When it comes to appointing the right management for portfolio companies, investors in the Private Equity (PE) industry must deal with three issues simultaneously. Firstly, some decision-makers in the industry are hesitant to exchange the leadership of newly-acquired companies and they wait for too long to put the right person at the helm. Secondly, once the decision to choose a new executive has been made, investors are confronted with a hugely challenging recruitment market for talent. Today, pretty much all industries struggle with a shortage of leaders and the PE sector is no exception despite attractive incentivation models. This is not helped – thirdly – by the sector’s image in the media of being too harsh on personnel.
Having worked on both sides, as a consultant to the Private Equity industry, respectively an investment professional in a PE, as well as consultants for the international executive search firm Russell Reynolds Associates, we find that for PE investors it pays to approach the leadership question early on with the same “cold” analytics used for any other aspect of the business. For executive talent we find that working for Private Equity investors may occasionally be tough, but it is never boring – and therefore highly attractive for talented leaders with the right skill set and personality.
So, how do you bring them together: Well-rewarded careers in the PE portfolio and highly talented executives who can build and lead a successful team with candour, resilience and empathy? In order to facilitate this, we have created ten rules for the decision makers in PE to consider. Some might seem self-evident. They are, however, crucial which makes it even more surprising that we only rarely come across PE firms that adhere to (all of) them.
Rule 1: Recognize that leadership is the prime factor in value creation
Is this the right strategy? Are we operating with state-of-the-art technology? What does our financial structure look like? Are we managing risk adequately? Are we complying with legal requirements?
These are usually some of the main topics for review when a Private Equity investor looks at a newly acquired company. Often underestimated, though, is the aspect of talent, team collaboration in the management and culture in the company. Do we have the right people to succeed? Human resources merits the closest attention. Are there talent gaps and know-how deficiencies that need to be filled? Do we have unsuitable talent on board that needs to be replaced? Does the current corporate culture allow people to work efficiently and effectively? Are succession plans in place – at least for C-suite executives? In short: value creation is not only about numbers and conditions, but primarily about talent, teamwork and a high- performance culture.
Rule 2: Be clear about your goals
Before the question who are the right leaders can be answered, investors need to define clearly where the company is headed. Goals can be strategic (e.g., enter new markets or initiate a turnaround), commercial (e.g., grow the top line or corporate profits), operational (e.g., digitise processes or improve customer service), or organisational (introduce a new structure or improve communications). Only after these goals have been articulated can the requisite talent be identified.
Rule 3: Find your unicorn
Investors must define their “perfect candidate”. If the recruiting process lacks clarity and discipline or realism, as is often the case, it causes frustration on all sides. Search profiles must be well-defined, addressing background, experience, soft and hard skills as well as previous responsibilities, other assessment criteria, and timeline. We all know that there are no unicorns – still, you should work towards that magical being that “has it all” as a benchmark. Aim for it – and then determine on which aspects you might be flexible.
Once you know who you are looking for, consult your network. Check whether there is someone to fit your profile. If the unicorn remains elusive, consider support by an executive search firm. If you do so, it is of utmost importance to brief the search partner well. Processes, roles and responsibilities should be clear. When you have identified a possible candidate, go the extra mile and conduct a systematic and in-depth reference check. True, that is a lot of work, but should not be neglected.
Rule 4: Tell it as it is – and sell it
At first glance, Private Equity does not resonate well with everyone. Investors often need to work on dispelling common misconceptions surrounding the world of portfolio companies. That is done best by stressing the opportunities for the candidates: “Join a high-growth company with an attractive compensation package and gain the executive power to drive change. Work in a fast-paced, dynamic environment which will add a highly sought-after dimension to your professional experience”.
