John Marshall was interviewed for the November/December issue of ACG’s Middle Market Growth, in which he discussed recruiting executives for private equity-backed companies. Read the interview below:
Q: DO PRIVATE EQUITY-BACKED COMPANIES HAVE AN ADVANTAGE WHEN RECRUITING TOP EXECUTIVES?
JOHN MARSHALL: It depends on the scenario, but there are key aspects that can create a recruiting advantage. Top executives are often attracted to private equity portfolio companies because of the opportunity to have a transformational impact on the business, which can result in significant personal wealth creation. The ultimate goal of going public or selling the company creates straightforward objectives for incoming executives, making it easy to tie incentives to performance. Executives understand that if they accomplish what they set out to and lead the company to a successful outcome, they will realize substantial financial gains in a relatively short period of time. And without the quarterly reporting requirements of public companies, which emphasize near-term earnings, portfolio company leaders can focus on strategic changes to maximize value three to five years down the line.
Q: HOW CAN INVESTORS ADD VALUE TO THE RECRUITING PROCESS FOR PORTFOLIO COMPANIES?
JM: Private equity investors can play a major role in both attracting the best candidates and assuring that the company hires the right leader. A private equity firm’s brand and prior successes offer clear differentiation. Executives often evaluate an opportunity with a portfolio company based on the investor’s reputation. Investors are also well-positioned to sell the vision for the company by articulating their investment thesis. With prior success substantiating the vision, the investor’s perspective can validate the opportunity and make it more appealing to candidates. Investors can also help assure that the right candidate is hired. Private equity investors know what it takes to win in a specific industry and what the leadership team needs to accomplish, so they understand the capabilities and experience required of candidates. Compared with operating executives or independent board members, investors are typically more experienced in evaluating C-level talent because they have worked with various management teams and have participated in a number of search processes for CEOs, CFOs and other functional leaders.
Q: HOW DO YOU GET ALL THE KEY STAKEHOLDERS INVOLVED IN THE SEARCH PROCESS?
JM: We begin each search with an in-depth kickoff process that includes the investors, board members and senior management. This range of perspectives gives us a complete view of the company and helps us determine the type of leader needed. Typically, all stakeholders are aligned before the search begins. If there is disagreement on what the company needs, we will review profiles of executives from different backgrounds with the search committee to reach a consensus on the types of individuals we are targeting before recruiting begins.
Q: AFTER A COMPANY TAKES OUTSIDE INVESTMENT FROM PRIVATE EQUITY, WILL THE PE FIRM TYPICALLY MAKE CHANGES TO MANAGEMENT?
JM: It depends on the situation of the company and the makeup of the team. If a company is in growth mode, you may not want to disrupt the team. Often we look to augment management by adding key strategic hires that bring competencies the current team lacks. But in some instances, a company outgrows the capabilities of its management team. Taking a company from $50 million to $500 million in revenue requires a different skill set than going from zero to $50 million. It is rare that executives are exceptional in both phases, and founders and early-stage CEOs usually recognize this. Once a company reaches a threshold, it needs leadership that can guide it through the next growth cycle. In buyouts and growth equity, bringing in an experienced CFO following an investment is common. In these instances, the company requires a sophisticated financial leader who can work with the board and position the company for a successful exit.