Private Equity Executive Search Trends Toward Up-and-Comers Ready to Lead

Lately, my colleagues and I have been hearing the same refrain from many lower middle market PE clients: They’re struggling to find executives, especially CEOs and CFOs, with prior PE experience to lead their portfolio companies. It’s happening across the board but especially for investors hyper-focused on executives with specific industry backgrounds. The same goes for portfolio companies located in less-than-appealing cities to which candidates aren’t interested or willing to relocate or commute.

While this executive search trend is frustrating, it nonetheless represents an opportunity to expand the C-suite search strategy in a way that doesn’t jeopardize investment plans.

The Drivers Behind This PE Executive Search Trend

No one is imagining this trend. Right now, there is a real shortage of available C-level executives experienced in professionalizing founder-led businesses that are now investor-backed. It’s the result of three converging factors:

  • More PE-backed platforms: There is a tremendous amount of capital being deployed right now. According to Pitchbook, more than 860 PE deals occurred during 2022 in healthcare alone, the sector I serve. This follows the record-setting pace of 2021.
  • Fewer portfolio companies ready for transition: The heady activity of the last two years has many of the typical candidates tied up in early phase investments. With their equity stake on the line, it’s too soon for these usual suspects to seek new opportunities, no matter the wealth potential.
  • Economic uncertainty: Even though the technology sector is bearing the recession brunt for now, news of mass layoffs anywhere in the economy always makes people more cautious about job changes or major relocations.

An Expanded Executive Search Strategy for PE Firms

Meanwhile, every day without C-level leaders delays the execution of investor business plans. Waiting out this trend isn’t an option, so we recommend that lower middle market PE firms expand their executive talent pool to include the up-and-comer profile. Larger PE-backed portfolio companies often have high potential senior VPs who would make excellent first-time CEOs, CFOs, or other C-suiters.

These highly accomplished number twos know that their ambition to lead a company more than likely won’t be met in their current situation. Therefore, they can typically be swayed to take the number one spot in a smaller PE-backed company—even one in a less desirable location or in one that requires an extensive commute—which experienced C-suiters might reject given that the current executive job market favors candidates.

Moreover, the equity potential of an early-stage-growth situation might not be enough to attract a PE-seasoned executive. But it definitely feeds a senior VP’s desire to create greater wealth than is possible if they remain where they are.

The Upsides of Hiring First-Time Executives

These senior VPs bring more than their openness to such offers. A hiring strategy that includes up-and-comers among the slate of candidates is easily justified when you consider these additional benefits:

More Affordable Price Tags

The inflation in PE-backed CEO and CFO compensation has reached an unsustainable level that leaves little, if anything, left to invest in the infrastructure and technology improvements needed to scale the business. The compensation requirements of a first-time executive often pale in comparison. And as more first-timers enter the PE market, it should help bring veteran compensation standards back to a more reasonable level over the longer term.

Comparable Skillset

Some PE firms don’t want to consider the up-and-comer because of a lack of executive leadership experience. These objections start to fall away when you consider that the size of a senior VP’s existing P&L carry is much greater in scope than what they will have in a smaller portfolio company. Their background and skills transfer quite easily.

Plus, you can make up for any gaps by pairing them with more experienced C-suite counterparts and/or an interim executive who can help them develop their weaker points. Moreover, many PE firms are building highly engaged boards ready and willing to offer guidance to assist the first time CEO or CFO hire. This creates a failproof safety net, ensuring success.

Industry-Specific Experience

The pool of PE-experienced executive candidates is already small right now. It further shrinks when you require someone from a highly specialized industry who can replace or bolster a founder who’s spent a lifetime learning a sub-sector’s unique ins and outs. The pool expands significantly when you include large portfolio company senior VPs with a long history and in-depth knowledge of that very industry.

Unique Motivation

Just like emotional intelligence, there are certain intangible qualities to consider when searching for an executive. Up-and-comers possess a fierce drive to prove their worth, a desire that has sometimes waned in seasoned candidates. A newly minted executive’s distinct self-motivation can inject a bolt of energy into a portfolio company that needs to rally its troops around a common goal.

Shorter Search Cycle

Casting a wider net across the entire spectrum of executive profiles at the search start allows the hiring committee to more easily compare and contrast one or more potential first-timers against a slate of traditional candidates. It also gives you some negotiating room and an immediate plan B in case the seasoned veteran of your choosing can’t be persuaded to jump on board.

Competitive Edge

Since there is no end in sight to this current shortage, adding up-and-comer profiles to executive search strategies is likely to become mainstream by year’s end. In the meantime, early adopters have a chance to outwit other PE firms and gain a competitive advantage.

Nothing to Lose, Everything to Gain

PE clients have long prioritized past experience as part of their C-suite hiring process. As long as plenty of seasoned executives are available, that strategy makes sense. But given the current tug-of-war between PE firms for available veterans, it also makes sense to expand your candidate pool. And there is proof that up-and-comers are ready to lead PE-backed portfolio companies.

By all client accounts, the senior VP candidates that Focus Search Partners has recently extracted out of larger portfolio companies as first-time CEOs and CFOs are exceeding expectations at the 90-day check-in. Moreover, they are making their mark to the distinct advantage of the PE investors who hired them.

By Alesha Herbert, Managing Director at Focus Search Partners

Want to hear more about the up-and-comer executive profile? Contact Focus Search Partners today.