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CEO turnover within private equity portfolio companies is staggering. In a recent survey completed by Alix Partners, 58% of private equity CEOs are replaced within 2 years of an investment. Over the lifetime of the private equity firm’s holding of a company, CEO turnover jumps up to 73%.
When a private equity firm makes an investment, the clock starts ticking towards the eventual sale and hopeful profit that can be passed along to both the General and Limited Partners. What’s most concerning to private equity firms is not only the turnover, but also the lost time spent recruiting and hiring a new CEO and the time required by the CEO (and perhaps a new senior management team) to assimilate into the organization and begin executing their plans.
Why CEO Turnover Is So High
The first statistic, that 58% of CEOs turnover within 2 years, does have an explanation that will be familiar to those in the private equity sector. In particular, when private equity firms purchase a family business, the new owners require the previous owner (who is usually the CEO as well) to stay on for a period of time to provide continuity in the business. Once that stay-period is up, usually within 1-2 years, there is an agreement that the previous CEO will step down and the private equity firm will have the opportunity to choose their own replacement. This scenario constitutes a large percentage of the 58% turnover.
The 73% turnover statistic is much more alarming and a cause for concern. The typical private equity purchase is held for 4-6 years. When you factor in a CEO replacement within that time-period, the ability for the private equity firm to attain desired returns and sell the business becomes more difficult.
How Strategic Hiring Lowers CEO Turnover
The survey from Alix Partners brought up some valid issues, most notably the hiring and assessment process. When faced with making a decision between the two, private equity firms prefer candidates with CEO experience rather than a private equity background. In our experience, this preference makes a lot of sense, though there are some exceptions to keep in mind. The most important consideration is whether prior experience aligns with the position in question. Unfortunately, we often see private equity firms recruit executives from large, academy companies to run their middle market business. While this sometimes works, the vast majority of hires like this end in less-than-stellar results. There is a big difference, in so many ways, between running a division of a Fortune 500 company and managing a middle market private equity portfolio company. Talent is different, processes and systems are not as developed, and resources are oftentimes scarce. That’s why an alignment between prior experience and the current role is essential.
The four top contributors to CEO turnover in private equity are the lack of strategic direction, poor performance, poor communication, and lack of cultural fit. It is also clear that a lack of cultural fit contributes to the other three factors. With that in Go to the full article.
Source:: Business 2 Community