THE CHALLENGE Tailwind Capital, a middle market private equity firm investing in industrial and...
THE EVOLVING PRIVATE EQUITY RECRUITING MARKET
Published in Hunt Scanlon Media’s Private Equity Recruiting Report 2020.
Jeff Hocking is a partner at ON Partners with over 20 years of search experience. Previously head of the North American technology practice at Korn Ferry, he serves private equity and major software companies with a focus on the technology and software sectors. Partner Baillie Parker has completed over 300 searches for C-level, board and high-level executives across a range of functions. His work focuses primarily in private equity across the technology and industrial sectors.
In this article, Mr. Hocking shares that the private equity industry is on the verge of becoming very active as firms prepare strategies based on lessons learned from the 2008 financial crisis. He explains why the industry is poised for a quick rebound and how PE firms will take advantage of the market changes caused by COVID-19. Mr. Parker then shares some traits that he has noticed have been important when filling private equity roles.
Private Equity Poised for Activity
Private equity firms have learned from the lessons of the global financial crisis, in which the industry was widely seen as having missed a major opportunity to acquire assets at steep discounts. As a result, firms are expected to be more active during the pandemic, determined to not miss the opportunity this time around, and have already begun ramping up this process.
Many PE professionals recognize they did not move quickly enough on undervalued companies after the 2008 crisis and are getting ready to actively deploy capital, while other firms are waiting to see when we will hit the bottom. This cat and mouse game should make it interesting: first mover advantage or waiting until the deals are extremely undervalued.
“PE firms are getting ready to deploy capital and are ramping up, either on potential due diligence of already troubled companies or staffing up and looking for additional operating partners,” said Mr. Hocking. “It is important to act proactively and to take advantage of opportunities caused by the virus and to make sure that you are staffing up your firm with the right leaders to steer the company in the right direction.”
PE firms are in a much better place to take advantage of the market changes post-COVID-19 for many reasons. They are positioned very differently than VC firms (which typically specialize in one or two industries and look at smaller opportunities) and corporate development teams of major companies that only invest in opportunities that benefit their individual companies.
Additional reasons PE firms are in a unique position include:
- Many have raised very large funds that are dedicated to investing in undervalued assets.
- They have dedicated teams whose sole job is to identify investment opportunities.
- PE firms have the assets and teams to potentially buy multiple companies and combine them to compete with competitors that are much larger than typical mid-market companies.
- Some of the major PE firms have dedicated industry sectors and are not just tied to technology or industrial, etc. This diversification will pay off tremendously in the near future.
COVID-19’s Impact on Portfolio Company Funding
Significant PE firm resources are being deployed to position current portfolio companies to survive the present downturn. However, the larger firms in particular are quietly looking at companies that will need a PE firm to survive. There is no shortage of funds, but it appears that cautious planning is taking place now – but everyone fully agrees that once the pandemic is behind us, the PE sector will be as active as ever.
“Depending on how much of a downturn we actually end up seeing, some PE firms may be taking over companies that have cut dramatically and now need to be rebuilt,” said Mr. Hocking. “Hopefully we won’t see a drastic downturn and PE firms will continue to look for turnaround experience and previous experience working in PE environments, which will always be in demand.”
The Importance of the CFO
Once we start seeing things return to normal, PE firms will be very focused on growth experience at the CEO and CRO level, but to ensure their investments are focused on the right actions, the CFO will also be in demand, maybe even more so than in the past.
Next to the CEO, the most important role in a PE-backed company is the CFO. Post COVID-19, PE firms will be investing in companies poised for growth, but every PE firm wants measured growth with profitability versus the growth at all costs business models we have seen in the past. Traits PE firms will look for include: a prior track record of working successfully in a PE backed environment; extensive exposure to the board; and strong leadership and decision-making skills – even if they are unpopular decisions. All PE firms want to maximize their investments and will rely on a CFO to do this, sometimes more so than the CEO.
Key Traits of Turnaround CEOs
Baillie Parker recently published a list of eight key traits he believes CEOs must possess in 2020 and beyond. Below, Mr. Parker shares two examples of how these traits have benefitted recent private equity roles that he has filled or been tasked to fill.
Having a highly skilled strategic problem solver in the CEO position is extremely important according to Mr. Parker. Strong turnaround CEOs have the ability to quickly digest information and data and distill the underlying issues in the business. Once you’re far enough along in the interview process, let candidates review the financials and the board documents. Observe what questions they ask.
Look closely at their previous leadership roles and understand how they identified and prioritized problems and came up with a new strategic plan for the business. You don’t want a candidate who is only capable of solving operational issues, which is just one aspect of the turnaround. You also need someone with a demonstrated ability to create a new strategy for growth with a very specific timetable around tactics and execution.
On a recent CEO search for a distressed private equity-backed company, for example, a finalist stood out because he had previous successful turnaround experience. More importantly, though, he had demonstrated success shifting market focus from a troubled sector – in this case energy – into new, higher growth markets.
It is also important for the CEO to be a realist with an open and transparent communication style. This person must have the ability to confront the uncomfortable. Once (s)he has distilled the business challenges, (s)he needs to be able to communicate those problems to the team and create a realistic transformation story that everyone can understand.
“During a CEO search for a troubled company, our private equity client was taken aback by the candidate’s directness voicing her concerns about the company’s strategic direction as well as its operational footprint,” said Mr. Parker. “Ultimately, though, they realized this sort of candor was exactly what they were lacking.”
Also, ask the candidate what mistakes (s)he has made in the past and in retrospect how they would do things differently. If the candidate is not self-aware enough to take ownership of past mistakes, (s)he will not have the transparency needed for a turnaround. Having the ability to acknowledge missteps and know how to correct them is key.
In response to the COVID-19 pandemic, ON developed a series of experience-driven tools designed to help clients and candidates, including an executive assessment and onboarding guide; tips on how to interview virtually; and a collective forecast from ON consultants about what to expect post-pandemic across several industries, including supply chain, ecommerce, private equity, telecom and telemedicine, software and life sciences.
ON Partners propels an organization’s mission by building C-level and board leadership teams. Founded in 2006 by like-minded consultants as a values-driven alternative to the multi-service global firms they were leaving behind, ON delivers a better executive search experience. Named by Forbes as one of America’s Best Executive Recruiting Firms and to the Inc. 500/5000 Lists seven times, the firm is consistently ranked among the top 20 retained executive search firms in the U.S.
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