The Market for Senior Roles Heating Up at Private Equity Firms
May 18, 2023 – Recruiting the right people to put in senior roles at PE portfolio companies and developing executive leadership teams to drive growth is hotter than ever. The most direct way a search partner can help PE/VC firms looking to build out management teams is obviously to identify, attract, and introduce strong talent. But, the true value of a strong search partner lies a level deeper—in the unique perspective and pattern recognition that comes from speaking with the most successful and influential leaders in a given space, recruiters say.
“Even though the macro environment has slowed PE dealmaking, this is the busiest period our PE search team has seen,” said Matt Harvey, senior partner at London-based search firm InX. “Investors are sharply focusing on the value creation journeys within their portfolio companies to counteract the various issues facing businesses today, and with many hold periods being elongated funds are really turning the screw to increase the value of their portfolio companies ahead of future exits. Against that, management teams are suffering fatigue. All of this plays into the hands of funds with strong operating teams, which is why investors up and down the chain are strengthening their functions – whether that be making their first, or 21st operating hire.”
Mr. Harvey also explains that from a fund-level operating partner hiring perspective, the spikes in activity are centered around distressed, stressed and turnaround vehicles, tech sector specialists (go-to-market, product & M&A specialists for B2B SaaS in particular), and of course the top-tier large-cap funds whose fund sizes continue to grow (for generalist operating partners with a clear spike, plus specialists for data analytics, digital (marketing and transformation) and ESG. “From a Portco perspective our busiest areas are CFO hiring, chief transformation officers (tactically plugged in by the funds to keep the value creation plans on track), digital transformation (to do more with less) and procurement & supply chain,” Mr. Harvey said.
With the current volatile market conditions Mr. Harvey also notes that PE has proven very resilient in comparison to public markets during recessionary environments. “In fact it’s precisely in or shortly after these periods that PE achieves its best returns,” he said. “Valuations have dipped to much more investor-friendly levels in comparison to recent years, and funds are sat on stockpiles of dry-powder – this is the time to go shopping, especially for active investors with good operational experience. Also, due to PE’s longer-term investment horizon its investors are more shielded from the panic selling you see in public markets, and management teams can focus on the long-term vision away from the pressure of quarterly earnings calls.”
Related: How Talent is Driving Private Equity Success
Mr. Harvey has over 10 years’ experience running global search campaigns across industry and private investing, with an emphasis on technology-oriented value creation, data, and digital transformation. Joining in September 2020, he leads InX’s private equity practice conducting searches across Europe and North America. Mr. Harvey focuses mainly on fund-level operating partners, value creation managing directors and vice presidents, and principal and senior associates. He helps investors strengthen their operating teams, including full team builds for large and mega-cap funds, first-time value creation hires for lower mid-market and growth equity investors, and data science focused hires.
Mr. Harvey recently sat down with Hunt Scanlon Media to discuss the role of operating partner as well as trends he is seeing within the private equity sector.
Matt, can you explain the role of operating partner?
An operating partner (OP) is an expert employed by a private equity fund to partner with and give ongoing direction to portfolio company founders, CEO’s and management teams to maximize the full potential of an investment during the ownership period. In comparison to investment partners (or deal partners) who are the financial shareholders, you can think of operating partners as the operational shareholders driving ‘on-the-ground’ value creation. As you dig deeper though, there are a myriad of different approaches to operating partner models and nearly every fund has a slightly different take. On the one hand, you have value creation-led PE investors where operating partners partake in investment decisions, are meaningfully involved in the pre-deal due diligence and management courtship phase, and play a very hands-on role during the hold period. Funds like these might actively pursue investments based on the potential for operational improvement, often requiring complex transformation, turnarounds or carve-outs. In settings like these it’s not uncommon for an OP to stand-in as a CEO or other C-suite member during a transitional or stormy period. On the other end of the spectrum you have finance-led funds that prefer to allow their portfolio companies more independence, and therefore their version of an operating partner may be considerably more light-touch. In this setting, the function of an OP may focus more on financial oversight and monitoring of the portfolio at large and be much further removed from the day-to-day running of any one business. Even in the middle of this pendulum there is still great variety from fund to fund – from an OP at a sector-specialist investor with a laser-focus on driving accelerated go-to-market and expansion efforts for three-to-five $50-200 million revenue businesses, to a large-cap oriented multi-sector investor with an operating team built around functional expertise, where an OP might operate as, for example, the digital marketing expert across 25 companies. So when it comes to the concept of an OP – the devil really is in the detail.
