Specialist Guide to Strengthening Leadership in Private Equity Portfolio Companies

With AI technology at the core and humans at the helm, scaleXT is here to deliver precision hiring intelligence for private equity strengthen the leadership of their portfolio companies.

According to Harvard Business Review (HBR) the average return of Private Equity buyouts in the past three decades has been declining. Harvard professors Josh Lerner, State Street and Bain & Company concluded a significant drop of six percentage points on a 10-year annualised return basis from 1999 to 2019.

What are the reasons behind the drop in performance? The PE firms are paying a lot more for businesses than in the past. The high number of active PE firms competing with each other for deals has reduced the potential to earn good returns. From an operational perspective, margins and growth are also under pressure due to increased competition and low differentiation.

To generate higher rate of returns, a strong leadership with financial discipline and operational excellence is required for transforming the portfolio company into a valuable asset.

In a separate HBR study, leadership has a 10 to 15% impact on financial performance and a 25 to 30% on market valuation. The pace of transformation also accelerates with the right leadership.

Evaluating leadership capital has always been a critical component of due diligence for deal teams pre investment. Increasingly, in addition to the standard interviews and team meetings conducted by deal teams, PEs are conducting more sophisticated, data-driven evaluations of a target’s leadership and culture risks and opportunities. This level of rigour and due diligence now needs to progress further into the value creation cycle in terms of how private equity firms are then strengthening the ‘C’ Suite leadership of their portfolio companies as these are scaled post investment. There is clear room for improvement.

7 reasons why attracting top decile ‘C’ Suite candidates is important

David McClelland a Harvard University psychologist who published an article called “Testing for competence rather than for intelligence” defined competency as “an underlying characteristic of an individual that is causally related to criterion-referenced effective and/or superior performance in a job or situation.” To elaborate, “underlying characteristics” means that “the competency is a fairly deep and enduring part of a person’s personality… that causes or predicts behaviour and performance” and “criterion-referenced” means “the competency actually predicts who does something well or poorly, as measured on a specific criterion or standard”. A top ‘C’ Suite depending on the functional area they operate in will usually have the 5 to 7 of the following core leadership competencies:

  1. Team Leadership [Competency] – The ‘C’ Suite must lead the organisation through strategic, business and operational decisions. They reward and motivate employees to exceed performance and effectively use allocated resources. They are visionary, goal-oriented and articulate individual with sound judgment who has the ability to juggle conflicting demands and reach difficult decisions.
  2. Long term performance (Strategic Orientation [Competency]) – This is a very important competency particularly for the ‘C’ Suite role. This type of position is a strategic, not tactical role. The ‘C’ Suite ensures that the most comprehensive approach is being followed for creating quality, efficiency and stellar customer service in tactical teams.
  3. Profitability / ROI Ratio (Results Orientation [Competency]) – A bad hire is costly in a PE firm’s portfolio company considering its “sunk investment costs”. In contrast, hiring the right ‘C’ Suite for your company can result in a huge ROI. It often pays for itself many times over. Using a specialist to help you find a qualified candidate will end up saving you time and money in the long run.
  4. Change Leadership [Competency] – A ‘C’ suite hire might be required to make big changes, or rapid changes to the company for stakeholder value creation. This change primarily consists of process, technology and people which are interconnected. A leader experienced and skilled with leading transformational change that is complex and challenging to execute, forms a core part of the C Suite role in a PE backed portfolio company.
  5. Customer Impact [Competency] – The ‘C’ suite hire has a clear understanding of the current and evolving customer needs and issues. A seamless customer experience across touchpoints is essential. In industries where the competitive intensity is high, the ‘C’ Suite creates a customer centric work culture. Numerous management consulting and academic sources have cited numerous scientific studies suggesting that hiring from top 20% helps companies achieve significantly higher customer satisfaction net promoter scores than their competitors.
  6. Collaboration & Influencing [Competency] – Effective collaboration of the portfolio CEO with PE operating partner is necessary. This can make or break the performance of the company. The ‘C’ suite hire has a high level of effectiveness in working with peers or partners not in the line of command.
  7. Developing Organisational Capability [Competency] –The ‘C’ suite hire is adept at developing competencies of the organisation by attracting top talent and developing the team.

