The Rise of First-Time CEOs in Private Equity Portfolio Companies

June 21, 2024 – In the fast-paced world of private equity, success hinges on effective leadership. With approximately 23,000 PE-owned portfolio companies in the United States alone, the demand for top-tier CEOs is relentless. Traditionally, PE firms have favored seasoned executives with prior industry or exit experience to lead portfolio companies post-buyout, however, a paradigm shift is underway as more firms opt to recruit first-time CEOs or promote them from within the organization, according to a recent report Geoff Votta, partner in the private equity practice at Acertitude.

Some PE firms feel that there are inherent risks associated with first-time CEOs, he explains. While they may lack a proven track record of transformation or successful exits in the PE realm, Acertitude believes they bring fresh perspectives and an unmatched hunger for success.

Competition for CEO talent

Private equity has fostered a fiercely competitive landscape for CEOs, offering enticing compensation packages that often surpass those of publicly traded companies. In about 70 percent of cases, PE firms opt to appoint a new CEO upon acquiring a company, according to a report from Fortune.

“Typically, these CEOs are recruited externally, with many having previously held chief executive officer positions at publicly traded companies, drawn by the lucrative rewards associated with exits that take place three to five years down the line,” Mr. Votta said. “However, a significant challenge emerges: the limited pool of chief executives from sizable companies available for private equity firms to recruit. Consequently, there is a growing imperative to broaden the search for top-tier talent beyond conventional avenues.”

De-Risking Recruitment

Regardless of the data presented, it is realistic to assume that numerous firms will maintain reservations about hiring individuals lacking a proven track record in private equity, according to the Acertitude report. “A mishandled succession could tarnish their reputation and disappoint shareholders. Rather than presuming that seasoned CEOs possess superior qualifications to first-time CEOs, boards should recognize that they offer different skill sets with varying degrees of relevance to the role’s requirements,” Mr. Votta said. “While experience is valuable, it doesn’t guarantee superior performance, as each CEO may encounter unique challenges in a new position.”

Related: The Market for Senior Roles Heating Up at Private Equity Firms

To mitigate risk, Mr. Votta notes that companies might opt to offer guidance and coaching through mentorship programs involving advisors and independent board members. “This approach facilitates the executive’s development, ensuring a solid ROI on their talent investment,” he says. “By nurturing a pipeline of promising talent and providing preparatory support, PE firms can cultivate a strong ecosystem of capable CEOs and functional leaders.”

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.”

Private equity firms typically rely on a narrow set of established criteria when evaluating candidates for C-suite positions, ensuring predictability, risk management, and success rates for executive talent. “While this approach may provide historical stability, it may also constrain opportunities for innovation and diverse perspectives,” Mr. Votta said. “Relying solely on past performance indicators to forecast future success is no longer sufficient. It is imperative for PE firms and CEOs to broaden their viewpoints on talent and challenge traditional norms. Failing to do so risks overlooking capable candidates who can effectively lead portfolio companies in the future. The skill sets of the past may not necessarily guarantee tomorrow’s success, necessitating a shift in approach.”

Founded in 2015, Acertitude specializes in recruiting CEO, C-suite, and executive talent in the consumer, financial, healthcare and life sciences, industrial, private equity, professional services, and technology sectors. Its consultants work from offices in Boston; Dallas; Miami; London; New York; Philadelphia; Providence, RI; Raleigh, NC; Shanghai; and Washington, D.C. Acertitude’s global professional services practice recruits leadership talent for technology services, strategy and management consulting, turnaround and restructuring, M&A and deal advisory, business process outsourcing, and human capital advisory firms.

Mr. Votta has been with Acertitude since the firm was established, helping to launch the brand. As partner, he continues to play an integral role in growing the firm’s industrial practice, particularly within the private equity arena and for companies driving business transformations.

Related: Rethinking Value Creation in Private Equity

Contributed by Scott A. Scanlon, Editor-in-Chief and Dale M. Zupsansky, Executive Editor  – Hunt Scanlon Media

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