The landscape for hiring a PE operating company CEO is changing fast—hire for “how” to navigate it successfully

Leaders of private equity firms looking to hire a portfolio-business CEO have a great deal to consider. The US PE talent landscape is changing dramatically in real time, due to multiple forces related to economics, industry, and consumer habits. They’re all converging to make hiring a CEO much more challenging than in the past. Most importantly, it means that the tried-and-true ways of identifying and assessing top PE-owned talent will no longer work. 

Based on our past and current experience helping PE firms find and select promising top executives, we recommend that you learn to assess for the future (the “how”) rather than relying largely on past performance (the “what”) to understand performance and potential.

How we got here

The size of funds, along with deal volume, grew significantly between 2018 and 2022.¹ Deal flow hit record rates through 2020–2021, fueled by large investment opportunities that ultimately translated into big paychecks for the founders and executives of portfolio companies, along with their PE owners. Indeed, consumer demand and pull-through were so extreme as the pandemic receded that many funds seemed to have the Midas Touch: anything they touched yielded an enviable ROI.

But as we all know, that didn’t last. As we moved further past the pandemic, consumer demand ebbed, supply chain challenges mounted, and inflation persisted. That meant high working capital needs in an environment of fast-rising interest rates, demoting many deals that looked like heroes at inception to zeroes, unworkable for any kind of near-term exit, and challenging even to maintain operations and profitability in countless cases.

In recent quarters, deal flow has been minimal,² as PE firms and senior portfolio executives remain caught in past deals that have now limped along for years. Industry wisdom suggests you need “eight great quarters” to transact a company well. Today, no matter how many quarters have gone by, getting eight great ones in a row is harder than ever. 

Thus, the talent landscape has shifted, and we’re about to see a major shortfall among potential CEOs with the qualifications PE owners have typically prized. Many more experienced executives are currently stuck in their portfolio companies with minimal hope for a near-term exit. That problem is exacerbated by the fact that the experienced PE CEO candidate pool is getting older, and the rate of retirements has continued to increase. 

The talent pool is further stretched because we are seeing a rise in searches for a change-out CEO to replace the current CEO. While it is true that poor results can stem from unforeseeable factors or “acts of God,” it is often the case that poor corporate performance stems from qualities that a thorough and effective CEO hiring process could have detected, thereby preventing losses; it is generally accepted in PE that replacing a CEO will stall a firm’s financial results, perhaps for many months. 

Together, these trends mean thin availability of candidates—CEOs have retired, are stuck in their current deals, or are facing replacement. And we think it’s going to get even more challenging. We (and others³) expect a rise in deal volume in the second half of 2024. That means another wave of retirements—roughly a third of CEOs with transactions under their belt, by our estimate. 

The bottom line? We’ll be looking at the largest deal market of the last few years, with no more than two-thirds of the pool of proven top executives available to help capitalize on it. All of it adds up to having to take a different approach to hiring top PE leadership. 

Hiring for “how” vs. “what”

Success in finding an effective CEO will hinge on doing things differently. One reason is that there’s simply not enough traditional talent to go around. But that’s far from the only reason to change hiring strategies.  

As we mentioned, we have seen a rise in searches for leaders to replace the PE CEOs who are struggling. But often the reasons for which the current CEOs are struggling are risks that could have been mitigated by a more holistic and robust hiring process, one that focuses on the “how” of leadership, not only the “what” of previous results—the reverse of what we have often observed when PE firms are hiring portfolio company leaders.

In the past, assessment of a CEO’s potential has centered on questions such as: Have they done a deal like this before? Did they lead a successful exit? Are they familiar with PE dynamics and velocity? We think of this old-school approach as focused on the “grit and grip” of a top executive, looking in the rearview mirror at their past achievements and credentials to understand their ability to weather adversity and maintain a tight hold on the wheel of performance. PE firms typically want leaders who have deep subject matter expertise, rather than candidates with more experience and comfort delegating to their teams (qualities more common in public company executives).

It's logical that PE firms have used such criteria. Just like these businesses seek to mitigate risk in their portfolio businesses—by assessing them carefully before acquiring—they have a similar mentality about executives. Using past experience seems like the easiest way to mitigate hiring risk. And for a long time, perhaps it was. 

Beyond professional impact, candidates have typically been assessed on their personal qualities, sometimes demonstrated by their behavior on the golf course or how they treat wait-staff in clubhouses and restaurants, for example. At the other extreme, hiring processes have relied on intrusive, four-plus hour psychological interviews that delve into very personal topics, leading to unpleasant candidate experiences and very little data of predictive value.

There is a way forward. It requires looking beyond the obvious past leadership qualifications to how people lead, manage, and drive execution in the present. Someone’s experience may look great on paper, but their actual leadership skills in action—especially the softer ones—are lacking. That might mean poor coaching skills, defensiveness in the face of valid feedback, or poor board interactions—all of which are likely to add up to failure. 

Getting it right: Three tips

1. Assess for the how. As we’ve suggested, a successful search for a PE CEO will likely focus on the “how”—how the candidate will lead, versus what they’ve already done. 

Beyond past impact and off-book references, look for a true growth mindset and the presence of a bespoke toolkit that will help the candidate navigate a dynamic environment. Look for proof of flexibility and adaptability by asking candidates to talk about how they lead, including executing new strategies, working with the board, and coaching their teams. Our META framework, for example, takes a forward-looking approach to identifying candidates who can mobilize, transform, and execute with agility. 

Looking at “how” can also help PE firms understand the value of non-traditional candidates as well, such as a strong second at a PE-owned firm, or a financially savvy general manager, or the proven leader of a large public company business or unit. It just may help you find an A-player you may not otherwise have considered. 

2. Mitigate risk. Of course, hiring based on the “how” is not risk-free either. A non-traditional or unproven leader may have high potential but lacks experience with specific issues or challenges. Thus, it’s best to mitigate that risk through strategies like hiring an executive chair to back up a non-traditional CEO, along with providing additional operating resources from the fund and a strong set of independent board members. In some cases, it may make sense to hire a proven CEO from the sector in question as an advisor and sparring partner while the new hire finds their footing. If the hiring process is done right, firms can be aware of potential skills gaps and mitigate those risks through the team.
3. Know your sector dynamics. The challenge of PE CEO talent varies by sector. Consumer services is an evolving, disruptive space with active buy/builds, but every candidate will have a gap related to industry knowledge and/or scale. Most searches will involve step-up CEOs or proven CEOs with a lack of scale. Mitigate risk through a flexible assessment and hiring playbook using the measures above. 

It's a time of meaningful change for hiring PE portfolio company CEOs, requiring a forward-looking approach that focuses on the how over the what. We hope the ideas and advice here help you think about your own search for a top leader as the outlook for PE deals and exits brightens in the coming year. Move beyond a battle over scarce resources into evaluating the best talent in the market you can backstop and make successful.

References

¹ US PE Breakdown Q2 2023, Pitchbook, July 2023, p. 8 and 25, pitchbook.com.

² Mary Kathleen Flynn, “Global private equity deal value fell 40% in first three quarters,” PE Hub, October 10, 2023; and Karl Angelo Vidal and Annie Sabater, “Global private equity deal activity plunges in 2023,” S&P Global Market Intelligence, January 16, 2024.

³ Private equity 2024 outlook,” Frank Templeton Global Private Equity, February 5, 2024.