January 10, 2022 – The global private equity market boomed across fundraising, acquisitions and exits in 2021, buoyed by cheap financing, vast monetary and fiscal stimulus, and the resulting increases in share and private capital market prices. In total, $1.17 trillion of deals were recorded between January and September 2021 – more than in any year since 2015, according to the BoardEx ‘Insights on Portfolio Company Talent 2022’ report. Despite the optimistic environment, one consequence was that PE firms faced greater challenges in achieving their promised returns amid higher entry prices, the report said. “In turn, these promised returns depend on creating value from the portfolio companies these PE firms have acquired. PE firms are increasingly aware of the critical role that leadership teams – from the CEO and CFO to the board members and other executives – play in their portfolio companies,” said BoardEx.
A recent Bain & Company report, based in part on a survey of PE professionals, found that the quality of portfolio company management is the reason most cited for deal success and the second most-cited reason for deal failure. In addition, more than 90 percent of respondents said that waiting too long to take action on talent issues had resulted in portfolio company underperformance in the past five years. Certainly, having the wrong leadership, particularly the CEO, can come with a heavy price.
Assessing, Identifying and Recruiting the Right Talent
“However, making the right talent decisions – across many portfolio companies and under tight timelines – is not straightforward,” the BoardEx report said. “The right leadership team, or the majority of individuals, may already be in place or the PE firm may need to recruit a number of roles internally or externally. PE firms must define the ideal experience and capabilities for each role and ensure the total sum of the team fits in with the firm’s overall strategy for the portfolio company.”
To do this, BoardEx says that PE firms draw upon both executive search and in-house teams to recruit new talent. In addition, PE firms are increasingly using in-house talent teams that focus on supporting the portfolio companies themselves with talent assessment, building and nurturing, as well as driving diversity.
In the case of recruiting a CEO or CFO for a new PE-owned firm, for example, the desired profile is likely to differ by company and PE firm strategy. BoardEx notes that for some, previous sector experience will be important. For others, previous portfolio company experience may be the priority, or it may be a specific skillset that is most important, along with a long list of other capabilities, qualities and motivations.
Bringing Added Value to the PE Firm
“In addition to the value they bring to the portfolio company they helm, the individuals that make up the leadership team offer a number of other, sometimes overlooked, benefits to the PE firm owner,” the BoardEx report said. “Portfolio company leadership teams are well connected to large numbers of senior business decision-makers. Given their remit, these leaders have professional relationships that connect them to a range of top executives, including board members and C-suite executives, chairpersons, committee members and others.”
The average U.S. portfolio company CEO or CFO has accumulated at least 1,600 first-degree connections to such decision-makers over the course of their professional career. BoardEx says that leveraging the networks of those first-degree connections, these executives’ second-degree connections are even greater in number — at an average of 260,000 individuals in leadership positions — making the portfolio company leader a highly valuable source of commercial opportunities.
Recruitment and Business Development
These networks of connections are powerful enablers for PE firms on both the recruitment and business development fronts, according to the BoardEx report. It is well known, if little studied in academic circles, that referrals and warm introductions are much more likely than cold calls to be greeted with an amiable response in the world of business. “In relation to recruitment, such connections can be useful for carrying out due diligence on a new hire,” the report said. “By leveraging portfolio company leaders’ networks (often within their sector of expertise), PE firms can find an executive who has previously worked with the potential hire and who would be amenable to a discussion. This is, in essence, a form of back-channel checking. These leaders’ networks can also be used to find a warm introduction to a relevant executive at a potential target company, enabling both due diligence and eventual deal closures. Finally, the networks of these portfolio company leaders will, on occasion, include connections to high-potential candidates, shortcutting the first-approach process for PE firms and speeding up the executive recruitment process.”
Today’s Portfolio Company CEOs and CFOs
BoardEx notes that successful portfolio company leaders must be able to navigate many sorts of commercial and operational challenges, while driving the company to achieve high performance. In the leadership team, the CEO and CFO are particularly important in steering the business and, ultimately, shaping it for exit.
