Misalignment of priorities is causing significant friction between private equity firms and the CEOs and other senior managers of their portfolio companies, according to a new survey of leaders at both PE firms and portfolio companies by AlixPartners.
CEO turnover at portfolio companies is unplanned 34 per cent of the time, according to averaged responses from the two groups in the survey, the AlixPartners-Vardis Third Annual Private Equity Survey, conducted in conjunction with private equity search company Vardis. This misalignment is costing PE firms valuable time by lengthening the period of their ownership of companies, as well as lowering their returns, according to survey results.
The poll also found that among private-equity respondents, 39 per cent said replacing a portfolio company CEO in the period one year following deal close and one year preceding deal exit causes the most disruption at the portfolio company, but that same group reported that 58 per cent of CEO replacements are made in that very time frame.
Looking at how private equity firms assess the quality of portfolio company management, 40 per cent of PE respondents said conflict management was the hardest trait of a CEO to assess. However, only 5 per cent of portfolio company CEOs and other senior managers said that this trait was important for high performance in their position. Among the portfolio company respondents, leadership skills (cited by 67 per cent) and strategic thinking (46 per cent) were rated as the two most important capabilities for high performance on the job. After ‘conflict management skills’, leadership skills and strategic thinking were indicated as the hardest competencies to assess.
Despite the reported high rates of unplanned CEO turnover, only 39 per cent of private equity respondents said they’ve sharpened their approach to CEO succession to accommodate longer investment hold periods, while 38 per cent indicated they’ve made no changes to their approach. Among portfolio company respondents, 63 per cent said longer investment holds by their owners haven’t prompted them to alter their approach to succession planning. Despite the obvious need for greater planning in this area, 64 per cent of both private equity and CEO respondents in the survey said they don’t have suitable successors identified for the CEO role in their company, nor for the CFO and COO roles.
Ted Bililies, PhD, global leader of the Organisation & Transformative Leadership practice at AlixPartners, and a managing director at the firm, says: “This year’s survey shows that private equity needs to take further action to avoid costly C-suite turnover at their portfolio companies. They need to undertake more robust CEO assessment during due diligence, move succession planning to the top of their priority list, and set clear expectations upfront with CEOs regarding goals, performance metrics, and communications.”