Rule 5: Watch out for stereotypes that cloud your judgement
Interviewees come in different shapes and sizes. The “storyteller” will provide a lot of context but very few details. “Fast-talkers” regard questions as opportunities to speak rather than respond. The “big-picture person” answers in terms of grand concepts or philosophies. The “introvert” cannot believe the interviewer is really interested in what they have to say and thus responds to questions with overly concise answers. “Populists” always use “we”, hardly ever “I”, and are offended if you want them to personalize their answers. Without judging any of these individuals, interviewers need to be aware of their characteristics and their typical responses.
Stick to your interview plan and use structured interview notes. Interviewers have to rigorously test for the key skills and competences their company seeks. To predict future performance, rely on past behaviour and delve deeply into different situations. Focus on how things were accomplished and listen carefully to the language used. Finally, interviewers need to relate the interview to the prospective job.
Watch out for common interview pitfalls. Manage the elements of personal bias and avoid giving preference to familiar personality types and communication styles. Additionally, be aware of the halo effect: Brand names in education and/or career stations can drive false perceptions. At an unknown company, a candidate could well have garnered even more relevant experience than at a prominent previous employer
Rule 6: Get it right from the start
Plan your on-boarding strategy and take the time to get it right. Nothing should be taken for granted. Promote team inclusion. The newbie should undergo regular short-term checks by management and/or the Private Equity investors. Follow-ups checks should be undertaken even if expectations on both sides are met.
Rule 7: Make people want to stay
It seems so obvious that an environment that makes people want to stay is key – but a welcoming culture is perhaps the most overlooked aspect in retaining top candidates. Every leader (CEO, executive board, board, investor) should be a trailblazer in establishing and maintaining an appreciative, attractive culture. Always (try to) be a role model. Jointly celebrate your own and your teams’ accomplishments. Provide open feedback – both negative and positive. Accept and respect any feedback you receive! Be crystal clear that bullying is unacceptable and will be rigorously sanctioned. Praise exceptional performance – words are more important than money.
Rule 8: Continually assess talent
Reviewing and building your talent pool should be a continuous process. Again, this may sound trivial, but it is neglected in practice. Talent needs to be seen as an investment rather than a cost: Determine where to invest through potential-focused assessments. Keep an eye on the market, too, and use external search processes to identify, assess, and attract available high-potential talent continuously. Evaluate your personnel regularly and make sure that your best performers advance into more senior roles. Also benchmark your own talent against external talent to determine C-suite readiness. And while you are at it: regularly review and update your succession plans.
Rule 9: Be prepared to be swift
If things go wrong, the investor should be prepared to act swiftly. If, for instance, it transpires that someone is not suited for their role, the investors could contemplate redefining responsibilities or resizing the individual’s duties. Coaching, one-on-one sessions or even external support might be considered. If none of the above works, be prepared to address the consequences sooner rather than later. Also, always anticipate unexpected resignations.
Conversely, it can be counter-productive to exchange key executives too often – underperformance of an asset can have many causes and changing mangement alone is not a cure-all remedy.
Rule 10: Be generous
This rule might come in at number 10, but that does not mean it is the least important. After all, attractive remuneration is key to attracting and retaining high-performance individuals. This is standard practice in PE, but applied with diverging standards.
To begin with, know the relevant market benchmarks in regards to compensation packages. Ensure homogeneous compensation structures at the various levels. Ideally, every senior manager should have skin in the game and be personally invested. Align the interests of the leadership team with those of the Private Equity investor for the exit scenario. Define performance targets clearly and reward exceptional performance generously.
Daniela Nienstedt conducts searches for both Private Equity and Industrial clients. Within Private Equity she has placed investment professionals as well as C-level positions in portfolio companies. Before joiningRussell Reynolds, Daniela worked as a management consultant for AlixPartners, L.E.K. Consulting and PA Consulting.
Juergen Vanselow has been working with Private Equity clients for well over 20 years in recruiting senior talent for both investment teams and their portfolio companies. Prior to moving into executive search in 1995, Juergen worked as an Investment Manager in Private Equity and as a Consultant in Strategy/Corporate Finance.