At scaleXT we also espouse that on top of a competency-based leadership assessment there needs to be an additional attributes overlay that assesses and better predicts the executives ability to scale in their role with the company that revolve around guiding questions such as:

How agile is the candidate? How able are they to adapt to unforeseen changes? How would they cope with a potential knock-out blow or set-back? Even as they are leading the transformation of their organisation, what is their capacity for self-transformation on the fly – and in real time?

Indeed, self-transformation seems to be a key competency regardless of the leader’s level of experience. In a survey by Egon Zehnder of more than 400 CEOs around the world, The CEO: A Personal Reflection, 79 percent said that the CEO role required them to be able to transform themselves to meet the position’s unique responsibilities.

Instead, scaleXT very much has found that CEO and ‘C’ Suite executives likely to perform well in PE portfolio companies need a high capacity for navigating change – the force multiplier quality we call potential – consistently exhibited four personal qualities:

Curiosity – The drive to embrace new experiences knowledge and feedback, combined with an openness to learning and growth.

Insight – The gathering and interpretation of a wide range of information in new and thought provoking ways.

Engagement – The ability to mix emotion and logic to communicate in a way that is both persuasive and allows others to be heard.

Determination – The fortitude to fight for difficult goals in the face of challenges and to rebound from adversity.

These attributes can also be uncovered in structured interviews that focus on key transition points in an executive’s career. Adding these findings to the traditional evaluation of a candidate’s experience, competencies, and other elements results in a more complete view of the potential for professional growth.

How to make targeting the top ‘C’ Suite candidates work for you?

There are some key things you need to consider when trying to attract the top ‘C’ Suite executives to your current recruitment process:

  • Your target strategy is important – Some of the key questions are: Which of type of ‘C’ Suite are we targeting i.e. For a COO hire which of the 7 types of COO are you targeting? Which sectors do we need to target? Which pool of target companies and candidates should we tap into? What are some lateral or aligned sector and/or company and/or candidate types we may not have considered yet? Your data sources are important -The overwhelming volume of candidate data being produced is growing exponentially every day faster than ever. At the moment only 5% of all data is ever used. The next step is ensuring that are accessing the right data sources are critical to help you separate the signal from the noise.
  • Your data sources are important – The overwhelming volume of candidate data being produced is growing exponentially every day faster than ever. At the moment only 5% of all data is ever used. The next step is ensuring that are accessing the right data sources are critical to help you separate the signal from the noise.
  • Increasing the sample size of potential candidates for your roles – Once the right data sources are locked in you then need to make sure that you build your datasets of potential ‘C’ Suite targets to represent the full universe of potential on-market (active) and off-market (passive) candidates. If you only have 30 to 50% of the total talent pool mapped then how do you even know if you are tapping into the top performers?
  • The right messaging channels is your superior access vehicle – Insights into the full universe of potential candidates is not enough. Then right messaging channels are critical and provide a superior access vehicle much like a trojan horse, so it is probably best not to rely on a single LinkedIn ‘Recruiter’ InMail which is likely to get very low single digit response rates at this level. In 2022 – and beyond – optimal engagement occurs through the right messaging across a mix of Platform/Email/Mobile and of equal importance for response rates the sequencing and timing of these. As a marker if you are doing this right you should be getting a target candidate response rate of 80%+.
  • Assess leadership competencies in a standardised structured way – A competency is the executive’s knowledge, skill and ability to perform the task successfully in a defined environment. It helps in predicting the performance of the candidate in the ‘C’ Suite role. The strategic intent will vary from company to company. This should reflect in the competencies. The ‘C’ Suite role is continually evolving one. The required competencies might change in a short period of time. That is why it’s imperative for a company to assess the ‘C’ Suite through structured interviews and reference checks on competencies and attributes.
How do I get started?

