Rob Huxtable knows what it takes to realize the potential of a private equity investment: relentless leaders.
“When a private equity firm places a $100 million-plus bet on a middle-market deal, the selection of the CEO and CFO is critical,” Huxtable says.
He should know. As managing partner of retained search firm FALCON, he’s found more than 250 C-suite leaders for more than two dozen PE firms.
“We’re constantly trying to identify those very special CEOs and CFOs who possess that rare collection of traits to thrive in what we affectionately call ‘the crucible of private equity,’’" Huxtable explains.
“The standards of private equity board members are unrelenting. These jobs have above-market rewards in terms of equity potential. But that comes with an above-market degree of difficulty.”
In this week’s Dealmaker Q&A, we spoke with Huxtable about his tips for finding leaders who can thrive under pressure, rise to a challenge and help PE firms maximize their investments.
Why are PE firms challenged with finding leadership for their portfolio companies?
The two most important realities of a private equity-backed deal are speed of decision making/urgency and the relentless rigor in which they operate. These two attributes combined create a tremendous pressure-cooker environment.
Many executives are quite good at what they do, but they may not be suited for this type of leadership challenge. It’s under this kind of pressure when we tend to reveal our most dominant traits. If a leader can’t thrive in that environment, it could be a derailment in the making, hurting both the executive and the PE firm.
You also have candidates who haven’t previously been involved in a private equity-backed deal, but see themselves as entrepreneurial. They may think their sense of urgency is extreme, that they’re hands-on and that their speed of decision making is spot on. But those terms are all relative, and often, they’re caught off guard with the extreme degree to which these traits are embedded in a private equity deal.
PE firms know they are looking for a rare breed of CEO. They’re just not always sure how to articulate that skillset and discern it in a candidate.
What’s the first step for PE firms looking for portfolio company leaders? Where do you begin?
It starts with an open and honest discussion with the firm about the investment thesis they have in mind for the portfolio company. We reverse engineer from that what we think the right background is, including functional experience, leadership experience, business model experience and market familiarity. We’ll draft a position specification tailored to that opportunity and work with the client to refine that document, so we’re as aligned as possible. Then we set about the task of fielding a slate of candidates.
What’s your process for finding those candidates?
We’re looking for folks who are both experienced in a private equity-backed deal as well as folks that we believe — despite not having that had that experience — possess the traits that would allow them to thrive in the aforementioned crucible. So our process is an interesting mix of attracting and recruiting, balanced with assessing and evaluating, and then trying to advise clients as we present a candidate. Here is the hiring thesis of this individual. Here’s why it might make sense for this person to lead this business.
In the next breath, we’re pointing out what the mistake thesis might be. This is where we all need to probe and learn more to try to determine whether this person is the right fit or a hiring mistake in waiting.
How do you advise candidates about their prospective roles?
We try to follow a similar process with candidates to help them understand why they might want to join a particular portfolio company for a particular private equity firm, each of which has a very different governance model and manner of engaging with management. That manner of fit matters a lot.
We’re also trying to help them understand why they may not want this particular gig. We try to get at as much intellectual honesty on both sides of the equation as possible. Like any search firm, we’ll stay through the process of facilitating interviews, narrowing the field, and running point on negotiation and offer acceptance.
What have you learned about finding the right candidates for these positions?
We almost always want early-career, blue-chip – what we would call “academy-company” – experience, followed by more recent experience leading in a hands-on, battle-testing environment such as an LBO. The first eight to 15 years of their career ideally have been with a highly respected, larger corporation where they would have been well-trained and had their toolkit of skills and processes developed. They would have been given the opportunity to hone their leadership chops and demonstrate the upward trajectory of their career through promotions and so forth.
That’s a good thing until they’re there so long or have ingested so much of the corporate Kool-Aid that they’ve become ‘domesticated.’ Corporate executives, given enough time, are at risk of cementing too many corporate bureaucratic traits that can really cause damage in a private equity-backed portfolio company, where it’s all about bias for action and execution, not career management.
You can’t know enough about the behavioral traits and DNA of the person in question. We have a proprietary leadership assessment model built for our PE-backed, middle-market assignments. Some of the key traits we seek: high IQ balanced with strong EQ; hands-on, strong bias for action, a contagious breed of leadership and comfort in one's own skin.
