Value of Strong Portfolio Leadership During the Holding Period
May 22, 2024 – Tim, one of the topics we frequently hear about at Hunt Scanlon is hiring remote executives to lead portfolio companies. What have you seen on the hiring front on how PE firms approach this new way of leading portcos with remote leadership?
Tolan: A really good question and a topic that is constantly being discussed at PE firms as well as with candidates we engage in search assignments. Candidly, many times the answer to your question is dependent on the PE firm, the role and the platform. In some cases, having the CEO or CFO physically located in the brick- and-mortar location is important but in many cases the decision boils down to the candidate that is the best athlete and has a proven track record and successful exits they can point to. It’s not always the best recipe to force the CEO to be tied to an office if that CEO is market facing and best utilized by being in front of customers or working with the sales team in pursuit of new customers, so it’s never a one-size-fits-all answer to the question. We see more and more decentralized models where a CFO may have multiple team- leads that are already remote, so in many cases the CFO can also be remote but again there are so many factors that go into these talent decisions.
In today’s environment with longer hold periods, how do you handle portfolio investments that have exponentially grown and scaled with an executive who lacks the expertise to lead a larger organization?
Russell: A dynamic that exists in companies that are backed by PE investors is the need to upgrade talent during the hold period. It’s not uncommon for investors to grow frustrated with this dynamic; often, the investor wants the executive to come on board at the time of purchase [of the company] and remain throughout the entire holding period. The issue is that the skill set to grow from one revenue point to the other differs, thus a talent “upgrade” is required. For example, the skill set needed to take a company from $10 million EBIDTA to $50 million EBIDTA differs significantly from the skill set needed to go from $50 million to $150 million.
It’s rare that the initial C-suite executive onboarded or hired to lead the organization in its current state is the same executive that goes across the finish line at exit. It happens… just not as often as investors would like. The inevitable question then is how to find that rare C-suite talent to help the firm grow, scale, and guide through exit? Finding top-tier talent is what good executive search firms excel in. The issue in finding these folks is not only the ability to locate them, but also the ability to afford them. Often in the early stage of a portfolio company existence, the budget isn’t available to be able to pay a seasoned C-suite executive that could accomplish that feat. If a candidate is currently at a $150 million organization and is ok with reverting back to a $10 million size company, that might be an indication of candidate concern. Oftentimes the $150 million executive is looking to advance their career and move to a $300 million company as a next step in their career. Weighing all the options of viability, affordability and practicability is the issue at hand. Suffice it to say, the need to upgrade talent at the mid hold milestone is an issue that will remain in the PE ecosystem.
What are the key characteristics of selecting a strong leader in today’s environment?
Tolan: PE firms look at previous history as an indicator of future results, so they care a lot about a candidate and their success metrics. Previous results in top line and EBITDA growth are always topics our sponsors care about. In the case of Covid they also want to hear about how leaders handled the business disruption of the pandemic and how their companies fared afterwards. There is definitely a lot to learn about leadership when you face challenges like we all experienced in 2020. We traffic in the healthcare and finance sectors so leaders with strong EQ are also vitally important. Being a strong communicator is important as is setting the culture. The other thing you should know is there are maybe two degrees of separation in the PE world we live in. Someone inside a PE firm that engages TTG knows someone who knows the investor of a PE platform that a candidate references. These back door calls to get “the skinny” on an executive are very common and there is not much we can do about it. Sponsors want to make a safe bet and speaking to a pervious sponsor is usually the best way to bifurcate the information we present about an executive candidate to our client.
What is the value of mid-management hiring during the “hold-period” in PE?
Russell: Seeing the value in hiring the right middle management team is crucial for the success of an investor-backed organization. Middle managers act as the ‘conduit’ between senior leadership and frontline workers. Regardless of sector, the mid management team is tasked with taking the executive team’s vision and making it a reality. They do this by deploying trust, inspiration and commitment among the staff. Their ability to clearly communicate and execute growth strategies directly impacts the company’s bottom line. Bottom line enhancement is the goal of the investor, and it’s the middle management team that has their hands on the lever of progress to make that happen. It’s no secret that in PE, growth strategies and operational improvements are the means of growing enterprise value. Having competent middle managers at the portco isn’t a ‘nice-to-have’ but a mandate in order to accomplish that objective. With aspirations of ascending in the company ranks and eventually joining the senior management team, middle managers relish the role of leading at the mid management level. It’s almost like they see their current role [as a middle manager] as their ‘audition’ for eventually ascending into the senior management team. It’s with this style of leadership, that middle managers are able to produce results towards growth and operational efficiency.
The executive search business has seen a 12 percent downturn
across all industries. Has this downturn in hiring impacted The Tolan Group?
Tolan: Our firm experienced solid growth year over year in 2023 and we anticipate the same or higher growth in 2024 compared to last year. That is due in part to the way our firm is structured, our sectors, and our recently added TTG Interim service line added last all to help portcos when a key executive suddenly departs. We fill those roles in days not weeks with an active bench of pre-qualified executives with solid PE experience. In addition, we have always been very ‘new logo focused’ which constantly adds new clients each quarter across all sectors. We will always have a strong new business focus, so I don’t see that changing for us. Our secret sauce is from the positive referrals we constantly get as a direct result of the excellent work our team does day in and day out. Our clients rave about the quality and speed in the way they operate. It’s impressive to see. Our industry leading performance metrics on search completion separates TTG from many other boutiques as well as all of the SHREK firms. It’s amazing to see how much we’ve grown, and we now have industry agnostic offerings in finance and accounting which adds to our performance and success. So that’s a long-winded way of saying this downturn has not impacted TTG.
