I’m a CEO – don’t get me out of here!

CEO turnover in private equity portfolio companies is high … with a significant cost in terms of time and returns. Combining thorough assessment with individual and team support from the outset makes a difference.

The received wisdom is that 50% of private equity CEOs don’t survive the lifetime of an investment. The 2017 Alix Partners Annual Private Equity Survey[1] corroborates this. The survey found that nearly three quarters (73%) of CEOs leave but when we exclude departures immediately pre and post deal, we are left with nearly half (43%) leaving ‘in flight’ between years two and four.

Whilst these levels of turnover (about 15% per year) are comparable to that of public companies, the issue for private equity owned businesses is the impact on returns due to timing. ‘In-flight’ leadership changes are particularly damaging to returns because they occur just at the point in time when the value is supposed to be created and also come with a significant cost in terms of business disruption, board distraction and loss of time and momentum. A 12-month delay in selling a business caused by a CEO leaving reduces the internal rate of return (IRR) by about four percentage points, which is about the same as having to inject an additional £12m of equity into a £100m deal.  

Why the departures? 

In a sample taken between 2009 and 2018, Spencer Stuart[2] found that 35% of Private Equity CEO exits were unplanned at the time of the transaction, of which only 32% due to unforeseen circumstances. The balance were split between failed recruitment process (29%) and having knowingly chosen a compromise candidate (39%). Surprisingly, 30% of the replacements were also replaced.

According to the Alix Partners survey, detailed psychological assessment as part of the recruitment process is only used by 63% of firms. 

This data would suggest that many situations were doomed from the outset but our practical experience of coaching individuals teaches us that this is not the case, especially if coaching services are engaged in time.

Private equity sponsors and boards have a vested interest in a CEO’s success but rarely have the resources and skills to provide the kind of help that they may require. Non-executive chairs or directors obviously play a crucial supporting role but do not necessarily have the training, objectivity and relationship of trust that an independent coach would … especially if they are required to apply pressure for results or consider removing the CEO if they are not performing.

[1] Alix Partners Annual Private Equity Survey 2017.  https://www.alixpartners.com/insights-impact/insights/private-equity-leadership-survey-2017/

[2] Spencer Stuart 2019.  https://www.spencerstuart.com/research-and-insight/getting-leadership-succession-right

Creating the conditions for CEO success  

The following three practices are not new but when used in conjunction with each other can make a significant difference.

1: Undertake rigorous psychological assessment at the recruitment  stage

There are many excellent specialist practitioners in this area who can design a process that looks at factors intrinsic to the individual (for example cognitive ability, values and motivators, emotional resilience and other derail risks), coupled with the business and stakeholder context, and the required skillset of the situation.  

2: Set the CEO up for success 

Where there remains a risk or doubt, engage an experienced executive coach from the outset, as part of the assessment debrief process, to engage with the individual and board on support needs. Don’t simply resort to coaching as a reactive step when an executive is already struggling. Instead, develop a programme over the first 6-12 months and ring-fence the cost up front, like a deal cost. The typical themes of CEO coaching would be: 

• Landing in role over the first 100 days

• Coping with relentless pressure from deal process to first 100-day planning, subsequent execution, monthly board meetings and managing inevitable bumps

• Building and maintaining board alignment and confidence

• Building a strong team and structure; driving accountability in the right way

• Developing a leadership style and approach as the business scales organically or through acquisition

• Providing a confidential space to reflect on specific personal, relationship or business issues

3: Help the board create a supportive context 

Undertake an externally facilitated team-building and chartering exercise at the outset to help create a constructive and supportive board context. At a minimum, use the session to gain clarity and alignment on strategy and priorities but ideally also share personality profiles; establish ground rules for constructive / supportive behaviours and conflict resolution.  

With this foundation, when (inevitably) the chips are down there is a better chance that the executive will feel supported by the board rather than lonely, isolated and under further pressure. 

Because you’re worth it 

These costs of the above are modest: a £50k-£100k investment in proactive measures (such as psychological assessment, coaching and training) to reduce the risk of CEO failure would impact IRR by less than 0.1% and compares favourably to the 1% - 2% of deal value spent on other aspects of pre-deal advice.  

Speaking as former executives, sitting board members and coaches who have first-hand experience of the pressure from both sides of the boardroom table, we wouldn’t consider taking a CEO role without support from a trusted and experienced business coach.  Given how critical CEO performance is to the success of an investment, and the relatively low cost, the case is compelling.