Private equity firms’ succession plans for chief executives at portfolio companies differ greatly from public companies’ succession plans, according to a survey recently conducted by advisory firm AlixPartners and executive search firm Vardis.
The survey found that PE firms are typically less prepared than public companies regarding CEO succession planning, but at least one industry source noted that this is in part due to the fact that PE firms hold companies for a much shorter time.
Almost half of private equity respondents, or 48 percent, said they don’t have a formally identified CEO successor for their portfolio companies, according to the survey, which was conducted over the summer. In contrast, only 18 percent of public companies said the same.
When selecting a candidate for the CEO position, PE firms and public companies focus on different criteria. Private equity firms placed most importance on finding a candidate with experience with similar strategic challenges, as replied more than 70 percent of PE respondents. Of the public companies, less than half selected that criterion. Instead, public companies placed the most emphasis on people leadership skills, followed by values alignment with board and owners.
Even when PE firms have identified a successor for a CEO at a portfolio company, they are typically less active than public companies to prepare and develop successors. Almost 40 percent of PE respondents said they conduct no formal preparation of a new CEO, the most popular answer, followed by on-the-job preparation and proxy CEO roles at about 30 percent. Meanwhile, more than 60 percent of public companies said they use formal assessment for CEO successor preparation and about 55 percent chose executive coaching.
Compared with public companies, private equity firms were more likely to fill the CEO position with an external candidate. Nearly three quarters of the PE respondents said they recruited the current portfolio company CEO externally, while only 51 percent of public companies said so.
When asked about the fairness or necessity of comparing publicly traded companies and private equity portfolio companies, Rob Elsey, AlixPartners director of leadership and organisational effectiveness, told Private Equity International: “A leadership transition at the top of an organisation is a critical period for any company, whether public or PE owned,” he said. “Selecting and installing the most appropriate CEO serves to advance a company’s ability to deliver value and avoid potentially costly mistakes, therefore highlighting the importance of looking at this topic across all types of companies.”
John Hoagland, Vardis North American office managing partner, added that the driving difference between the two types of companies is expectations. Public companies have more presumption that a company’s current direction and strategy is the right one and don’t look to change, he noted, while private equity generally comes into a company “at an inflection point,” that requires an executive with a specific skillset or experiences.
AlixPartners and Vardis also found that the most common time for a PE firm to change the CEO is two or more years into the acquisition and that it’s mostly driven by underperformance.
This may be explained by the nature of private equity funds itself, according to Kelly DePonte, a managing director at Probitas Partners.
“The time horizon of private equity funds is, in reality, very short; they are most often not looking to hold a portfolio for four to five years before exiting it,” he told PEI. “CEO succession at a private equity-owned firm is often triggered by the PE firm firing the current CEO in order to generate the performance needed for their exit; very different from a public company.”
Indeed PE firms had a different view of an ideal CEO tenure at a company than public companies. The survey found that 65 percent of private equity firms said three to five years are ideal, whereas 41 percent of public companies said six to 10 years are ideal.
For the survey, conducted in July and August, AlixPartners and Vardis interviewed 103 senior-level executives, of which 38 percent were from public companies, 39 percent from portfolio companies, and 23 percent from private equity and venture capital firms.