Record Holding Periods for PE Portfolios Drive Urgent Focus on Talent Acquisition and Retention Strategies

September 25, 2024 – The median holding period for private equity-backed portfolio companies has reached 5.7 years, the highest since tracking began in 2000, according to Private Equity Info. With a record peak deal year in 2021, many portfolio companies are closing in on their exit timelines in the next few years. And, amid fluctuating market conditions and interest rates, securing new deals has become increasingly challenging, prompting PE firms to shift their focus toward optimizing their existing portfolios. In this environment, hiring and retaining the right executive talent is more complex than ever.
A recent EY survey reveals that 76 percent of the largest PE firms identify talent acquisition and retention as top priorities. Moreover, articles from both Harvard Business Review and Business Insider emphasize the necessity for PE firms to adopt innovative talent strategies centered on operational value improvement to ensure successful exits. As PE firms navigate these complex dynamics in executive recruitment and retention, they face the additional challenge of attracting increasingly savvy candidates who are acutely aware of the market’s shifting realities.
ON Partners, in collaboration with HR Signal, has released the 2024 Private Equity Talent Trends Report. By harnessing real-time workforce data, HR Signal’s platform delivers bespoke people analytics and predictive AI, providing organizations with actionable insights for an HR advantage
Hiring Growth Rate
In recent years, the chief revenue officer role has experienced the most significant hiring growth rate across public, private, and PE-backed organizations, according to the ON Partners’ report. In PE-backed companies only, the largest growth rate surge in hiring has been for sales and customer-focused roles, particularly in marketing, product, and customer experience. Meanwhile, PE executive roles in finance, HR, and technology have remained flat or declined over the same period.
“In today’s market, both candidates and hiring firms are exercising increased caution during the recruitment process,” the ON Partners’ report said. “Candidates are often evaluating multiple opportunities simultaneously. This has led to extended timelines for scheduling interviews and an increase in candidates withdrawing, especially when they have concerns about a company’s financial stability or compensation that does not meet their elevated expectations.”
Related: How Talent is Driving Private Equity Success
In-person interviews and the demand for leadership in the office have led to local/regional talent pools, the ON Partners’ report explains. “This uncertainty has also led to more thorough talent evaluations, including a stronger emphasis on recommendations and referrals, with a focus on verifying a candidate’s actual impact on previous growth,” it said. “Hiring firms and companies are also incorporating more assessments, and scorecarding, particularly around soft skills, to ensure candidates are well-suited for the current market’s demands. This mutual caution highlights how both sides are taking deliberate steps to reduce risks and ensure the right fit.”
A Look at the Landscape for Hiring a PE Operating Company CEO
Leaders of private equity firms looking to hire a portfolio-business CEO have a great deal to consider. The U.S. PE talent landscape is changing dramatically in real time, due to multiple forces related to economics, industry, and consumer habits, according to a recent report from Heidrick & Struggles’ Jason Henderson and Amanda Worthington. “They’re all converging to make hiring a CEO much more challenging than in the past,” the report said. “Most importantly, it means that the tried-and-true ways of identifying and assessing top PE-owned talent will no longer work.”
According to ON Partners’ executive search data from 2022-2024, private equity firms are evaluating on average 15+ more candidates per search, compared to just six+ more candidates in searches conducted by public and private companies. In support of the claim that private equity is placing greater diligence on rigorous talent acquisition processes, ON Partners’ executive search data from 2022-2024 shows that private equity firms are conducting two+ more interviews on average per search, while public and private companies have reduced the number of interviews in their processes.
Rise in Compensation
“The increase in private equity compensation can be attributed to the sector’s focus on optimizing existing portfolios amid challenging market conditions,” the ON Partners’ report said. With fewer new deals and heightened pressure to drive operational value, PE firms are offering higher cash to attract top talent capable of leading these crucial transformations. Compensation expectations have risen across the board, but private equity stands out with the highest rate of increase compared to other sectors. An analysis of base and bonus compensation, excluding equity and stock options, reveals that the PE group experienced a 7.7 percent average rate of increase in overall compensation.”
“In today’s private equity landscape, with longer holding periods and challenging performance environments, equity has become an even more crucial element in attracting and retaining top executive talent,” said Ashley Day, partner at ON Partners. “While cash compensation is on the rise, the structure of equity packages remains a key differentiator.”
Related: Opportunities and Challenges in Private Equity Recruiting
“Most PE firms use a mix of time-based vesting and performance hurdles, with management equity pools typically around 10-12 percent,” said Ms. Day. “However, extended hold periods bring more executives onto the cap table, squeezing the equity pool as leaders exit with vested shares. Standard time-vesting periods are usually five years, but turnover and prolonged hold periods add complexity to managing these equity packages. Savvy candidates now ask sharper questions, seeking to understand how their equity package aligns with business performance.”
“They want clarity on what growth milestones are needed for their equity to vest, particularly in a more uncertain market,” Ms. Day said. “In response to these challenges, ON Partners has seen their PE clients leverage transaction bonuses to attract and retain talent, especially in the following three scenarios.”
“As deal flow has slowed over the last couple of years, PE firms have dedicated more time and resources to ensuring that their current investments are performing,” said Jake Espenlaub, partner at ON Partners. “A key part of this effort is a heightened involvement in the leadership selection process for portfolio companies, where getting the right people in the right roles is critical to driving value creation and achieving desired investment returns.”
“PE firms, and their associated operations and talent teams, are taking a more hands-on approach to ensure that the right leaders are in place to drive operational improvements that align with the investment thesis and corresponding value creation plan,” said Mr. Espenlaub. “This involvement extends beyond traditional oversight, with firms actively participating in the search and diligence processes for senior leadership roles. By leveraging their own networks alongside those of executive search firms, PE teams are ensuring they identify and hire the most suitable candidates.”
“In-person interviews and case study exercises have become more frequent, allowing PE firms to more directly assess candidates’ alignment with the company’s needs,” Ms. Day said. “Given the focus on successful exits, PE firms and their talent management teams are also doubling down on leadership development, referrals, assessments, and scorecarding of potential candidates. By augmenting management teams, improving team dynamics, and ensuring executives are prepared for the demands of a successful exit, firms can create stronger alignment between leadership and the value creation plan. This deeper engagement in talent decisions is now a crucial part of their strategy for maintaining investment returns in a slower deal environment.”
Related: The Market for Senior Roles Heating Up at Private Equity Firms
Contributed by Scott A. Scanlon, Editor-in-Chief; Dale M. Zupsansky, Executive Editor – Hunt Scanlon Media