In this special feature of The Heidrick & Struggles Leadership Podcast, Heidrick & Struggles’ Jason Henderson and Sean McLean sit down to talk about trends in private equity across Canada and the United States: evolving dynamics, human capital, and how leaders can compete in this environment.

Below is a full transcript of the episode, which has been lightly edited for clarity.

Welcome to The Heidrick & Struggles Leadership Podcast. Heidrick is the premier global provider of diversified solutions across senior level executive search, leadership assessment and development, team and organizational effectiveness, and culture shaping. Every day we speak with leaders around the world about how they're meeting rising expectations and managing through volatile times, thinking about individual leaders, teams, organizations, and society. Thank you for joining the conversation.

Sean McLean: Just by way of introduction, my lens is that over 50% of my practice is in the diversified North American private capital space, and that includes both growth and buyout, but it's primarily executive search in Canadian portfolio companies. So, I'm seeing a lot of what's happening in the Canadian domain, but again, a lot of the private capital firms themselves are North American or US and Canadian.

Why don't you introduce yourself? 

Jason Henderson: Sure. Jason Henderson, I am the PE [private equity] Consulting Practice leader for Heidrick, I sit in our New York office, and we've got a bunch of consultants around the world that do corporate portco [portfolio company] and private equity work.  I tend to be the guy that helps corral go-to-market and create solutions for our PE-centric clients and their portfolio companies.

I guess the first question, Sean, that I want to ask is, what are those human capital trends that you see day in and day out with your clients? 

Sean McLean: What I'm definitely seeing is more of a focus on value creation; longer holds. In the previous 10 years, as long as you had the top-line growth, it was really multiple expansion that was going to get you to a very successful exit for shareholders.

Now it's margin expansion, and that has led, certainly in Canada, to more scrutiny, more thinking around What does the optimal management team look like? How are we going to get to margin expansion, and to value creation through the management team? I would say that's become a huge focus. How does that align with what you are seeing?

Jason Henderson: I would just say 100%. I use the line that investors are having to think like operators, and operators are having to think like investors. So, it's been this odd dynamic. 

But you said something that was very accurate on my end, which is the digging into the management team, the digging into the culture, the digging into the cost structures, the margin optimization, the investment—“corporate-like” is the word I use a lot, which means that everybody's like, “OK, we’ve all got to roll in the same direction.” And what that means is much more specialized needs in terms of the individual, but then also, what is the team doing and how does the team do it?

The language of how we work is much more prevalent than what we do in the last five years. I would say a little bit before Covid, but then really big after Covid and since, PEs become the language of how, and I hear that over and over again, how we do this and how we do that, and how we operate and how we function. And for corporate types, that's very normal. For private equity types, it’s still a little bit of a new language, but because they are the most adaptable animal in the jungle, they get it very quickly. So that's 100% aligned with what you're seeing. 

Almost every week I get on the phone with a board chair or a PE sponsor or somebody that says, “Hey, I think we may need to make a move on so and so. I think we may need to swap the CEO, swap the COO, whatnot, but we want to talk it out with you.” My first question is always, “OK, tell me why you think you need to make a move?” And they almost always go into methodology: “I don't like how they're driving execution. I don't like how they're bringing the team along. I don't like how they're consolidating operations.” And then I say, “Well, tell me a little bit more. What do you want?” And there's a gap there, right? “They're doing it this way. I want them to do it that way.” There's a gap. So I ask, “Well, what would the ideal look like?” And it's behavioral. And then I always ask, “Well, when you interviewed for this what did they tell you they were going to do? And that's where there's a little bit of a pause and they go, “OK. To be honest, we didn't really get into that.” 

And part of it is because maybe they have [hired] somebody [who hasn’t been a CEO or COO] in the past. But also because PE loves show me your credentials, show me your past record, show me your track record, show me what you've done, which makes a lot of sense. But ultimately, when you hire for what and you fire for how, you have a data problem—at least I call it a data problem. So that's what I see a lot of times, and the firms that are getting it right are starting to adapt that methodology of, well, maybe there is some how-based hiring criteria that will help us drive it. And now that I'm an operator, or an investor that thinks like an operator, I have skin in the game and I have a rubric of what good looks like on the operating how side, as well as on the what side. Does that make sense?

