Keys for First-Turn Portfolio Companies Using Executive Search Firms

April 1, 2024 – For first-turn portfolio companies—companies that are typically founder-led and partnering with a private equity firm for the first time—the experience of working with an executive search firm often varies. Founders are often new to partnering with search firms, as they have mostly hired through their networks. While PE firms want to hire world-class talent and are focused on value creation through their hold cycle, the founder’s priorities lean more towards hiring a strong executive for today, who fits into the organization’s culture, according to a new report from Russell Reynolds Associates’ Linda Barham , Mike Heberlein, Ted Moore, and Catherine Schroeder. Through interviews with private equity firms invested in first-turn portfolio companies and their founders, the search firm outlines key lessons learned and tactical recommendations on how to create a seamless search process.

In the early days, founders often had Swiss-army knife executives. However, as the organization scales, the Russell Reynolds report explains that executives need to evolve along with the organization. “Founders often remain on as CEO, and the focus is on hiring roles that complement the founder and existing management team’s skillset,” the report said. “When defining the profiles of the key first hires, sketch out the organizational chart for what you want the company to look like at three or four times its current size.”

The Russell Reynolds report first points to chief operating officers. “A first-turn COO is pivotal to scaling business operations and ensuring organizational resilience, while also complementing the gaps of the founding team as they scale,” the study said. The firm notes that they engineer robust operational systems to support scalability and efficient company-wide processes while overseeing the development of infrastructure that supports both immediate operational needs and long-term growth.

“They act as a scalability and growth orchestrator,” the report says. “They plan and manage the organization’s operational scalability to handle increased production, team expansion, and market growth. COOs synchronize cross-departmental efforts to ensure consistent and sustainable growth, aligning with the company’s strategic objectives.”

COOs also implement performance metrics and quality control systems to maintain high standards during rapid growth. They drive initiatives for continuous improvement and operational excellence, ensuring the organization’s output meets market demands, according to the Russell Reynolds report. They translate the company’s strategic plan into actionable operational goals, ensuring alignment across all departments.

First Turn CFOs

The ideal first-turn CFO profile meets the portfolio company where they are at in their journey and scales along with them. The Russell Reynolds report explains that they are able to stand up and professionalize the finance function and bring deep experience in classic finance functions including accounting, reporting, compliance, controls, and control frameworks. “They have the ability to roll up their sleeves and get into the weeds working proactively and closely with the finance and leadership team,” the report says.

The report also points to these CFO duties:

• Evolves the finance function and operating model as the firm’s business model changes. Drives attention towards value-adding finance activities by ensuring finance and accounting operations are efficient and effective.

Related: Leveraging Portfolio Talent At L Catterton

• Provides leadership on M&A, profitable growth, and acquiring capital. Deep expertise in financial engineering and structuring complex transactions.

Transforming Portfolio Companies and Driving Value Creation via Human Capital
At the beginning of last year, Gartner predicted a 20 percent rise in turnover rate across industries. Heightened inflation, rising interest rates, post-pandemic priority shifts, and hybrid work preferences have created a fierce scrimmage for companies worldwide trying to hire the people necessary to drive long-term profits.

These challenges are compounded for private equity firms with numerous portfolio companies, according to a report from JM Search’s Trista McCarthy. “Aside from achieving sustainable growth, your team is tasked with ensuring that each company in your portfolio can hire and retain talent for everything from line-level openings to vacancies in the boardroom and C-suite,” said the study. “Because at the end of the day, a healthy EBITDA and proper valuation are only possible with the right people in critical positions.”

• Provides leadership in aligning financial, business and investment strategies. Sets the future direction of the company to enhance business performance. Can be a potential CEO successor.

First-Turn CHRO

The ideal first-turn CHRO profile is pivotal to scaling the workforce, developing talent, and helping to solidify culture as the organization grows. Russell Reynolds notes that they act as a culture and talent catalyst focusing on developing and advancing a culture that embodies the organization’s values, driving high performance and inclusivity while overseeing talent management and acquisition for strategic workforce scaling and continuous improvement.

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

The CHRO aligns HR development needs with the firm’s core long term development strategy to support organizational growth and adaptability in changing markets, according to the Russell Reynold report. “The executive focuses on continuous development across all levels of the organization; not only ensuring that the workforce scales but also fostering an environment of growth for the entire C-suite,” the study said. “They streamline and implement operational improvements and total reward strategies to attract, retain, and motivate top talent effectively.”

Ensuring a Seamless Search Process

Transparency, balancing stakeholders, and access to data are fundamental to partnering with an executive search firm. Through Russell Reynolds’ interviews, the firm found that successful searches excelled at the following:

• Taking time to understand the search process. With first-turn portfolio companies, this may often be the first time the founder and management team have partnered with an executive search team. In tandem with the private equity firm, Russell Reynolds says that we need to ensure founders invest the time to align on the value of the process, the market, role archetypes, non-negotiable core competencies, and what great talent looks like.

• Balancing stakeholders. Balancing the relationship between private equity firms and founders can be challenging. The dynamics can vary depending on the type of investor and their involvement in the company. While private equity firms tend to want to hire world-class talent and are focused on value creation through their hold cycle, the founder’s priorities lean more towards hiring a strong executive today with a culture fit. Striking a balance means focusing on candidates who can complement the founder’s skillset and reach the required level of scalability, according to the Russell Reynolds report.

• Leveraging organizational data. Early access to organizational data, such as revenue, EBITDA, CAGR, and perspectives around future MOIC and valuation of the business, can impact the quality of the search. Being open and transparent about key financial metrics, growth targets, and the investment thesis can help attract high-caliber candidates.

• Perfecting the pitch. The earlier we understand the organization’s topline, growth, investment thesis, and compensation philosophy, the better. As a search firm, Russell Reynolds says that understanding the story we are bringing to the market will help calibrate the talent profile we are after.

• Navigating compensation challenges. Founders may have sticker shock when comparing their cash compensation to the market, so Russell Reynolds explains that understanding that the equity and long-term value creation these executives will help drive can help keep everyone aligned and motivated.

“That said, it is important to have early discussions about compensation expectations, especially the equity component, and provide real-time market data to calibrate profiles and show the value of the offer,” the Russell Reynolds report said. “The portfolio companies having a clear compensation philosophy and understanding the market will be crucial.”

Related: Avoiding Bad Hires for Private Equity Portfolio Companies

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