How to Foster Epic CEO Performance in a Private Equity Ecosystem

This fall, I attended Private Equity International's Operating Partners Forum in New York, the world's largest event dedicated to operating partners. A theme that dominated the event again in 2021 was how to unleash the performance of portfolio company CEOs.

Three esteemed PE executives and I unpacked this topic on a panel, addressing the tools, profiles, and engagement practices for epic CEO recruitment and leadership. In addition, each panelist provided a wealth of insightful comments based on their respective experiences working in the trenches as senior operating partners in large- and mid-cap funds and running private equity-backed companies.

Here are the major takeaways from our conversation.

Tested Tools and Techniques

The panelists agreed that the most important task of a PE operating partner in any investment is selecting the right portfolio company CEO. However, upon comparing tools and techniques for superior hiring, we noted three essential elements contributing to successful hiring.

Behavioral interviews

The speakers unanimously called out behavioral interviews as time-tested table stakes. I agree. In my experience, these interviews are critical for surfacing CEOs who can deliver on the investment thesis.

The OPs said they particularly lean on competency-based interviews for understanding how candidates have previously handled relevant situations, whether that's having effectively turned around a troubled company, driven an international expansion, or reinvented a business model amidst market turmoil.

One OP cautioned that many candidates can weave good stories about prior achievements. However, when faced with high-pressure situations, as is frequently the case in PE, these same candidates are not always up to the task.

Validated psychometric testing

To mitigate the risk of mis-hiring, the operating partners said they rely on an additional battery of validated psychometric tests. The testing arms OPs with additional data points about more complex attributes to assess for, like bias for action, raw intellectual capability under pressure, and leadership skills.

Case studies

Case studies were cited as another valuable tool to set the stage early on for strong PE-CEO relationships. One fund said that they provide all candidates with their investment thesis and ask them to come back with their vision for the company. They stressed the importance of taking time to understand what the CEO thinks the value creation plan is so that they don't arrive on day one with a different opinion about the business.

Model CEO Profile

A senior operating partner at a mid-market PE firm noted three essential qualities that drive portfolio company CEOs to lead their respective companies to outperform industry benchmarks. The attributes mentioned are as follows:

Bias for action

Not having a bias for action is a dealbreaker. CEOs who feel a sense of ownership, process information rapidly, and act with urgency outperform peers on every measurable metric. An executive described it well.

Exceptional leadership skills

To execute on the numerous complex activities that create value, CEOs must be capable of building solid management teams. This should be at the very top of the CEO's agenda when stepping into the portfolio-company leadership role, the OPs agreed.

Once the right team is in place, it's all about focus, speed, and optimization. CEOs need to ask questions and engage those working in the trenches to keep a finger on the pulse of what is going on in the organization — and remove roadblocks to exit success. This hinges on establishing trust, so showing empathy in relationships with leadership teams is critical for portfolio company CEOs.

PE experience: valued, not required.

The panelists felt that CEOs with prior private equity experience have an advantage over CEOs without a playbook from which to draw on lessons. CEOs with a few PE cycles often come with pre-existing networks of talent to recruit, for instance. That said, all OPs said they've also had great success hiring CEOs from outside the space too. And in today's competitive candidate market, the panelists stressed that expanding the talent pool to include first-timers is a must.

Rules of engagement

The relationship between the operations team, CEO, and management team needs to be stewarded with care if the company is to thrive within a fiscally and operationally disciplined private equity environment.

While public company boards are more hands-off, portfolio boards tend to play a more active role in directing their companies. A senior operating partner from a large mid-market PE firm said that they view themselves as strategic partners, with the CEO as the day-to-day strategic driver of business. This approach allows the CEO to rapidly execute on the implementation plan with ownership and flexibility.

Regardless of the owners’ level of involvement, all PE operating partners said they want to have a harmonious working relationship with portfolio company CEOs. And, that it is in their best interest. That means quickly resolving any conflict or dysfunction arising from miscommunication and perceived or actual offenses that result in bruised egos.

Implement corrective measures swiftly

PE operating partners are sometimes hesitant to replace a CEO who's not working out. Whether the underlying problem stems from the CEO's inability to do the job or irreconcilable differences of opinion, allowing dysfunction to persist without addressing it is the wrong approach.

The panelists noted that it is best to implement corrective measures swiftly, even if it means firing a CEO who is a poor fit and restarting the search process. To quote Marcus Tullius Cicero, "More is lost by indecision than wrong decision."

Undeniably, selecting a new portfolio company CEO is one of an operating partner’s highest-stakes decisions during a deal. Having multiple tools in the recruitment toolbox, assessing candidates for necessary skills like bias for action, and supporting CEOs to build capable teams around them are some of the ways our panelists drive strong performance — and accelerate the journey to creating value.