Sean McLean: It makes total sense. But to your point around the how there's this nuance: More and more PE firms are far more interested, in my experience, on things that aren't necessarily easily measurable on a spreadsheet, but that are more subjective, and that I find fascinating. But it's a very different type of conversation with the leaders and the financial engineers that know how to make money, that know how to put businesses together, that know how to drive results, when they're now needing to think about soft skills. 

Jason Henderson: That's right. And what's really cool is to hear an investor type who has had pattern recognition; I think one of the reasons why PE is so adaptable is the stewarding of multiple portcos or assets or whatever. You get pattern recognition very quickly for what good and bad looks like.

I had an investor say to me, “The middle management layer matters more than ever.” And I asked, “Where did you gain that?” And he said, “I watched seven different portcos go like this. And I saw a trend and I dug into it, and now I think we need scalable assessment solutions, two, three levels below the CEO.” That's awesome. They see the ROI and say, “I don't know how to fix it, but I know it creates value, and it reduces headwinds and creates tailwinds for value creation. I need it. Let's go.” 

To me that's the best thing about the phrase “never waste a crisis.” The crisis is we don't have as much talent, it's harder to make money, and interest rates are not great. So, in that crisis, what do we do? We go to the things that we can control more, which are talent, engagement, culture, skillset, A players, those types of things. And it's just really neat to see. 

Sean McLean: How would you want to leave this in terms of how our private capital listeners should be thinking about competing in this environment?

Jason Henderson: Two things that I will often say to folks is, “You have created an ideal methodology for your portfolio companies, for your executives, and for the management, right? And leadership is one thing, but let's think about the management. It's the unsexy part of how we make money.” The more you become a PE operator, whether you're an investor who's an operator or who is thinking like an operator, codify what good looks like to you. What do you want?

I have one client that says, “I want grip, meaning white knuckle grip on the wheel: No matter what, you get up with fire in the belly and come at it every single day.” And I know when we present candidates to them or we do assessment results, I always talk about how they do grip and how they do grit. Codify that. By the way, you already know this; you're just not writing it down.  Codify it and exchange it. What's the language of performance of our clients? 

When I work with PE firms, I say, “Tell me what good looks like. What's your language of performance?” Then the second thing is to ask yourself, what are the things that you talked about? Can you pivot from a retail customer-centric perspective to a patient outcome perspective? Is that an allowable pivot? Is that an allowable expansion of talent or is it not? And find those non negotiables, those deal breakers. Because again, you have pattern recognition, and I'm not going to try to change your pattern recognition. I just want to capitalize it and codify it. So, what are you willing to work with? What are you willing to not? And then just come out and say it—be very clear. 

Sean McLean: Wow, that's a perfect lead into exactly the advice that I would give from a search perspective. Measure the individuals and the teams that are driving the value creation, not because they were specialists or because of industry knowledge, but what attributes, competencies, and capabilities—what style did they have? And look across your portfolio. There is fantastic data within your portfolio. Study that and have a point of view. One of the best PE firms that I work with has now created the profile, created the model of what our best value creation CFOs consistently look like. We had an ultra-high performing CEO who I recall saying, “We need it all.”

We have so many unpredictable events coming at us. There is so much uncertainty. We need agility. We need a high learning aptitude. So, he was starting even to think more in terms of what are the attributes that are going to allow this management team to succeed in all conditions with any variety of externalities versus trying to get pegged into one particular box. I thought that was really insightful.

Jason, I knew this was going to be an interesting conversation. It was for me. Hopefully it was for our listeners as well. Again, I really appreciate you making the time.

Jason Henderson: No worries. It's good seeing you, Sean, as always, and we'll talk soon.

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About the participants

Jason Henderson (jhenderson@heidrick.com) is a partner in Heidrick & Struggles’ New York office and leads the Private Equity Practice for Heidrick Consulting.

Sean McLean (smclean@heidrick.com) is the partner in charge of Heidrick & Struggles’ Calgary office and a member of the global Industrial and Financial Officers practices.