In today’s competitive private equity landscape, where achieving a return on investment is challenging and the competition for purchasing high-quality assets is intense, it is crucial to assess the leaders who manage and propel the growth of your business. For example, did you know that when a CEO change goes wrong, it can reduce the IRR of an investment by 82%? This article explores how PE firms can leverage executive search and assessment to drive value and secure successful exits.

The Importance of Leadership in PE

HIEC has been working with PE firms, supporting them pre- and post-deals to help them target, aiding in attracting and retaining top executive leadership for their boards and day-to-day operations of their portfolio companies.

We have been headhunters for more than 20 years and have worked with more than 100 PE funds globally (both buyout and growth equity) during this time. As a result, we have the expertise to identify the patterns, attributes, and resilience required to drive change, growth and a successful exit. Essentially, these skills can significantly impact the chances of success and maximise the outcomes and returns. However, it is important to reliably spot the executives with the right capabilities to deliver against the plan.

Increasingly we are seeing PE firms use a combination of leadership assessment tools and search to help them increase the number of data points when making changes to leadership. There is no doubt that the implications of making the wrong decision around a new CEO will prove to be costly and may in some situations set the exit process back in excess of 12 months. We know that in one PE fund, from data collected across all their portfolio companies if a CEO change is needed, and it goes wrong, the IRR of an investment drops by 82%. We also know that IRR is 3x greater when senior searches are initiated within one year of a deal.

Key attributes of successful PE executives

What do we look for when meeting Senior executives? It’s simple: evidence. I’ve narrowed it down to four key pieces of evidence that shortlisted executives can demonstrate:

Adaptability and Agility
These are vital in constantly changing markets, whether due to regulation changes, technology-driven innovation, or creating new ‘go-to markets’ for traditional companies that need to reinvent. Agility is a vital skill for any executive looking to create value in the market.

Innovation and Strategic Thinking
Whether that is new technologies, business models or new approaches to traditional problems. A desire to innovate fuels value creation. A leader’s ability to demonstrate this through their experience is often essential and a great guide to future success. However, this success can only be achieved if the leader can combine this with the power of strategic thinking. The innovation must be linked to long term goals and aligned with the actions that drive value creation.

Digitisation Mindset
Their ability to understand the importance of digitisation is relevant to every business, regardless of sector or offering. The use of data analytics and digital tools to drive the right decisions and maximise operational efficiency are key to delivering commercial results.

Emotional Intelligence
A leader with emotional intelligence is self-aware and understands their own emotions, strengths and weaknesses. They can effectively self-regulate in high pressure environments and avoid making impulsive decisions and maintain their composure. They will have compassion for their employees and listen effectively, building positive relationships and driving effective communication and collaboration across the business. A business that collaborates tends to foster strength and confidence both internally and externally.

All the above are the commercial drivers and behaviours of people that can be evidenced through experience and outcomes. Alongside these, commercial skills are the three most difficult elements of assessment to predict, but often have the largest impact on outcomes, the softer leadership skills. Emotional intelligence and an executive’s ability to foster a collaborative environment.

The Role of Assessment in Executive Search

Formal assessment tools can serve as an excellent guide to whether an executive possesses some, all, or a combination of desired qualities and how these attributes come together. These assessments indicate preferences and operational styles under pressure. By combining the outcomes of tests such as Hogan with detailed competency-based interviews and the experience of headhunters, one can increase data points to reduce the risk associated with hiring.

The value of using an experienced assessment professional lies in the depth of their experience in assessing talent and their understanding of what ‘great’ looks like for the specific challenges facing the hiring company. Different skills are needed depending on whether the situation calls for growth, restructuring, or innovation to reinvigorate a more traditional business.

The Headhunter’s Role

A headhunter can ask probing questions, push different agendas, and test how candidates operate under pressure. They can evaluate leadership skills and growth-driving abilities. Crucially, headhunters can confidentially test responses through informal references from their broader networks.

Team Dynamics

An additional factor impacting success is team dynamics. It’s not just about the CEO; it’s about the executive team having the right mix of skills to enable success. No senior recruitment should be done without understanding how the individual will work with the broader team.

Many clients, especially private equity (PE) funds, have started to take this seriously. Some PE funds are implementing tools such as Wisnio across their full portfolio. Wisnio is an AI-enabled tool that analyses individual executive profiles and how they fit together, highlighting potential gaps or watch points for the board.

When recruiting key leaders into PE-backed businesses, it’s advisable to consider this dynamic. Engaging with all key contributors helps understand what they want from the incoming individual and, more importantly, how likely they are to be successful together.

The PE Leadership Landscape

Private Equity remains very much a club. When recruiting for portfolio companies, the first question often asked is, ‘Have they worked for PE before?’ Operating Partners are creatures of habit and want to know someone understands the PE levers.

A great corporate career doesn’t necessarily translate to success in Private Equity. If anything, there are more failures than successful moves, especially in growth equity, which has exacerbated the issue. Cash is now expensive; the old financial engineering lever is harder to pull off, and funds now have to focus on portfolio performance.

This shift is evidenced by:

• The volume of Talent People and Operating Partners being hired into funds
• Greater use of ‘independent’ advisors to assess deals
• The volume of qualified independent board members (although funds still prefer to use people they know – ‘friends of the firm’) in addition to the investment partners
• All of these measures are being used alongside deeper assessment to de-risk bad hires and mitigate the commercial implications of these decisions.

Diversity and Performance

Data shows that gender-diverse teams are 48% more likely to outperform non-diverse teams. Consequently, greater due diligence is being put into the people part of a transformation-led journey to de-risk the process as much as possible.

In an era where financial engineering alone can’t guarantee success, PE firms must prioritise strategic talent management. By leveraging comprehensive assessment tools, focusing on key leadership attributes, and embracing diversity, PE firms can significantly enhance their chances of successful exits and maximise returns.

The H.I.E.C Advantage

At H.I. Executive Consulting, we specialise in identifying and placing transformational leaders who possess these critical adaptability and agility skills. Our global reach and sector expertise allow us to find the perfect match for PE-backed companies looking to thrive in today’s dynamic business environment.

Ready to transform your leadership team? Contact Sarah Wilding, Managing Partner, at swilding@hiec.com or +44 7786 556104 to learn how H.I.E.C can help you find your next agile leader.

About H.I. Executive Consulting (H.I.E.C)

Founded in 2007, H.I.E.C is a leading global executive search firm that places transformational leaders across various sectors. With 13 offices spanning North America, Europe, the Middle East and Asia Pacific, our agile, borderless team structure allows us to deliver bespoke services from an integrated group of consultants. Find out more here.