Investors told Alix Partners there was a 73 per cent chance portfolio company CEOs would be replaced during the investment life cycle, with 58 per cent being sacked within two years.
Market conditions, it seems, “are forcing private equity (PE) firms to hold investments longer than ever”, and as a result, executives have been searching for new ways to drive growth. This often means taking the company into a different direction – and unfortunately a belief that portfolio company CEOs aren’t up for the challenge runs rampant in the PE community.
“This response highlights the importance of accurately assessing a CEO’s suitability and fit for the future role,” the research maintained. “For example, does the CEO have the capabilities, motivation, and knowledge needed to implement the new strategy? And can those qualities be developed within a reasonable time frame?”
Many feel the answer to both questions is no, citing a failure to deliver results and appease expectations as a primary reason for replacing the head honcho. It echoes findings that, for 78 per cent of investors, the pace of change is the most disputed issue, followed by performance targets.
With these thoughts in mind, PE companies unveiled CEO experience in the PE landscape helped foster a better relationship as they were perceived to be better adapters. That didn’t mean, however, that PE knowledge was the only thing they looked for. Experience in general, no matter the sector, was key. In fact, they prioritised it above short-term PE experience.
PE executives also tend to take into account success records, with 55 per cent looking up whether the candidate in question had faced similar strategic challenges – and pulled through.
The reason why it often took “so long” to gauge the fit of the CEO – that two year marker – was because, according to investors, it’s often hard to measure soft skills, with some qualities being harder to monitor than others. For example, 35 per cent found it difficult to measure leadership skills, with 50 per cent claiming a fit with the company’s culture was hardest to gauge.
Either way, investors wanted to have a lot more conversations. Only three per cent were satisfied with the consistency of their meetings – and perhaps tackling the issue of communication will solve the high turnover rate.
As Alix Partners exclaimed: “There are key areas of chronic misalignment between CEOs and investors. So to drive down disruptive turnover and bolster portfolio company performance, the topic of alignment should be on every investor’s agenda.”