Redefining Success: The Rise of First-Time CEOs in Private Equity Portfolio Companies

In the fast-paced world of private equity, success hinges on effective leadership. With approximately 23,000 PE-owned portfolio companies in the United States alone, the demand for top-tier CEOs is relentless. Traditionally, PE firms have favored seasoned executives with prior industry or exit experience to lead portfolio companies post-buyout, however, a paradigm shift is underway as more firms opt to recruit first-time CEOs or promote them from within the organization.

Some PE firms feel that there are inherent risks associated with first-time CEOs. While they may lack a proven track record of transformation or successful exits in the PE realm, we believe they bring fresh perspectives and an unmatched hunger for success.

Competition for CEO talent

Private equity has fostered a fiercely competitive landscape for CEOs, offering enticing compensation packages that often surpass those of publicly traded companies. In about 70 percent of cases, PE firms opt to appoint a new CEO upon acquiring a company. Typically, these CEOs are recruited externally, with many having previously held CEO positions at publicly traded companies, drawn by the lucrative rewards associated with exits that take place 3-5 years down the line. However, a significant challenge emerges: the limited pool of CEOs from sizable companies available for private equity firms to recruit. Consequently, there is a growing imperative to broaden the search for top-tier talent beyond “conventional” avenues.

De-risking recruitment

Regardless of the data presented, it is realistic to assume that numerous firms will maintain reservations about hiring individuals lacking a proven track record in private equity. A mishandled succession could tarnish their reputation and disappoint shareholders. Rather than presuming that seasoned CEOs possess superior qualifications to first-time CEOs, boards should recognize that they offer different skill sets with varying degrees of relevance to the role’s requirements. While experience is valuable, it doesn’t guarantee superior performance, as each CEO may encounter unique challenges in a new position.

To mitigate risk, companies might opt to offer guidance and coaching through mentorship programs involving advisors and independent board members. This approach facilitates the executive’s development, ensuring a solid ROI on their talent investment. By nurturing a pipeline of promising talent and providing preparatory support, PE firms can cultivate a strong ecosystem of capable CEOs and functional leaders.

Final thoughts

Private equity firms typically rely on a narrow set of established criteria when evaluating candidates for C-suite positions, ensuring predictability, risk management, and success rates for executive talent. While this approach may provide historical stability, it may also constrain opportunities for innovation and diverse perspectives.

Relying solely on past performance indicators to forecast future success is no longer sufficient. It is imperative for PE firms and CEOs to broaden their viewpoints on talent and challenge traditional norms. Failing to do so risks overlooking capable candidates who can effectively lead portfolio companies in the future. The skill sets of the past may not necessarily guarantee tomorrow’s success, necessitating a shift in approach.