By Jack Syred, Partner, Wilton & Bain
For years, private equity firms could look to a familiar place for seasoned PE experience within a portfolio company’s management team: the CFO, or sometimes the CEO. The key to quality management is an executive who has worked through several ownership cycles already. They bring an understanding of the relationship with the fund, the accountability behind a value creation plan, the response required when performance slipped and the work involved in preparing a business for exit.
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That experience is especially valuable when other members of the leadership team are working under PE ownership for the first time. Today, the talent market supporting that model is changing.
Private equity is bigger than it was a decade ago. A simple statement but that’s what underpins the evolution in expectations for leadership. Sponsors want more executives who already know the environment, yet there are too few proven candidates to meet that demand.
EQT recently described great PE-backed CEOs as a “rare breed”. Its head of global network talent, Bettina Siempelkamp, also reflected on how much more importance the industry now places on the portfolio CEO than it did when she entered private equity 17 years ago.
Scarcity is prompting sponsors to consider step-up candidates and executives entering PE for the first time. It also invites a more precise assessment of experience. If a CEO or CFO has never worked in a PE-backed business, who else around the leadership table understands what that ownership model demands?
Previous PE experience is useful, but that line on a resume can conceal important differences. A first institutional investment has different demands on management from taking over a business that is significantly behind target. A secondary buyout can introduce a sponsor with a different pace and level of involvement. An approaching exit brings another set of pressures. An executive might know the functional role well while having little experience of the situation surrounding it.
For a long time, experienced PE CFOs supplied most of that knowledge. Their value extended beyond technical finance capability. Where they have worked through multiple ownership cycles, they understood sponsor relationships, lender expectations, underperformance and exit preparation. A CEO new to PE can draw on someone who knew how decisions will be tested and what information investors need.
The CFO market is now facing the same scarcity problem as the wider C-suite. Bain estimates that new owners replace between 50% and 70% of portfolio company CEOs during the hold period, and points to the steep learning curve for CEOs encountering PE ownership for the first time. That figure will concern CEOs, but it illustrates the pressure on sponsors to assemble leadership teams that can adapt quickly.
From my executive search perspective, the PE CFO market is under similarly intense scrutiny. Interim demand is active because reporting, lenders, transactions and value creation work usually need an immediate answer. A permanent appointment takes longer. CFOs with several successful PE exits behind them face strong competition, and their price will not make sense for every asset.
Sponsors must therefore decide when to compete for a repeat PE CFO and when to back someone earlier in their development – both can be sound choices.
Transformation leadership is one place that experience is accumulating. In the interim Chief Transformation Officer (CTrO) market, some executives have worked across a wide range of PE ownership situations. The nature of their careers allows them to move through several portfolio companies and sponsors in the time a permanent executive might experience one or two.
One assignment might follow a first institutional investment. The next could involve a business behind plan, a carve-out or an asset approaching exit. Along the way, these leaders work with different CEOs and CFOs and see how funds vary in their involvement and pace.
That breadth is really valuable. “PE experience” is often discussed as though private equity were a single operating environment. Anyone who has worked across the space knows it is not. A seasoned CTrO who has moved repeatedly between sponsors can bring practical knowledge of what happens when an investment plan meets the reality of a business, as well as the ability to lead a transformation.
CFOs and CTrOs have distinct responsibilities. Yet some of what the experienced PE CFO historically contributed to the management team was broader than finance: an understanding of how PE ownership works in practice. Increasingly, I see some of that accumulated experience sitting with the CTrO.
That can change the balance of a leadership team. A CEO or CFO may be experiencing PE ownership for the first time while working alongside a transformation leader who has already navigated several versions of it. The appointment gives the business both the opportunity to develop new PE leaders and access to someone who knows the ropes.
Private equity needs to keep creating opportunities to drive the sector forward. It cannot continue raising its requirement for previous PE experience and expect the same finite group of executives to fill every leadership role. Experience will always be essential to portfolio performance, but sponsors might need to look more carefully at how it is distributed across the team.
The next generation of portfolio leadership could include more CEOs, CFOs and functional leaders entering PE for the first time. They can still be part of an experienced team. And we might see the person who has seen several ownership cycles sitting in the transformation seat.
