is a trend that’s been gaining momentum for several years, to the point where roughly two-thirds of newly appointed portfolio company CEOs are culled from publicly traded companies. But the difference today is the degree of pressure on these leaders to deliver on demanding performance goals, capture market share and increase EBITDA, while contending with fewer inorganic growth opportunities.”

As a result:

• PE firms are approaching the hiring process with greater flexibility.

• Having previous leadership experience in PE isn’t going to be a make-or-break condition for candidates.

“But other things still might be — which is why understanding how, where and why PE moves the goalposts of risks and rewards is especially crucial for interested candidates,” Mr. Hazen said.

Different Risks, Different Rewards

There are inherent risks involved in making the move from, say, corporate president or divisional head to newly appointed CEO with PE backing. Of course, along with them come new — and very often superior — rewards, according to Mr. Hazen. “But it’s important to understand the tradeoffs,” he said. Let’s start with the former. How are the risks different for CEOs who make the move to PE-backed companies?”

Less Safety: Mr. Hazen explains that tight timelines for driving performance improvements translate to higher turnover rates for portfolio company CEOs compared to their counterparts at publicly traded companies, for one thing.

Decreased Base-Level Compensation: Corporate leaders should expect to take a pay cut, at least initially, in terms of annual salary, when moving to a PE-backed company, according to Mr. Hazen. “Perks and benefits will also be less generous, and ditto severance packages,” he said. “All of this is counterbalanced by the huge potential upside, of course, which I’ll get to in a moment.”

Doing More With Less: Cutting costs typically ranks among the top priorities for newly appointed CEOs at portfolio companies, especially today, when a quarter of PE firms report experiencing margin erosion in consecutive years, according to a report from EY. Running a tight ship, wearing many hats and doing more with less, all without sacrificing key elements of effective leadership like motivating colleagues or building culture, is going to be mandatory.

Related: Spotlight: Redefining the Search Sector for PE Leaders

On the other side of the ledger, Mr. Hazen explains that there are the rewards to consider.

Financial Windfalls: Exact numbers vary, but incentives for CEOs of PE-backed companies typically include between two and 10 percent of the equity upside, which can translate to a huge payout for leaders who are successful. Factoring equity into the equation, the Financial Times estimates that annual take-home pay for PE CEOs may ultimately be closer to $9-17 million, compared to $6-7 million for CEOs of mid-cap public companies. Recent studies have reached similar conclusions as well.

Greater Autonomy: ”Portfolio company leadership can be something like a middle path between full-on entrepreneurship and corporate bureaucracy,” Mr. Hazen said. “CEOs always need to be aligned with their PE partners, obviously, but there’s significantly less “paralysis analysis” and things move a whole lot faster.”

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These are probably the most important risks and rewards to bear in mind for newcomers contemplating a move to the PE space — and the scales will tip in different directions for each candidate. But in closing, Mr. Hazen offers a few words of advice that may help inform the decision.

Mr. Hazen learned a lot about what makes for successful PE leadership in the course of leading the end-to-end executive search process for countless clients, and bearing in mind the risks and rewards above. He offers three recommendations. “First, treat the interview as an opportunity to actively Q&A the business strategy of your PE partners,” he said. “How do they plan to capture synergies, for example? What areas of the business are they prioritizing for value creation? Are their cost cutting or containment goals realistic? This should give you a solid foundation for understanding not only the potential upside of the investment, but whether you’re the right leader to drive operational effectiveness.”

“Second, don’t worry too much if moving to PE from a corporate setting entails taking on less overall P&L ownership,” said Mr. Hazen. “Going from, say, $1 billion in P&L responsibility to something more like $250 million could feel like the opposite of career growth, but only if you overlook the broadened leadership remit that comes with it, as well as the financial upside.”

“Third — and this probably goes without saying — but arrogance and overconfidence won’t play well in this context (or any context, for that matter; see the research connecting arrogance to lower cognitive ability and decreased self-esteem),” Mr. Hazen said. “I’m not sure why, but when big players at large diversified conglomerates approach PE, they occasionally seem to be under a different impression.”

Related: Leadership Dilemma Unfolding at Private Equity Firms

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