Having the right executives in place to turn around private equity-backed companies is proving a more urgent challenge than the pressures of a potential recession, according to a new survey of PE firms and portfolio companies.
Nearly half of respondents weren’t confident in their current leadership, and more portfolio company executives ranked talent recruitment and retention among their top concerns they face over the coming year, management consultant AlixPartners found in its annual survey.
Among PE firm respondents, 54% said they have the right leadership in place at their portfolio companies; only 53% of portco executives believe the same, AlixPartners found.
“The industry needs to offer reasons to come and reasons to stay that amount to more than the promise of a big payoff in five years,” AlixPartners says in summarizing the survey. “That means bringing culture, engagement, career pathing, and other issues into the management repertoire of portcos—and ensuring that PE firms understand the importance of these initiatives.”
Amid the economic challenges creating roadblocks for easy PE returns—think slower GDP growth, inflation and high interest rates—firms have to ensure their portfolio companies are tightly run operations in order to create value for a successful exit, AlixPartners says.
While companies are usually distressed or at a crossroads when PE firms acquire them and lay on the debt, they need to reach peak performance to generate the returns LPs expect; these companies require adequate staffing and focused executives.
Changing, or keeping, a management team is an integral part of the reorganizations, shake-ups or expansions that GPs tackle when they add companies to their portfolios. In the survey, 70% of responding firms ranked effective leadership as their top strategy for generating value.
As a whole, the PE industry—firms and companies—struggles to build long-term talent strategies, according to AlixPartners. The consultant suggests that firms focus more on succession planning for key roles and put greater emphasis on learning and development along with diversity, equity, and inclusion.
Beyond leadership, 60% of PE firms and 81% of portfolio company leaders said recruitment and retention would be among their most significant challenges in the next 12 months.
PE firms were almost equally concerned about a recession, with 61% of respondents saying that would be a significant challenge.
For company leadership, the challenge of recruitment and retention ranked far above recession risk, higher interest rates and harder-to-access debt, strategy execution, and market volatility.
Since most industries are exposed to the great hiring mismatch—as blue-collar salaries climb, tech workers face waves of layoffs, and fresh college graduates have more trouble than usual landing jobs in their fields—PE’s hiring concerns are almost inevitable.
Labor shortages in the healthcare industry, particularly in key lower-skilled roles, are hitting PE firms especially hard, PitchBook has reported.
Featured image by iJeab/Shutterstock
