Private equity is no stranger to executives stepping down from leadership roles. From founder CEOs cashing out for retirement to other C-suiters resigning for personal reasons, many leave of their own accord. Of course, involuntary exits also occur for poor performance and budgetary reasons. Sometimes, it’s a joint decision, such as when both parties agree that the CFO’s profile doesn’t align with the investors’ playbook.
PE firms have always needed to carefully choose replacements at these critical junctures, but the stakes are particularly high right now. An overall air of uncertainty looms given stubborn inflation, recessionary pressure, higher interest rates, recent bank collapses, and industry disruption from technology advancements like artificial intelligence. Amid all this unpredictability, choosing future-ready executives to replace exiting leaders will help ensure your portfolio companies survive and thrive.
Doing More with Less
The particular uncertainty that comes with a recession inevitably leads to belt tightening, regardless of whether businesses are feeling a direct impact or not. In my experience, a downturn is when clients start to seek executives who are willing and able to do more with less.
Ideally, these C-suiters can maintain productivity and performance with less staff and smaller budgets, while also being capable of personally overseeing a wider set of responsibilities. For instance, this might involve hiring a CFO experienced enough to manage the finance office as well as operations, eliminating the need for a COO.
Identifying Future-Ready Executives
As important as doing more with less is in light of a recession, it isn’t the only thing I suggest looking for right now. Candidates who also possess the following characteristics will be able to help you predict and prepare for whatever else the future holds for your particular industry, be it healthcare, technology, manufacturing, or another sector:
A Broader Background
Whether you’re considering an up-and-comer or a veteran PE-backed executive, a candidate who has managed a more extensive scope of responsibilities over the course of their career will have a broader perspective through which to assess and analyze how current conditions might impact future operations. This is also true when replacing senior VPs. During past recessions, I’ve helped many clients find accomplished number twos able to replace multiple people. The key was carefully assessing their background and avoiding candidates whose careers were too siloed.
Forward Thinking Perspective
As much as you want executives who understand and excel at today’s best practices, that only guarantees current success, which can quickly fade. You also need leaders who are closely watching the market and have their finger squarely on the pulse of what’s coming down the pike.
Let’s say you’re a healthcare-focused PE firm whose portfolio companies operate hospital and/or other medical facilities. When interviewing for a senior human resources leader, whether that’s at the CHRO or VP of HR level, the candidates should be asked about their ideas for addressing the current and future shortage of registered nurses and other healthcare workers because this will be critical to future business viability.
Creative Problem-Solving Skills
Most clients tell me they want an executive who is strategic. When I ask them to define that, nine out of 10 say a problem solver. The problem with that is once most executives reach that senior-most level, they’re no longer the hands-on problem solver they once were. But they should still own any problems within their scope of responsibility, even if it’s their staff, not them, rolling up their sleeves.
In particular when it comes to private equity, executives need to solve problems creatively, not with more money. When vetting executive candidates, I always ask for clear examples of how they’ve solved challenging problems. If the only examples someone can provide involve adding staff or increasing the budget, that’s a red flag telling me to seek more suitable candidates.
Tech Savviness
Automation is one of the primary keys to scaling operations and integrating the processes of multiple facilities. During interviews, future-ready executives can speak to past experiences where they’ve comfortably worked with technology leaders or staff to do the following:
- Compare the features and functionality of potential technology solutions
- Conduct cost/benefit analyses of various solutions
- Select a solution and structure the vendor contract to meet service level needs
- Implement the solution without major or extended disruption
Emotional Intelligence
Emotional intelligence might be challenged given things like hybrid or remote workforces where teams have less in-person interaction. This furthers the need for a strategic hiring process, featuring a candidate scorecard that intentionally gauges emotional intelligence in interviews, formal assessments, and informal meetings.
Executives with emotional intelligence can better relate to and connect with employees than those who lack it. Moreover, their high EQ helps foster C-suite collaboration with their peers, a crucial ingredient to private equity success, especially in founder-led businesses. For example, a company’s first-ever CFO who diplomatically handles the relationship with its founder can help that CEO more quickly and easily assimilate to the PE-backed environment. This helps avoid unnecessary delays in the investor business plan due to founder resistance.
Using Downturns to Prepare for Inevitable Upturns
Maybe you don’t have anyone stepping down from a leadership role right now or you’ve enacted a hiring freeze because of economic uncertainty. That doesn’t mean you should stop thinking about and assessing the talent in either your C-suite or your leadership pipeline. In fact, the smartest boards always keep talent at the top of their minds, especially in a down cycle. Why? Because it puts their business in the best position to take advantage of opportunities as they emerge on the inevitable upswing.
By Lynn Durant, Managing Director at Focus Search Partners
Need help developing a future-proof succession plan for your portfolio companies? Contact Focus Search Partners today.