In the world of executive search, private equity (PE) is one of the more unique spaces to play in. Though talent has increasingly become the difference maker in unlocking enterprise value, the environment of a PE-backed portfolio company demands a certain flavor of leader that can be less commonplace and potentially difficult to retain.
For decades now, Townsend Search Group has been obsessing over the specific nuances, organizational structures and executive characteristics distinguishing middle market private equity companies from their founder—and family-owned counterparts.
So, we thought we’d share a bit of what we know with you.
The Life Cycle of a Private Equity Deal
To understand exactly who thrives in a private equity-sponsored company, particularly when first-time institutional capital is being introduced, it is important to know how most of these relationships are structured.
When a successful founder—or family-owned middle market company—needs capital to grow, a private equity firm comes in to provide not only the funding, but the guidance, strategy and resources needed to maximize enterprise value.
Once acquired, the portfolio company typically needs to be professionalized in multiple specific functional areas—for example, they may have never had a true CFO, and their systems, structure, data and reporting are inadequate to unlock the level of value being sought.
That’s where the need for fresh, experienced and dynamic talent comes in.
A Different Breed of Executive
The executives brought in by PE groups to lead a portfolio company need to deliver more than technical know-how. They must possess each of, what we call, the 5 E’s:
These leaders not only have the founder(s) and existing company leadership to report to, but also private equity investors, their investors (limited partners), financial institutions and other stakeholders. Ideally, they have experience going through a sale process, and know how to properly prepare an organization for prospective buyers.
In most cases, these individuals are not coming into a perfectly honed machine. PE-backed companies are often first-time institutional capital businesses with systems that may not be sufficient to allow them to scale. While it may scare some away, the right candidate embraces the potential to influence the future of a company.
From the shop floor to the boardroom, these socially intelligent leaders can effectively and articulately communicate their vision, how it will bring value to the business, and why it will better achieve the specific goals they were brought in to undertake. Being able to develop and execute on that vision is simply an expected given.
They are also able to present the full story of the business—where it’s been, where it is now, and where it can go—so an investor or potential buyer can see the opportunity for growth and value creation beyond what has been accomplished.
Keeping the Culture
If a private equity group is successful, they’re able to supplement and support their portfolio companies without changing the secret sauce that made the businesses successful in the first place. Therefore, any new executive they bring in to help their companies grow should be wholly aligned with the existing culture, founder(s) and leadership.
These people are expected to lead a tight-knit team that’s often been working together for decades and may have never dealt with PE or institutional investment. A cultural fit helps achieve that delicate balance of needing to steer the ship without rocking the boat. They can also more effectively serve as liaison between the founder(s) and the PE group to ensure a consistent sync on the path to enterprise value creation.
When you’re in a PE environment, you’re surrounded and motivated by specific objectives, a timeline and clear communication of where you’re going and why. This honed precision tends to dispel a lot of the unproductive behaviors, politics, drama and noise that prevent other types of organizations from achieving results.
Heading for the Exit
Those people in the C-suite may face the potential risk of being unseated after a PE exits the investment. So why would an executive be motivated to join a company if they knew they could be out of a job? That’s where the equity participation program becomes a key part of the deal.
A PE-sponsored company has a pool of equity shares that are typically distributed amongst the leadership team—tearing down silos, creating collaboration and forging alignment to ensure everyone is working toward the same mission. When an exit takes place, a liquidity event occurs in which the executive receives an often-hefty lump sum.
Most leaders understand the risk that comes with this change of control, but the financial and experiential incentives makes the transition much more acceptable. In the event a transition occurs after a transaction, the executive has now led a successful exit and gone through a sale process, acquiring a number of skills that will be valuable arrows in the quiver when they seek out the next endeavor.
Whether they’re kept on or dismissed at exit, the right executive gets excited by the known unknowns that are in store at that moment of transition.
The Townsend Difference
As one of the leading executive search and leadership advisory firms to partner with middle market private equity, Townsend Search Group has a proven track record of helping PE groups and their portfolio companies unlock enterprise value by finding the best leadership talent available.
We understand every nuance of the environment—from equity programs to employment agreements—and leverage our network, relationships, insights and technologies to support our clients across every aspect of their business, both at the GP and portfolio company level.
If your portfolio company is ready to place changemaking talent, get in touch with any of us on the Townsend Search team and experience The Journey to placing top executive talent.