As consumer deal activity hits the buffers, many private equity-backed management teams are burnt out. Having already survived Covid and with exits in certain sectors being pushed back even further due to the macro environment, they’re ready for a new challenge – or a break – and investors are in hiring mode. But, with a shortage of leadership candidates boasting a PE track record, it’s time to give untested candidates a chance.
You don’t need me to list the challenges facing consumer sectors in the current market. It has been a rollercoaster few years and 2023 looks set to deliver more of the same. But private equity investors are a philosophical and optimistic bunch. Knuckle down and the markets will pick up again in due course. In the meantime, focus on fortifying existing portfolios, and keep an eye out for good value deals in those markets proving themselves to be resilient over the next 12 months.
One significant priority in the current market is reviewing and optimising management teams, which are likely to be showing signs of strain. As exits are put on hold, leaders who were already depleted from the trials of Covid are starting to feel burnt out. Having taken on roles with a set timescale in mind, many now feel like they are hobbling through extra – or extra, extra - time. Some tactical substitutions will re-energise businesses – and their value-creation plans. This is coupled with the consideration of motivation, are those individuals who have made significant returns in the past, really going to have the grit and drive to ride out the next two to three years until an exit?
More of the same?
Investors know that they need to make changes, but the current market presents some challenges. Instinct tells you to hire in the template of the current team, with strong sector experience alongside situational experience (or a track record in a private equity-backed environment). However, the way things stand, these candidates are not readily available. Investors are also faced with the challenge of incentivising management teams. Put simply, it is often more realistic and more affordable to create a new structure for new management, rather than re-incentivising existing management, some of whom have high expectations.
While there was a big exodus of senior talent post-Covid, the Great Resignation appears to be coming to an end, amid nervousness about the ongoing uncertainty. Many of the best leaders are employed in protected markets and don’t want to risk moving into a more challenging area – unless there is a significant promotion on offer. Consequently, investors must think outside of the usual mould.
Time for a step-up candidate
Candidate value proposition climbed up the agenda post-Covid and as the perceived risk of moving roles has increased, employers must offer something different if they are to lure high performers out of their comfort zone. These candidates aren’t interested in moving laterally; they want to move up, or not at all. That means focusing hiring efforts on step-up candidates – who may be previously untested in a PE management role.
Not only are step-up candidates more prepared to take a risk, but they are also eager to prove themselves. For portfolio companies, that means leaders who will bring new energy, and ideas, put in the hours, and give it 200 per cent. The key is identifying the right individuals who have what it takes in terms of the competencies and behaviours to complement the existing team and thrive during a downturn.
Going beyond face value
Hiring an untested candidate can seem like a risk but data analytics can take much of the uncertainty and unpredictability out of the process. By using Leadership Dynamics, investors can map out the functional, situational and domain competencies that the team needs to deliver its value creation plan, simulate how different individuals will fit into those requirements, and analyse what has worked for similar successful teams in the past. Using PACE is also critical to see whether candidates have the right mix of behaviours, such as agility, resilience, and curiosity, to turn a challenging environment to their advantage.
For example, if a retailer is looking to double down on its digitisation strategy, can you find a candidate who has been a “number two” within the right function and has been on a similar digital journey, albeit in a non-PE environment? Or, given the current economic challenges, is there a candidate who performed strongly in a consumer role during a previous downturn, and therefore has the proven experience, resilience, and agility to battle through hard times?
By mapping candidates against the exact requirements of a value creation plan, you gain an objective view of behavioural fit and likely performance, plus the hard data to make the case internally and have the confidence to step off the beaten path.
It's only natural to fall back on the tried and tested, particularly during uncertain times. But it is often at times like this that it almost pays to try something different. Technology now makes this easier, enabling us to look beyond the usual suspects and remove the guesswork from making untested leadership hires.