There are three options:

  1. Do it yourself – you will need to consider the following: Who is in your network? Find potential candidates. Understand the supply and demand dynamic and learn where the available candidates are. Follow up leads, referrals and tidy up your Job Description.
  2. Use a traditional executive search firm – save your own time trading this for a pretty big commission or fee. When looking for a search firm make sure you consider the following: Use a search firm with a large network who can leverage their relationships to find you the best candidates first.
  3. Use scaleXT – since our launch 5.5 years ago we have now built the largest dataset map of operating ‘C’ Suite executives in Australia and New Zealand (and expats globally) to serve public, private, and private-equity owned organisations across all sectors by placing world-class operational leaders in leadership roles via innovative and compelling arrangements such as permanent, interim, and operational advisory leadership initiatives. We can deploy a shortlist of seasoned leaders within days, rather than weeks or months. If needed we can also provide interim cover at very short notice.
Next steps …

Now you have a clearer understanding of the ‘C’ Suite landscape across Australia and New Zealand and afar … and have reflected back on the target you want your arrow to hit, including the role they’ll play in shaping your future. You’re now in a position to develop a plan, either by yourself or with an executive search professional or scaleXT.

We’d like your NEXT STEP to be with scaleXT so you would like to set up a deep dive 60 minute strategy session so you can explore how they can help you get what you want, quickly and effectively please let us know.

FAQs

How does scaleXT work? With scaleXT you can now tap into the best of both worlds. AI-powered precision matching intelligence at the core with humans at the helm.

Why should I care? Now you can tap into AI to do a lot of the heavy lifting sourcing work so you can focus on more higher ROI activities like candidate experience, screening and on-boarding. Recruitment is on the cusp of becoming hi-tech industry in a similar way to what we have seen in other areas like sales and marketing automation with the new Salesforce.com AI product Einstein.

How fast is scaleXT? Typically you will get a high-quality Candidate Data MAP™ within 24 Hours and a shortlist Interested CV’s to your INBOX™ or ATS within days, rather than weeks or months.

What type of roles work best? The roles that make the biggest impact are: Chief Executive, Chief Information Officer, Interim CIO, Chief Technology Officer, Interim CTO, Chief Operating Officer, Chief Revenue Officer, Chief Transformation Officer, Chief Digital Officer, Chief Data Officer, Chief Security Officer and then building out the organisation chart reporting to each of these hires – amongst others

What powers your AI? We use a proprietary AI powered algorithm called Enigma – which has processed millions of real world job scenarios – that it is able to replicate the way that the human brain works to improve decision making at a scale previously not possible. This uses Natural Language Processing (NLP) versus traditional Key Word search. First words from data for each unique candidate are mapped relative to each other. Then data for each unique candidate is sorted in space with data from other unique candidates. The platform then uses feedback to distinguish matching candidates and non matches. From here our dedicated team of humans at the helm at scaleXT take it from there to increase the precision matching even further still!

How do you get Interested CV’s to your INBOX™ or ATS within days, rather than weeks or months? Once the matching engine identifies precise matches our AI and predictive analytics tools automate personalised interactions with the right candidate through the right channel at the right time.

What channels does scaleXT use to interact with candidates? scaleXT interacts with candidates through 3 channels (i.e. Platform/Email/Mobile) and will use the channel(s) in which candidates are most likely to be engaged on – as well as using data science to allow right sequence of interactions and right follow-up prompts occur at the right time.

Are humans involved? Yes this is critical. We have a high touch Customer Success Manager overseeing each recruitment process so there is a blend of AI at the core with humans at the helm. AI allows us to automate a huge amount of the heavy lifting part of the sourcing recruitment process so that you can put more human touch into the areas that really matter!

Is there a guarantee for your Candidate Data MAP™ and Interested CV’s to your INBOX™? Yes. If you are not fully satisfied there is a full 100% money back guarantee.

If I join scaleXT, what kind of time commitment am I looking at? We recommend that you only come to scaleXT for urgent critical hires that need to be done at high speed. You will still need to time box appropriate slots of time to move the candidates quickly through the recruitment process.

How do I join the scaleXT Launch programme? Typically joining is by invitation only or through a referral from one of our members. Our next intake for our Launch programme will be in December 2022. Once you have applied to be accepted on the Launch programme and are accepted you will be able to activate job requirements immediately.

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