Private equity talent: where are the next generation of chairs coming from?

When I started out advising PE funds on hiring chairs for their consumer portfolio businesses, the formula was relatively straightforward. The fund would look to install a chair with deep experience from the same sector, with prior private equity experience, preferably as a CEO, and would rarely look outside of these parameters. With these bases covered, and strong financial gearing, they would begin the expansion plan and watch the multiples increase. The talent pool, while not overstuffed, was robust and replenishing, fed by a consistent stream of CEOs with experience of previously successful PE deals and feeding the pipeline.

The picture today is more complex. The consumer space is more risky than it has been in decades, a product of high labour costs, low consumer confidence and a constantly shifting market underpinned by a shift to digital.

Strategies, understandably, have shifted to deal with the rapid changes reverberating through our sectors. Disruption and digital transformation are the watchwords of the day, and any firm investing in consumer businesses that ignores the potential of new technologies does so at its peril.

Naturally, this has complicated talent demands. While private equity houses have always understood the importance of hiring the best chairs, the traditional specifications – deep sector knowledge, prior chair experience, and strong experience of private equity – look increasingly insufficient in identifying leaders able to drive growth and create winning businesses in this new era.

Of course, sector knowledge and private equity experience aren’t out of fashion, nor will they be. Their value is evident despite the waves of transformation washing over every consumer sector. However, increasingly clear is the need to add a further set of qualifications and skills to sit alongside these standard specifications.

The rise of new growth levers, such as ecommerce and data, has created new challenges at board level. The need to have an expert on digital transformation on the board is coming up more and more frequently in my conversations with figures across the private equity industry. The key is finding individuals with direct experience of how to effectively transform a business model and culture so that it is best positioned for the future while not losing the culture and organisational DNA that made the business successful in the first place.

This is, of course, easier said than done. Many of the more traditional chairs whose CVs are burnished with physical retail know-how may not have had direct and sustained contact with successful digital transformation initiatives on an operational level, as this probably happened after their time in an executive career sense. Indeed, shifting talent requirements have reduced the number of relevant profiles that fit the new chair specifications. This is especially true if one places a high degree of importance on experience of significant business transformation.

A further challenge is that, as Mark Advani of Livingbridge told me, ‘experience ages’ – what was cutting edge in 2008 is not today. There are simply not that many successful digital businesses operating in the private equity consumer space which have been around long enough to produce a large number of chairs.

To put it simply, the old model of having a deeply experienced chair, likely holding several chair roles and often having strong ties to a few select private equity firms, is becoming insufficient to deal with the challenges posed by digital transformation agendas. The fact is that portfolio companies need non-execs who’ve been close to the coalface recently (or are still there) and who can proactively mentor teams on how to drive through genuine change using technologies and business language that didn’t even exist five years ago, let alone a decade or two.

To tackle this, we are beginning to see appointments of specialist NEDs alongside a more traditional chair on PE boards. By hiring more non-executive directors, firms can choose depth over breadth, bringing culture fit, PE experience, local knowledge, operational prowess, strategic vision and digital savvy to the table all at once. Adding supplementary NEDs is a fairly new trend of the last five years, and it is certainly continuing to pick up.

This approach has the added benefit of opening the door to industry executives not able or ready to commit to being fully plural. In many cases, these are the profiles with the most relevant and valuable digital transformation experience. Of course, this strategy creates pitfalls as well as opportunities, but as long as the balance of power at the board level is clearly delineated and understood by all stakeholders it has the potential to yield significant value. Moreover, these are the executives most likely to have an intuitive connection with the next generation of consumers, and as my colleague Moira has written, having a representative of the customer of the future on the board is crucial if businesses are to thrive.

“It’s all still important but the question is where you want to compromise. I think the days of having one NED as chair who can do it all in digital may be numbered.” – Mark Advani, Head of New Investment at Livingbridge

We may also see more traditional chairs take on roles that put them closer to the digital action such as board positions on startups which offer increased exposure and networking opportunities.

“From the more traditional Chairman set, I think those who stay close to and/or gain access to these constantly evolving digital issues & trends, with the ability to perhaps draw in expertise/insight from a relevant network in this field, are better positioned to add the most value in the ‘more modern’ Chairman role.” – Joy McCormack, Director, Board Development at 3i

Not only are sectors changing at pace but private equity in general has migrated its deal focus in recent years. As emphasis moves from the high street and restaurants/QSR to sectors like pureplay ecomm, travel, wellness, fitness and consumer challenger brands, the number of potential candidates who meet the sector and private equity experience specifications naturally falls.

The board level talent that is available is often in high demand and frequently tied to a specific firm. Candidates with the right culture fit and experience often have too many existing commitments to take on other roles. Here, as with digital transformation, there is significant advantage to be gained by looking outside the classic talent pool.

New investment strategies and rapidly changing market conditions mean that firms that keep an open mind about their board-level talent have an opportunity to win. An innovative approach to board level talent can and should be on the agenda of every business planning to succeed in an era of digital transformation and rapid change.

@TheMBSGroup | The MBS Group