Private Equity’s Approach to Leadership Is Evolving—Are You Prepared?
April 3, 2025 – Executive search consultants continue to say that the private equity landscape has undergone significant transformations in recent years, particularly in how firms approach leadership acquisition and talent strategy. This evolution is driven by several key factors and trends, according to a recent report from global executive search provider SpenglerFox’s Michael Klingler.
The traditional PE playbook focused primarily on financial engineering is no longer sufficient in today’s market, the SpenglerFox report explains. Financial engineering now accounts for only 25 percent of PE value creation, down from 70 percent pre-2000, according to reports. “This shift has placed greater emphasis on operational expertise and leadership capabilities to drive growth and value creation in portfolio companies,” the report said.
Extended Hold Periods and Complex Integrations
“Average holding periods for PE investments have stretched to approximately seven years, demanding sustained operational excellence over longer timeframes,” the SpenglerFox report said. “Additionally, platform and roll-up acquisitions have become more prevalent, requiring exceptional leadership to integrate smaller firms and drive synergies.”
Leadership Challenges and Instability
Portfolio companies face significant leadership instability, with 54 percent of CEO departures being unplanned and most exits occurring within two years of acquisition, according to a recent Harvard Business Review analysis. “This turnover creates a ripple effect, directly impacting investment returns and extending hold times – a critical challenge for PE firms focused on value creation,” the SpenglerFox study said.
Evolving Talent Acquisition Strategies
To address these challenges, SpenglerFox notes that forward-thinking PE firms are implementing comprehensive talent strategies at multiple levels:
Firm Level
- Appointing dedicated human capital partners.
- Developing leadership playbooks and assessment frameworks.
Portfolio Company Level
- Establishing measurable leadership goals.
- Transforming HR from transactional to strategic.
Deal Level
- Integrating leadership assessment into due diligence.
- Implementing robust onboarding strategies for new executives.
Key Trends in PE Leadership Acquisition
1. Focus on Operational Expertise.
“PE firms are increasingly prioritizing leaders with strong operational backgrounds who can drive business growth and financial turnarounds,” the SpenglerFox report said. “The demand for portfolio operations roles has surged, reflecting the need for hands-on leadership in value creation.”
Related: Opportunities and Challenges in Private Equity Recruiting
2. Emphasis on Adaptability and Crisis Management.
Economic uncertainties have led PE firms to value leaders with strong adaptability and crisis management skills, the SpenglerFox report explained. Executives who can navigate volatile market conditions and quickly adjust strategies are highly sought after.
3. Balancing Short-Term Performance and Long-term Value Creation.
“Successful PE leaders need exceptional skills in managing multiple stakeholders, including investors, board members, and portfolio company teams,” the SpenglerFox report explained. “They must balance short-term performance pressures with long-term value creation objectives.”
4. Cross-Sector Experience and Innovation Focus.
While deep industry knowledge remains valuable, PE firms are increasingly open to leaders with cross-industry experience who can bring fresh perspectives and innovative approaches to portfolio companies, according to the SpenglerFox study.
How to Identify Leadership Potential in Private Equity Acquisitions
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.”
5. Enhanced Due Diligence on Leadership.
“PE firms are conducting more thorough assessments of target company leadership during the due diligence phase,” the SpenglerFox report said. “This includes evaluating the existing management team’s capabilities and identifying potential gaps that may need to be addressed post-acquisition.”
Board Composition and Governance
SpenglerFox also explains that PE firms are also evolving their approach to board composition and governance in portfolio companies:
Pre-Deal vs. Post-Acquisition Approaches
- Pre-Deal:Firms often identify potential board members during due diligence, focusing on individuals who can provide industry insights and support the investment thesis.
- Post-Acquisition:After acquiring a company, PE firms typically reshape the board to align with their strategic objectives, often bringing in operational experts and industry veterans.
SpenglerFox’s Best Practices in Board Governance
1. Diverse Expertise: Successful PE boards typically include a mix of industry experts, operational leaders, and financial professionals.
2. Active Engagement: PE boards are characterized by high levels of engagement, with frequent and in-depth interactions between board members and management teams.
3. Alignment with Value Creation Plan: Board composition and activities should be closely aligned with the PE firm’s value creation plan for the portfolio company.
4. Regular Performance Reviews: Implementing regular performance reviews for both the board and individual directors ensures ongoing effectiveness.
5. Clear Communication Channels: Establishing clear lines of communication between the board, PE firm, and portfolio company management is crucial for effective governance.
“In conclusion, the evolution of leadership acquisition in private equity reflects a broader shift towards operational excellence, adaptability, and strategic talent management,” the SpenglerFox report said. “As PE firms navigate complex market conditions and longer hold periods, the ability to identify, develop, and retain top talent remains a critical factor in driving portfolio company performance and overall fund returns.”
Founded in 2003, SpenglerFox is a global search and HR services firm working across multiple territories serving both the mature and emerging markets. The firm further provides interim management, payrolling, and recruitment process outsourcing in both mature and emerging markets. The firm also has a dedicated focus on board work for small to mid-sized companies and a research team that provides talent mapping and pipelining solutions.
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
