What Do Private Equity Firms Look for in a CEO?

A survey recently conducted by AxialMarket took a high-level look into CEO compensation and how private equity firms tend to approach it. Each of the five questions were decisively answered with a clear majority, showing an overall consensus among the respondents.

When asked what is valued more when deciding on a CEO, experience was the clear winner with more than three quarters of the vote. Career trajectory garnered just over 20 percent and education received no votes.

Respondents then overwhelmingly said that they would rather buy a company with a CEO, rather than bring one in. More than eight out of 10 private equity professionals would prefer a strong company with an established CEO. Less than 20 percent said that they would rather bring in outside help.

When it comes to CEO compensation, earnouts and equity were preferred above salary and other benefits, with nearly 90 percent of the vote. And when it comes to aligning CEO incentives, long-term equity was the clear preference over short-term financial, again with nearly a 90 percent majority.

Finally, AxialMarket asked about the average tenure of a CEO in respondents’ portfolio companies. About 60 percent said that three to five years was the average. One to three years and five to ten years came in even, with just under 20 percent each. Less than five percent of respondents said that average CEO tenure was less than a year, and nobody selected ten years or more.

The moral of the story here is that private equity groups look for a company and management team with whom they can partner. We often see companies who want a private equity group to pay a premium valuation and bring value to the table through a management team or high-level board direction. While this is a reasonable desire, it is not necessarily reasonable to expect value from a private equity group both in the form of consideration and its time and energy.

A valuable management team that is willing to stick around long enough to help the private equity group achieve its goals, is much more likely to achieve its own goals in terms of valuation. It’s a give and give relationship, so both can cash in at the end.

For more information, a summary of the AxialMarket survey can be found here.

2018-02-12T17:33:16+00:00 Private Equity & Venture Capital|