Despite a drop-off in deal-flow last year, all signs indicate that the tight market for seasoned talent in the private equity sector will continue for the foreseeable future. And with that, experienced leaders will continue to command premium compensation packages. All good news, right?
In a sense, the PE sector could almost be viewed as a victim of its own success. The outsized returns generated over the past couple of decades in high profile deals caused a wave of new capital to rush into the sector. For Eric Walczykowski, Chief Executive Officer of Bespoke Partners – the high-touch leadership ‘talent partner of choice’ for public, private equity and VC-backed software and SaaS companies – he sees talent through a unique lens.
In his view, new capital means new competition. “With talent now the most critical factor for the investment thesis, that means competition for the best leaders with proven track records in private equity is heating up,” he told ExitUp in a recent conversation.
“Cracking the code for talent means being able to hire quickly and to get moving as soon as possible on the value creation plan,” he said. “But it also means getting the right talent – the executives who have the right skill sets and leadership acumen to drive growth and expand EBITDA.” The challenge, he said, is doing both at the same time – hiring fast and hiring right. “And that is what we help our clients to navigate every day.”
Below are excerpts from a recent discussion with Eric that we think you’ll find fascinating. For more information, please read the firm’s latest quarterly Bespoke Partners’ Private Equity Talent Benchmark Report.
Eric, what’s happening in the talent markets right now?
I was sitting down with one of our top private equity clients recently and the very first thing he said to me was that talent is the most important factor in driving growth. And that really resonated with me. The sentiment explains on a deeper level why the market for private equity leadership talent remains so tight despite the sharp drop-off in deal volume in the sector. You can’t have a discussion with private equity dealmakers today without their acknowledgment that talent is not only the big equalizer, but it is oftentimes the competitive edge a business needs to stay ahead of the curve.
What explains the tightness around talent?
One piece of anecdotal evidence that helped Bespoke Partners’ consultants understand the continuing market tightness is that many firms are considering mid-hold period leadership changes in which they may take advantage of newly available experienced talent. This strategy ensures that seasoned executives with successful private equity track records remain in demand.
So, what’s the solution?
To help mitigate the pressure of the tight market for seasoned leaders, some companies are considering ‘Step-Up’ candidates – these are leaders who have excelled at lower-level executive positions and who may be ready to step up to the most senior role in their functions. Our findings indicate that these Step-Ups can indeed be a bargain and produce outsized ROI if vetted properly.
Are there any ways that your firm can help PE clients benchmark their strategies and better optimize their talent?
Great question. Emphatically, yes! Despite these efforts to widen the candidate pool and ease the tight market, our findings indicate that demand remains high for leaders who have deep experience in driving capital-efficient growth. These are leaders who understand how to optimize the use of resources to generate profit and grow revenue at the same time.
Can you explain this a little more?
Sure. This trend is underscored by two areas that we analyze in our latest Talent Benchmark Report, and it is worth repeating here. First, the composition of leadership teams that are securing investment today shows an emphasis on more mature expertise, with more companies led by C-suite level marketing, sales, and operations leaders than in acquisitions of previous years. The second area that we analyzed – an examination of founder transitions, i.e., bringing in more experienced CEOs to replace a founder who has served as CEO up to that point – likewise points to leadership succession that considers capital-efficient growth as a desired skill set.
Eric, your team looked at leadership turnover patterns. What did you find?
Executive turnover trends – tracking which leaders change in portfolio companies – is a good proxy for leadership demand. Turnover is most frequently correlated with deal-flow as private equity firms often make leadership changes as part of the investment thesis. We gathered data on 1,570 instances of PE executive positions turning over in 2021 and 2022 across the U.S.-based software and SaaS portfolios of 31 private equity firms. The data revealed a market that experienced a spike in demand through most of 2022, following the historic surge in PE deal flow in late 2021. Interestingly, data from Q1 this year indicate that demand remains well above the historical norm.
What roles did you see turning over most?
Go-to-Market roles of Sales, Marketing, and Customer Success, and the Operational category in which we place Chief People Officers, CHROs, and COOs.
The high turnover in HR and Operational roles is notable.
You’re right, it is. An increasing number of those turnover instances are in the HR domain. We see this as evidence of the rising importance of HR leaders and the emergence of the Chief People Officer, which is a trend that I know Hunt Scanlon has reported on recently as well. In our view, this underscores the widespread recognition of the role that talent management plays in achieving the investment thesis. We expect that trend to continue as demand grows for Chief People Officers. But the larger question is where is the turnover rate heading and what can that tell us about how long we can expect the talent market to remain tight? We don’t know yet, but we’re working on this every day!
Join Bespoke Partners’ Chief Executive Officer Eric Walczykowski next month as he examines the trends and timing around founder transitions, where CEOs involved in those successions are being sourced from, and how PE dealmakers can work better to ensure successful transitions.
Bespoke Partners is the largest talent acquisition firm focused exclusively on executive recruiting and leadership advisory services for software and SaaS companies in the U.S. Over the past decade, Bespoke has brought exceptional leaders to the software and SaaS sector, especially for companies that are backed by private equity firms. The firm’s consultants have conducted more than 1,000 executive searches in every C-suite role, including CEO, CFO, CRO, CMO, CPO, CTO, CIO, CHRO, Board Members, and Operating Partners, among others.
The firm’s Private Equity Talent Benchmark Reports, offered quarterly, give unique market perspectives on every facet of private equity recruiting and value creation. The firm’s data and informed insights help PE firms rewrite their own talent management playbooks, allowing them to extract greater value from the talent lever.
For more information, please visit bespokepartners.com and read the firm’s latest PE talent benchmark reports:
Caleb A. Edmundson is Editor-in-Chief of ExitUp, the investment blog from Hunt Scanlon Ventures designed for professionals across the human capital M&A sector. Caleb serves as an Associate for Hunt Scanlon Ventures, providing robust industry research to support the firm’s investment group. Connect with Caleb.