Evaluating Talent Through a Private Equity Lens
Sep 20, 2022 – by Jaimee Marshall
While private equity firms come in a variety of models, they are distinct in their hiring practices. It’s important to understand the general executive profile that is sought for CEO and leadership opportunities within portfolio companies before pursuing these roles.
At its core, PE is about generating maximum investor returns while mitigating risk. An investment thesis provides a framework for determining the probable success of a potential business acquisition and a similar strategic formula is applied to the evaluation of talent.
The formula includes:
TRACK RECORD OF PERFORMANCE + RELEVANT BUSINESS PEDIGREE + KEY CHARACTERISTICS
It is typical for a PE firm to set a defined time (~3-7 years) to recoup capital and exit the businesses they acquire. Therefore, the most sought-after executives are those that possess the greatest probability of success within the timeframe.
Here’s what those profiles often look like:
1. Track record of performance
Past performance is the first thing PE firms consider when evaluating executive talent. Whether they aim to increase a portfolio company’s value through growth, transformation, or some other mechanism, they will seek to hire executives who have previously delivered results like those spelled out in the investment thesis.
PE firms further validate performance through exhaustive due diligence that places considerable value in referrals and reputation. Prior success is key, as they are less likely to overlook business or role failures than other hiring entities.
For portfolio CEO roles, it’s worth noting that the ideal performance profile also includes previous PE exposure, or – more importantly – a transaction or monetization event that further demonstrates candidates’ ability to ‘land the plane.’
2. Relevant business pedigree
Brands matter to PE firms, as showcasing a team of pedigreed executives can make an impact during fundraising and exit events.
For CEOs, the optimal profile typically blends early exposure to best-in-class operating environments – such as Fortune 500 companies, industry/segment leaders, banking or consulting backgrounds – with more entrepreneurial, closer-to-the-action experience that is valued for instilling urgency and an execution mindset.
Executives who have been groomed exclusively in large corporations may draw concerns about their ability to succeed outside of structured, heavily-resourced environments. Executives who have spent entire careers in smaller-format organizations may be considered risky since their ability to substantially scale a business is less proven, and their exposure to best practices is inconsistent. Ideal candidates have both.
For non-CEO executive roles, additional profiles that may be considered include either deep functional experts or ‘best athlete’ types who have a demonstrated ability to succeed in a variety of roles.
3. Key characteristics
In addition to the background indicators of track record and business pedigree, PE firms seek executives with certain characteristics that are suited to leading in uniquely results-and-exit-oriented environments. They include:
- Results-oriented leadership style
Given the pace and change agenda of PE firms, executives need to be proficient team builders who can come in and get everyone marching in the same direction as quickly as possible. This includes aligning the team around the investment thesis and focusing on three to five priorities that will yield the greatest impact within the timeframe.
It also includes instilling a sense of urgency to deliver results with an emphasis on accountability and reliability. Time is money, and PE firms are expected to demonstrate specific results to investors in defined time increments. As a result, the hours can be long and these roles don’t always create optimal conditions for work-life balance. Intense, ambitious executives who like to ‘get stuff done’ are often successful in PE-backed ventures.
- Exit mindset
PE investments end with an exit. Whether that event is a strategic sale or an IPO, PE firms seek leaders who understand how to directly improve businesses in the near term while positioning them for future growth and monetization in the next stage. Rather than tackling an exhaustive list of business issues, they seek executives who can focus on developing select, high-impact areas that are scalable to show proof of concept so that another entity or structure can envisage the next stage of potential success. Any true wealth creation is aligned to an exit.
- Ability to influence
PE firms look for executives who instill confidence and have high emotional intelligence (EQ). Portfolio leaders are expected to have strong storytelling skills that can be leveraged both when presenting to investors and when recruiting talent to the business. ‘Talent magnets’ with the ability to attract, motivate and influence are coveted.
- Strong financial fluency
Potential hires must have a sharp understanding of the investment thesis and the financial acumen to deliver results. For CEOs, previous P&L management is critical, and the entire executive team needs to be numerate, aligned around investment goals and clear on expectations. During the lifespan of the investment, executives will be asked to present business results to their PE partners and will be challenged on strategy. Executives must be able to frequently and confidently discuss rationale in terms of numbers and key performance indicators.
- Lean operating approach
During the life span of a PE investment, the primary goal is to maximize EBITDA which includes strict containment of costs. PE firms therefore seek leaders who are sensitive to investing resources, understanding that maximizing ROI and improving bottom line will lead to a multiplying financial effect at an exit. This lean approach forces more ‘doing’ vs. purely ‘managing’ onto all executives. Candidates that can dive into the details and execute with less staff support have an advantage.
- Concise communication skills
PE partners are often generalists – not necessarily experts in one particular industry – so portfolio executives need to communicate without relying on industry jargon or assumed knowledge. A direct, transparent communication style is valued in which business updates are distilled down to the essentials in a succinct, easily-digestible manner.
- Moderate risk orientation
A degree of risk orientation is table stakes for portfolio leadership roles, as executives must be willing to defer immediate cash incentives for future equity upside. PE firms expect candidates to align personal and financial interests with the investment thesis to ensure everyone has some skin in the game. This way, decisions are made through the lens of ‘we all win or lose together.’
Private equity positions are coveted due to their ability to generate wealth for those who are successful. However, they aren’t for everyone, so it’s important to understand the broader executive profile that is typically sought prior to pursuing PE roles.
Executives who feel suited to this environment should additionally seek to understand the unique character and investment approach of each individual PE firm in consideration, as they are all unique. The ultimate goal is to match PE opportunities with executives where the closest alignment exists.