BoardEx’s Insights on Portfolio Company Talent 2022 offers unique insight into the characteristics of the CEOs and CFOs who lead these companies, making it an essential read for firms looking to make the most of their talent management and acquisition strategies.
Leadership teams play a critical role in their portfolio companies and the impact on company performance. The CEOs and CFOs brought in to steer these companies are selected for their experience and connections aiding the PE firm in recruitment, due diligence efforts and facilitating business development. To view the full report click here!
BoardEx also highlighted the key characteristics of today’s portfolio company CEOs and CFOs, each within the context of their own peer group. Focusing on U.S. portfolio companies fully or partially owned by U.S.-based PEI 300 firms, BoardEx began by looking at the age, gender, and education of these executives. Next, they studied their type of appointment, role duration and prior experience, including their most common employers (that is, their alumni networks). Last, BoardEx profiled the CEOs and CFOs of U.K. portfolio companies owned by U.K.-based PEI 300 firms, and point to some of the similarities and differences between them and their U.S. peers.
Overall, the data demonstrates the significant level and often specialized experience of these executives and underlines why it is crucial for PE firms to recruit and retain the right talent while making the most of their connections.
Age and Gender
The study said that the average U.S.-owned portfolio company CEO or CFO was in their early to mid-50s. Given the importance of senior executives – especially the CEO – to a portfolio company’s performance, PE firms often recruit talent with extensive prior experience. This was reflected in the age profiles of CEOs and CFOs in this universe of companies. Almost half of the CEOs (47 percent) were aged 51 to 60, and 77 percent were in the 46-to-65 age group. Their average age was just shy of 54. CFOs had a slightly younger age profile, with 79 percent aged between 40 and 60. Their average age was 52.
Just 7.5 percent of U.S. portfolio company CEOs were women, the report said. Although women were underrepresented in senior executive positions across almost all business sectors, the gender imbalance at the top of U.S. portfolio companies was particularly pronounced. According to the study, 92.5 percent of U.S. portfolio company CEOs were male. The situation was only slightly better among CFOs, with women accounting for 14 percent of the total. Despite the mounting calls for greater gender equity in the corporate world, it remains to be seen how quickly the share of female CEOs and CFOs in PE-owned firms will increase. Despite this, the low female representation is not an outlier when seen against businesses in both the S&P 5008 and the S&P SmallCap 600 Index, the latter of which, among stock market indices, is a relatively good match for these portfolio companies with regards to market capitalization.
Type of Appointment, Tenure and Experience
BoardEx found that more than 70 percent of PE-owned firms’ CEOs and CFOs were appointed externally. Data shows that 71 percent of U.S. portfolio company CEOs, and 75 percent of CFOs, were external appointments. This is perhaps not surprising. PE firms often replace – sometimes immediately, sometimes later – the CEOs (and other leaders) of companies they acquire, in many cases because of a perceived lack of fit with the PE firm’s culture and investment strategy. “Because PE firms have invested significant capital in the portfolio company, they will want to hire a CEO and CFO who are fully aligned with their approach,” the BoardEx report said. “Moreover, because portfolio companies tend to be smaller than publicly traded firms, the internal succession pool may be limited. Yet it must also be acknowledged that there is not an insignificant proportion of CEOs and CFOs who simply stay on in their roles regardless of company ownership, with the PE firm benefiting significantly from the enormous value, knowledge and experience they bring to a business they have often either founded or been with for a considerable time.”
Upon assuming their current role, the average CEO or CFO of a U.S. PE-owned firm had more than 20 years of professional experience. Today’s portfolio company leaders bring a wealth of experience to their roles. “They also tend to have had some prior portfolio company experience, given the specific skills needed to drive company performance and, ultimately, achieve a successful exit,” the BoardEx report said. “Leaders with a strong track record as a CEO or CFO at a publicly traded company will not necessarily be destined to succeed in a PE-owned firm environment, with its more accelerated timescale and different challenges and pressures. That said, at an average of around three years for both roles, previous portfolio company experience does not appear to be an absolute necessity (although the average figure rises when non-executive roles are included).”