When conducting a search for a PE outfit, where do you look for candidates for this role?
That’s a great question, and depending on which member of the PEI 300 we’re talking about, there could be 300 answers. When we’re running an OP mandate we like to carefully define the ‘goldilocks zone’ with our customer. We think about the investment thematic, sector alignment, geographic scope, size and scale, purpose of the role (generalist versus functional specialist), and the culture of the fund of course! Once we’ve done all of that, we identify the key pillars of the market that will harbor the right person for the job. That might be: Competitive / adjacent funds; leaders inside relevant investor-backed businesses; industry organizations; and consulting organizations with the right style / focus. Pillars one and two are often the most attractive, because these candidates have first-hand experience of PE’s focus, prioritization and time-horizon and are perhaps more likely to think with a shareholder mindset. Pillar one also offers the opportunity for our client to buy somebody that’s already learned how to be effective as an OP so it can de-risk the hire, but that can require significant upfront cost to pull someone out of their existing carry arrangement unless you’re catching them between fund cycles. Interestingly when you rewind the clock to the earlier days of operating team builds, funds often leaned towards pillar four (thoroughbred consultants) because they bring the classic problem solving toolkit, breadth of experience that industry folk might not have enabling them to spot opportunities across a wide portfolio, and the ability to influence decision makers to achieve significant results. But as the PE industry has evolved and competition intensified, the tip of the spear for PE funds is fast-becoming their operating muscle, as opposed to proprietary deal flow. Now, an executive with real-world leadership experience, whom has sat in the same seat as the management teams they will advise, challenge, coach, replace, is often viewed as a stronger potential OP.
“It’s widely acknowledged that the PE industry needs to continue its proactive effort to improve DEI both internally and across their portfolio companies.”
Are candidates aware of this position and what it entails?
Yes and no. Executives in pillars one, two and four have first and second hand experiences with PE, but their understanding of what an OP does will naturally be formed by the funds with which they have personally interacted – so even when someone has worked with a PE fund, they may have had anything from zero to weekly interactions with an OP, and as we’ve discussed an OP in one fund may be drastically different from another. As a search partner, we have to spend a lot of time helping executives get to grips with any specific fund, their governance and interaction model, and the nuances of each role. For some of our top-tier PE customers that place a premium on up-and-coming industry rockstars we face an interesting challenge: this sort of human often views the OP role as something they’ll do after they’ve achieved their career climax, offering up their worldly experience to benefit multiple companies as their swan song. This viewpoint is regularly at odds with a full-time OP proposition – which (at the right investor) presents excellent career acceleration due to PE’s meritocracy, a rich variety of experiences you’d struggle to build as quickly anywhere else, and compelling long-term wealth creation opportunity via fund carry. In fact, we are seeing an increasing number of cases where operating partners step out into CEO roles for the first time, reaching the number one job far quicker than they would have had they stayed in their corporate lane.
When conducting searches for PE firms, how has DEI efforts become more relevant?
It’s widely acknowledged that the PE industry needs to continue its proactive effort to improve DEI both internally and across their portfolio companies, not least because it’s the right thing to do, but also to deliver improved financial returns and effectively compete in the war for talent. DEI performance is becoming more transparent year on year, with increasing LP pressure, a growing number of research studies and the establishment of programs such as ILPA’s Diversity in Action initiative which encourages LPs and GPs to commit to specific measurable actions. As a search partner that supports both private and public markets it’s clear to us that the PE industry is playing catch up, and thankfully we’re seeing a concerted effort across the industry – and its suppliers – to improve its reputation.
How do you go about providing a diverse slate of candidates for these clients?
The PE industry tends to favor executives that have experience in the PE industry, which presents a real challenge because first off the industry already suffers from a lack of diversity and the industry is growing. The demand for candidates with proven PE experience is far outpacing supply, and when it comes to diverse candidates this problem is even more acute. When it comes to building diverse shortlists for PE clients, the three key things we do to overcome these obstacles are first measure and transparently report back on the diversity ratios within the target talent pools to ignite a constructive dialogue at the outset if there is underrepresentation for a certain skillset. Secondly they should be thorough and creative with research, mapping and networking, leaving no stone unturned and tapping into analogous markets and industries beyond the obvious. And lastly, most effectively, be ahead of the demand.
Related: Redefining the Search Sector for PE Leaders
Contributed by Scott A. Scanlon, Editor-in-Chief; Dale M. Zupsansky, Managing Editor; and Stephen Sawicki, Managing Editor – Hunt Scanlon Media
