November 6, 2019 – U.S. private equity firms are becoming more sophisticated and generating record demand for operating specialists with the skills and experience to actively manage their portfolio companies, according to a new study by Heidrick & Struggles.
As measured by deal activity in 2018, the U.S. private equity market closed a record 4,828 deals worth a combined $713 billion. The data also shows there has been a sharp decline in fundraising, signifying that firms are likely more focused on investing the capital raised in previous years. As a result, more private equity firms are now tapping operating professionals to help portfolio companies reach their full operating potential, said Heidrick’s “2019 North American Private Equity Operating Professional Compensation Survey.”
“It’s an interesting time for private equity and the most competitive and active market we have seen in the past two decades,” said Jonathan Goldstein, regional managing partner of the search firm’s private equity practice in the Americas. “As operational issues and value creation become increasingly complex, general partners are hiring operating executives at a record rate to create value and differentiate themselves in the marketplace. The operating executives who can bring the specific skills and expertise required to meet these challenges in the market will continue to be in demand, and their compensation will reflect it.”
Building Out Operating Professional Teams
Private equity firms are now hiring generalists, industry specialists and functional specialists to build out their operating professional teams, said Heidrick & Struggles. Two of the fastest-growing specialist roles are CFO of portfolio operations and head of talent, given the expanding range of required skills and need to attract and retain top level staff.
Heidrick found that more than half of operating executive candidates have general functional expertise (59 percent), followed by functional expertise in finance (11 percent). Additionally, candidates most often have a generalist industry focus (37 percent) or focus on the technology/software (19 percent) and industrial sectors (15 percent).
Firms also favor operating professionals with certain kinds of experience, from mid-level to the most senior ranks, said the report. Successful candidates typically have backgrounds in consulting, operational experience (including P&L responsibility) and exposure to private equity, either at a portfolio company or as a former operating partner. Nearly one-third (31 percent) of respondents previously held the title of CEO, followed by management consultant (19 percent) and operating executive (18 percent). Last year, 87 percent of operating partner hires had no prior connection to the investment firms they joined.
Strong Base Salaries
Operating professionals received strong base salaries and bonuses in 2018. Heidrick found that nearly half (46 percent) of operating professionals reported that their base salaries went up in 2018, roughly the same percentage as in 2017. Thirty-two percent of respondents who received base salary increases saw an increase of more than $50,000 in 2018. Similarly, for bonuses, nearly half (48 percent) of respondents reported higher bonuses in 2018, slightly more than in 2017. Forty-seven percent of respondents who reported bonus increases saw an increase of $50,000 or more in 2018.
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“Private equity firms are now focused on building out their operating professional groups across all levels, which is something we have never seen before,” said Mr. Goldstein. “Most firms prefer a combination of operational and P&L experience, ideally at a PE-backed company, along with previous consulting experience. Sometimes we are helping firms find a generalist, but many times the successful candidate will have functional or industry expertise.”
Mr. Goldstein is a member of Heidrick & Struggles’ global private equity practice. With nearly two decades in the private equity space, initially as an investment professional and subsequently as an advisor, he has counselled alternative-asset firms on their recruitment, leadership and talent needs. Mr. Goldstein recruits investment professionals, operating partners and advisors, as well as fund-raising professionals. He also serves as an advisor to his clients, helping them navigate through portfolio company issues. His proactive approach has resulted in the formation of new private equity funds as well as increased deal flow for his clients.
Mr. Goldstein works with both the general partner and limited partner communities. Within the general partner community, his clients include buyout funds, growth equity funds, special situation funds, distressed funds, credit opportunity funds and specialty lending funds. His limited partner clients include sovereign wealth funds, fund of funds, insurance companies, corporations and endowments.
Mr. Goldstein recently sat down with Hunt Scanlon Media to discuss the recruitment of senior executives within the private equity sector. Following are excerpts from that conversation.
Jonathan, can you give us an overview of the current climate for recruiting senior executives to private equity concerns?
This is the most competitive and active PE market we have seen in the past two decades. This is not surprising given the amount of capital that has been flowing into the industry. We are seeing activity from firms that are raising larger funds and new strategies. In addition, we are seeing spin-out groups, as well as other new entrants into the market. Finally, we have done a significant amount of work with LPs that are moving downstream and becoming more GP-like. As more capital has flown into the industry, the multiples that PE firms are paying have increased. As such, more PE firms are hiring operating professionals, at all levels, across industry sectors and functions.
What are some of the challenges recruiting within this sector?
We like to say that most of our assignments are straightforward but not easy. Our clients have very high expectations, for good reason. Most of these firms are private partnership and even when it is not a private partnership, it is still like arranging a marriage. The vast majority of great candidates are in a very good situation and are locked in either economically or because they are loyal to their colleagues and strategy. These assignments can take a long time and are very complicated.
“This is the most competitive and active PE market we have seen in the past two decades.”What types of skill-sets are PE firms looking for in senior executives?
From the point of view of operating professionals, PE firms generally like to see a mix of experience at a PE-backed portfolio company, as well as consulting experience that has been garnered early on in one’s career. The role of an operating professional is very demanding, requiring a tremendous amount of travel, so it’s not for everyone. Finally, PE firms look for executives that will be able to mentor, guide and lead, while at the same time not eclipse the management of the portfolio companies.
What types of roles are most in demand?
The role that is most in demand is the operating partner generalist, but the fastest growing roles are functional roles, be it the chief financial officer of portfolio operations or head of human talent.
How has your background in PE helped you recruit senior executives within this sector?
It has been enormously helpful. I have walked in the shoes of my clients so I’m able to understand what may motivate them to make a move and the opportunities and challenges of the marketplace.
Contributed by Scott A. Scanlon, Editor-in-Chief; Dale M. Zupsansky, Managing Editor; and Stephen Sawicki, Managing Editor – Hunt Scanlon Media