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Five portfolio management tips from venture capital veterans

Venture capital is often referred to as an apprenticeship business because so much important learning comes from day-to-day experiences. Yet, as an article published by the Business Development Bank of Canada (BDC) explains, you can shortcut the learning process by learning from experts: “Your learning curve can be shorter—and your results better—if you learn from pros who’ve already mastered key … ... read more

Private Equity

3 Strategies to Identify Successful PE Portfolio Company CEOs

By Rebecca Hinds

Much of a private equity firm’s focus is aimed at identifying CEOs who can spur impact and strong performance. Leadership changes are a common reality for PE portfolio companies. In fact, according to A.T. Kearney, 50% of private equity transactions undergo leadership changes.

Identifying the ideal CEO candidates can be challenging. Here are three strategies that PE firms should embrace when scoping out potential CEOs.

  1. Don’t over-emphasize prior experience

Many PE firms fall into the trap of being laser-focused on prior experience when vetting potential CEOs. While prior experience is important, there are several other factors that tend to be much more predictive of the likelihood of success. Research has shown that CEO success is only about 10% attributable to prior experience and motivation. Success is much more dependent on leadership characteristics (50%) and job and technical skills (40%).

When vetting potential CEOs, PE firms should look well beyond previous CEO experience and expand the pool of candidates. General managers and others can be lucrative potential candidates. Research has shown that operational leadership experience, as well as P&L responsibility, are key predictors of success, much more so than CEO, finance, and portfolio company experience.


Source: Pitchbook/ Russell Reynolds Associates

2. Prioritize humble candidates

Research has shown that successful private entity portfolio company CEOs tend to have higher levels of humility than their counterparts. This typically allows them to more readily gain the trust and acceptance of others. Humility does not entail the absence of competitiveness. Oftentimes, the most successful portfolio CEOs are very competitive but they don’t toot their own horn. Instead, they are quietly self-assured.

When vetting CEO candidates, it’s important for PE firms to evaluate candidates on not only their prior experience and IQ, but also their emotional intelligence and critical EQ factors like humility.

3. Emphasize team-building skills

Research by Jeffrey Cohn of DHR International, an executive search firm, and J.P. Flaum of Green Peak Partners, a consulting firm, has found that a CEO candidate’s ability to assemble a high-performing team is the most powerful predictor of his or her success (of the 13 attributes Cohn and Flaum used). Team-building skills are essential in any workplace environment but they are especially critical for PE portfolio companies. This is because PE portfolio companies are often in the throes of turnarounds and new CEOs are tasked with rebuilding teams from the ground up.

It can be difficult to evaluate team-building skills. Fortunately, Cohn and Flaum’s research sheds light on several effective tactics. PE professions can steer clear of prospective CEOs who use “I”, especially when discussing experiences and accomplishments. One PE professional explained a tactic to assess for team-building skills: “We ask questions like ‘How many people followed you from your last job to the next one?’ One CEO we interviewed had pulled 31 [former co-workers] into his portfolio company, and it has been a big part of his success.”

A PE firm dedicates much of its resources to hiring CEOs. A CEO who is able to drive impact and performance can make or break a company’s prospects. When embarking on the search process, it’s important to keep a keen watch for humility and team-building skills and avoid over-reliance on experience. Leveraging Affinity to help you conduct the search process and identify paths of introduction to individuals who have previously worked or interacted with prospective CEOs will allow you to conduct a more effective search.
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Private Equity