Through all of the work done by Private Equity (PE) firms when acquiring new companies, one of the most important aspects is finding the right leadership. And with PE firms taking a more active ownership approach, especially in the software sector, CEO succession planning for portfolio companies has become more important than ever.
A recent analysis by Spencer Stuart found that among software companies with $100 million in revenue, 54% of PE-acquired companies recruited a new CEO before they exited the company. Of those 54%, a quarter of those companies had at least one more CEO change before the company exited.
As Private Equity firms consider investing in a company and looking to improve the returns from their portfolio companies, the analysis found the following themes useful.
Include CEO assessment as part of pre-deal due diligence
As the analysis showed, you are more than likely going to need to replace the CEO. No matter what you think of the current CEO or founder, there is a good chance they will not be at the company by the time you plan to exit. Therefore, make sure you account for the strengths and weaknesses of the executive team during due diligence and be especially clear on the needs for the CEO role. Recommendations from the analysis include:
- Formalize a methodology and process to assess the current CEO’s ability to execute the value creation plan
- Evaluate the CEO against the top available talent in the space. How does this person compare to industry peers?
- Begin succession planning immediately — even if you are not actively planning for change
Post-acquisition, engage in an ongoing CEO succession planning process
As mentioned earlier, making a CEO change doesn’t mean you won’t have to make another change before the exit date. Hence, it is wise to continue planning for succession. While the hope is that you got it right with the first change, situations you didn’t plan for can still arise. The analysis provides the following recommendations:
- Evaluate your leadership’s ability to execute the value creation plan going forward; assess skills to determine whether they can lead through the next stage of growth
- Review your internal bench to know what potential candidates may be available, while ensuring you have a roster of strong external possibilities
Use coaching and mentorship to support your CEO’s development
Most successful executives will likely point to coaching or mentoring when describing their keys to success. Knowing the importance of this type of support, Private Equity firms would be wise to invest in helping their CEOs with their transition and development. Spencer Stuart’s recommendations include:
- Ensure you are giving your CEO access to the support and coaching they need to meet their potential
- As part of ongoing CEO succession planning, ensure that you are developing and coaching the next generation of your company’s leaders
Be open to first-time CEOs, or those without PE experience
While this may be difficult for some PE firms to accept, be open to different options when looking for a CEO. More than 60% of the CEOs in the study were first timers and two-thirds didn’t have PE experience. This may indicate how few candidates out there meet a PE firms vision of a perfect fit. The surveys suggests:
- Consider the past experience of potential CEOs at best-in-class large enterprise tech players; these are breeding grounds for many of the software world’s future CEOs
- Through references and interviews, learn about how a potential candidate enacted change in a short period of time
- Learn about how this individual evaluates talent and determines when to pursue new talent
- Analyze the leader’s exposure to the board and to other experiences and attributes that would prepare them for work in a PE setting
For the past five years, Sheer Velocity has been recognized by Hunt Scanlon as one of its top 100 most prominent executive search firms serving the private equity sector. For more information regarding our private equity executive search approach and process, send us a note and one of our private equity recruiters will follow up with you.