The Hidden Cost of Getting the CEO Decision Wrong

Private equity firms are operating in a market where financial engineering alone can no longer carry the investment thesis. Longer hold periods, higher financing costs, uncertain exits, and changing value creation plans are placing greater weight on the executives responsible for delivering returns. Evan Berta, an associate at Hunt Scanlon Ventures, examines new research from Russell Reynolds Associates and why selecting, and continually reassessing, the right CEO is becoming one of the most consequential decisions a sponsor makes.

Russell Reynolds Associates’ latest report, The CEO Decision: How PE Investors Select and Reassess Leaders from Entry to Exit, puts numbers behind one of private equity’s most important human capital questions: how much does the CEO decision matter to investment performance?

The answer is significant. Russell Reynolds Associates notes that top-quintile portfolio company CEOs generate annual shareholder returns approximately nine percentage points above industry peers, while GPs attribute more than half of investment returns to portfolio company leadership. Its own analysis covers more than 200 European PE exits completed between 2020 and 2025, including 196 companies where CEO succession could be reliably tracked.

What emerges is not an argument against leadership change. In fact, CEO turnover appears to be a normal part of PE ownership. The bigger risk is recognizing a leadership mismatch too late, or repeatedly resetting the organization after execution has already drifted.

CEO Change Is the Norm

CEO Change Is the Norm

Nearly seven in 10 deals studied experienced at least one CEO change during the hold period. Among those companies, one in four changed CEOs more than once, averaging 2.4 transitions per deal. Russell Reynolds found the pressure particularly relevant in the upper middle market, where rapid growth and transformation can quickly outpace an incumbent leader’s capabilities.

Sponsors also overwhelmingly look outside when they decide a change is necessary. Only 30 percent of companies changing CEOs promoted an internal candidate. Yet prior PE experience was far from essential: among external hires, 77 percent had direct sector experience, 65 percent had previously served as a CEO, but only 50 percent had investor-backed experience.

“The data reinforces that PE pedigree alone does not make someone the right portfolio company CEO,” said Evan Berta, an associate at Hunt Scanlon Ventures. “The more important question is whether that leader has the sector knowledge, operating experience, and adaptability required to execute the specific value creation plan.”

That has important implications for executive search. Rather than simply identifying executives who have previously operated under PE ownership, sponsors increasingly need to assess leadership against the specific investment thesis and the different situations a CEO may encounter throughout the hold.

The Real Risk Is Lost Time

One of the report’s most compelling findings concerns the timing of CEO transitions. A single change was associated with almost no difference in average hold period: 5.5 years for companies retaining the acquisition CEO compared with 5.8 years for those making one change.

The picture changes dramatically when leadership resets become repeated. Average hold periods increased to 8.5 years with two CEO changes, 9.2 years with three, and 11 years with four. Russell Reynolds is careful to note that this relationship is associative rather than causal – more difficult investments may themselves produce more leadership changes – but the pattern highlights the potential cost of repeated disruption.

“Leadership change is not necessarily what destroys value; indecision can be far more damaging.”

Timing tells a similar story. Companies appointing a new CEO during the first year exited after 4.4 years on average, compared with 7.7 years when the appointment occurred after year two. Again, the report cautions against treating that relationship as causal, but argues that the greater risk may be delaying action after a mismatch becomes apparent.

“Leadership change is not necessarily what destroys value; indecision can be far more damaging,” said Mr. Berta. “If the investment thesis has moved beyond the CEO’s capabilities, every additional reporting cycle spent avoiding that decision can become lost time in the hold period.”

Underwrite Leadership Before the Deal

Russell Reynolds Associates argues that CEO selection should therefore move much further upstream. Leadership should be underwritten with the same rigor sponsors apply to commercial, operational, technology, AI, and sustainability diligence.

The framework outlined in the report asks investors to determine whether the incumbent CEO fits the thesis, whether capability gaps can realistically be closed, what internal and external succession options exist, and how leadership requirements could evolve throughout ownership. The objective is to make CEO succession an explicit component of underwriting rather than a reactive portfolio intervention.

“Human capital diligence becomes much more valuable when it happens before there is a leadership problem.”

“Human capital diligence becomes much more valuable when it happens before there is a leadership problem,” said Mr. Berta. “Sponsors should understand the CEO, the succession options, and the capabilities required for each phase of the investment before execution starts to drift.”

That does not necessarily mean replacing an incumbent CEO. Some sponsors deliberately back existing leaders while strengthening the surrounding team with experienced CFOs, COOs, board members, coaching, and other support. The important distinction is having an explicit leadership thesis rather than waiting for performance to determine the answer.

One CEO May Not Fit Every Phase

Perhaps the report’s broader implication is that the right CEO at acquisition may not necessarily be the right CEO at exit. Among companies that changed leaders, more than 60 percent appointed the executive who ultimately led the business to exit after the second year of ownership. Only 24 percent made that appointment during year one.

That makes continuous reassessment critical. A leader capable of stabilizing a business may not be best suited to accelerate organic growth, execute a buy-and-build strategy, navigate restructuring, or ultimately sell the equity story to the next buyer.

“The CEO decision should evolve with the investment thesis,” said Mr. Berta. “Sponsors need leaders who can adapt as conditions change, but they also need the discipline to recognize when the business has entered a phase that requires a different leadership profile.”

Leadership Becomes a Continuous Decision

Russell Reynolds recommends formal leadership review points throughout the investment lifecycle, from diligence and the first 100 days through value creation and exit preparation. That includes maintaining internal succession options and an externally benchmarked shortlist rather than beginning the search only after a leadership problem becomes unavoidable.

For private equity firms, that may be increasingly important as investments made during the 2021 and 2022 market peak move through longer and more difficult holds. With returns more dependent on operational execution, leadership is becoming less of a supporting consideration and more of an underwriting variable.

The question for sponsors is therefore no longer simply whether they have a strong CEO. It is whether they have the right CEO for the value creation plan, at the right moment in the investment lifecycle, and whether they are prepared to act when that answer changes.