The current state of recruiting within the PE sector remains strong. “The search firms that recruit in certain sectors that PE firms invest in are doing very well,” said Tim Russell, managing partner of The Tolan Group. “GPs are shifting their focus back to growth and scale in preparation for exit, as opposed to crisis management focusing on liquidity and cash flow concerns and strategy adjustment, which is what most of the focus was on in 2020.” Hiring across the sector started to heat up in October of last year,” Mr. Russell said. “The pace picked up considerably as 2021 rolled on and a familiar velocity of deal activity resumed.”
BoardEx found that U.S. portfolio company CEOs and CFOs have been in their current positions for more than five and three years respectively. Since assuming the role, CEOs of PE-owned firms have so far spent an average of 5.6 years in their present position. Portfolio company CFOs, on the other hand, have been in their current posts for 3.2 years on average. Given the typical five-year timeframe for many U.S. PE investments, these figures highlight the need for PE firms to consider possible successions during their stewardship of the portfolio company, according to BoardEx. “Among CEOs, this tenure (so far) is longer than that of their peers in companies in the S&P 500 Index,” the report said. CEOs of U.S. PE firms’ portfolio companies have, on average, been in their present positions for longer than the CEOs of large publicly traded firms in the S&P 500 Index (4.7 years). BoardEx says that this may reflect the tendency of some PE firms to install new senior management at a company soon after acquiring it, as well as the continuous pressure on CEOs of large publicly traded companies to meet market earnings expectations. Portfolio company CEOs have been in their roles for a similar length of time to the chief executives of smaller publicly traded firms in the S&P SmallCap 600 Index. Interestingly, differences in CFO tenure between portfolio companies and publicly traded firms are less marked than for CEOs.
The U.K.: Similarities and Contrasts
As a group, how do the CEOs and CFOs of U.K. PE-owned firms compare with their U.S. counterparts? To explore this, the report examined BoardEx data on the U..K portfolio companies fully or partially owned by U.K.-based PEI 300 firms. The data revealed some similarities between the two countries’ portfolio companies, but also threw up some notable differences. The leaders of U.K. portfolio companies were slightly younger than their U.S. counterparts, and female representation was even lower. The average age of a U.K. PE-owned firm’s CEO was 51 – more than two years younger than the CEOs of U.S. portfolio companies – with 80 percent aged between 40 and 60.
But only five percent of these U.K. CEOs were women, which was even lower than the 7.5 percent share in the U.S. Female representation among CFOs of U.K. PE-owned companies was slightly higher, at 11 percent, but was still below the U.S. level of 14 percent. BoardEx says that this clearly indicates that gender imbalance at the top of PE-owned companies is a problem in both countries. Less than 60 percent of U.K. PE-owned firms’ CEOs and CFOs were appointed externally, well below the U.S. level. BoardEx data showed that 56 percent of CEOs were external appointments, compared with 71 percent among U.S. portfolio companies. Likewise, 58 percent of U.K.-owned portfolio companies’ CFOs were recruited from outside, significantly below the 75 percent share in the U.S.
The average CEO of a U.K. portfolio company had been in their current role for 5.5 years, virtually the same tenure as the U.S. average. The CFOs of companies owned by U.K. private-equity firms were in their current jobs for four years on average, compared with 3.2 years in the U.S. Like their U.S. counterparts, U.K. portfolio company leaders tended to have had previous experience of working at PE-owned firms before assuming their current CEO or CFO role. CEOs had an average of 2.6 years of experience and CFOs 2.7 years – just a few months less than their U.S. peers in each case. “When non-executive roles are included, this goes up substantially,” the BoardEx report found. “With regards to total years of professional experience, U.K. leaders are a few years behind their U.S. counterparts, due, in part, to being slightly younger.”
Contributed by Scott A. Scanlon, Editor-in-Chief; Dale M. Zupsansky, Managing Editor; and Stephen Sawicki, Managing Editor – Hunt Scanlon Media