Private equity companies quickly shed incumbent CEOs

Private equity companies quickly shed incumbent CEOs, with more than 70% moving on by the point of exit – usually due to differences in expectations between investors and CEOs. While this can be beneficial when transforming previously ingrained business practices, it can also create issues of stability and continuity for private equity firms.

A new survey from AlixPartners looks at how private equity (PE) firms and their targets are managing their integrations – focused largely on the relationship between the PE firm and the CEO of the target. The study involved 104 survey respondents from across the PE industry in the United States, Europe, the Middle East, and Africa – the largest cohort of respondents were CEOs of portfolio companies (42%) while PE Directors represented 24% of the group.

The study found that portfolio companies owned by PE firms tend to shed standing CEOs rapidly following acquisitions. Initially, around 15% of CEOs depart following an acquisition, while by year 1, 37% of CEOs have moved on from the company acquired by a PE firm on average. By year two, more than half have moved on, while, by the time PE firms exit, 73% of initially hired CEOs have been replaced. This partially supports another recent report from PwC network member Strategy&, which found that CEOs typically had a five year life-span at most in the top job.

The investors note that the most common reason to replace a CEO, for PE firms, is their lack of fitness for the new strategic direction of the acquisition. This, the study highlights, may be due to a lack of skills to drive through the changes, or a lack of willingness to implement cuts or transformations.

In demand skills

To better understand who makes for a better CEO candidate, in the absence of an experienced PE CEO, offered varying answers – depending on whether they came from PE firms of the portfolio company.

PE firm respondents overwhelmingly (70%) cited CEOs without PE experience as the top contender, followed distantly by PE portfolio company executives (13%) and public company divisional managers (10%). For portfolio company respondents, PE portfolio company executives was the most highly cited category, at 48%, followed by CEOs without PE experience, at 36%.

PE firms are particularly interested in formerly successful candidates, as cited by 73% of respondents, while 55% prioritise candidates that have faced similar strategic challenges in their earlier career. People-leadership skills were cited by 48% of respondents as of key importance.

Areas of difference

The research also asked respondents what the key areas of difference were between portfolio company CEOs and PE firms. The research found that PE firms were relatively keen on contact with portfolio company CEOs, while the CEOs themselves were less keen on the kinds of levels of contact expected of them by the company owners.

33% of private equity firm respondents expect portfolio company CEOs to be on-call 24/7, compared to 14% of portfolio company respondents. Portfolio company respondents, meanwhile, were much more keen (31%) on scheduled monthly meetings, compared to 3% of private equity firm respondents. A similar number were keen on ad hoc meetings within reasonable working hours, at 30% of portfolio and 35% of PE respondents respectively.

The consulting firm notes that CEO churn can have a range of negative effects on the success of their transformation or turnaround programme. Identifying areas of difference early, improving communication and supporting incumbent CEOs may improve outcomes. The report concludes, “Portfolio company CEOs should gain clarity on those expectations quickly—especially if PE investors have not explicitly outlined a preferred approach. To drive down disruptive turnover and bolster portfolio company performance, the topic of alignment should be on every investor’s agenda.”