For an industry that so often touts its ability to improve the businesses it owns, private equity general partners can discount the time and skill it takes to hire the right people.
“Sourcing and assessing talent is a craft,” says Jerry McGrath of the recruiting firm DHR International. “And it’s astounding how often very smart investment professionals try to do it in their spare time.”
Using ‘spare time’ to hire becomes harder the bigger a firm gets, so chief executives are beginning to turn to chief talent officers. This is not the same as a head of human resources, and the responsibilities vary with the unique needs of a particular manager. Some may be looking for an in-house recruiter, while others want strategic guidance into talent management, which includes assessing current staff and building a network.
The right candidate may not need private equity experience, but his or her skills and experience should be in sync with the firm’s priorities for the role. And the success of a CTO is dependent on the right mix of resources and empowerment from the firm’s leadership.
If that sounds like a tall order, market participants argue it is worth the time. At their best, CTOs can deliver much more than the right candidate.
“There’s so much capital in the market, you need an angle to win the deal,” says Pete Deegan, a senior vice-president in Comvest’s operating advisory group who serves as their CTO. “So how do you get that angle? You get it from relationships.”
Sourcing and assessing talent is a craft
And as they search for talent, CTOs build networks of relationships that can lead to not just the right person for a portfolio company role, but an executive who can help broker the right deal.
Most GPs know the value of having close relationships with operational talent, and for their first few funds the founding partners may feel they have to own that task. When Genstar Capital considered hiring its first chief of talent, it was reluctant to give the role to a single individual.
“Relationship development and talent management is so important, they still wanted everyone on the deal team to continue to hone and use that muscle,” says Katie Solomon, the firm’s first and current CTO.
But what Solomon brought the team was a focus only on talent.
“I have the luxury of making talent my first priority,” says Solomon. “That allows me to keep an independent perspective, so I have some distance to stay objective and think about talent more holistically on a portfolio-wide basis. As I’m networking with executives, I can be thoughtful about the company/culture which would represent the best fit for their leadership style and skillsets.”
Deegan’s firm hired him because they felt he would bring talent management closer to the deal team, instead of relying on outside recruiters. “They were at a point of critical mass, having raised their fifth fund, with almost $3 billion in total assets now under management,” he says. “They knew human capital matters were going to be critical to the success of the fund.”
For many of the market participants pfm spoke with, the catalyst for hiring a CTO was a milestone fundraise, rather than a specific amount of assets under management. This often left the deal partners without the bandwidth to source talent. But they should ensure the search is a rigorous one.
“Don’t go into this trying to boil the ocean,” says Keith Giarman of DHR International. “Think about the firm’s key needs for that role, and prioritize accordingly.”
Unlike a head of HR, the person will focus on talent sourcing and management, not designing and implementing policies and procedures.
“Years ago, it was really this straightforward recruiting role, where the CTO would do their own recruiting or co-ordinate with outside firms,” says Giarman. “Now it’s shifted to be more strategic, a tendency to address talent issues across the whole portfolio.”
CTOs address three key areas for GPs. The first is sourcing talent at portfolio companies, which usually involves collaborating with recruiters and giving any search process rigor and urgency.
The second is assessing current staff, which can also involve collaborating with outside experts to conduct reviews. Some firms prefer that a CTO devote his or her time to assessing talent at portfolio companies; he or she can troubleshoot problems with an individual or team chemistry.
The third issue is perhaps the most nebulous, but also where CTOs can deliver the most value to the firm. This involves the building and maintaining a network of senior leaders to not just serve at portfolio companies, but to participate during diligence on new investments or offer a unique angle on a given deal, which can lead to proprietary dealflow.
“As I interview candidates or visit portfolio companies, I can take the time to meet with people of interest,” says Deegan. “So even if I don’t have an opportunity for them at the moment, we’re building a relationship where we exchange ideas that might prove worthwhile down the line.”
Having a CTO in-house can also improve the firm’s internal investment and operational talent.
We even solicit feedback from portfolio chief executives as we make new investments
“I’m involved in recruiting VPs and associates and in continuing to expand our network of strategic advisory board members,” says Solomon. “We are attuned to career development and committed to continuing to improve as an organization. We even solicit feedback from portfolio chief executives as we make new investments to understand what we did well through the process and where we could improve.”
A lean staff means internal talent management takes up about 10 percent of Solomon’s time, which is typical for a CTO.
“The biggest impact CTOs can have is with the portfolio,” says Giarman. “Especially if they take a strategic approach to building up the talent function at the individual companies, by working closely with CEOs to develop top tier practices.”
But if it’s what the firm needs, the role can be that of in-house recruiter. “The default [priority] for firms looking for CTOs is talent acquisition, and that may be right, but it’s worth understanding that’s a choice,” says Matt Moore, who holds the role at Alpine Investors.
Skills trump resume
And that choice should be what dictates the right candidate for a particular firm. If he or she will be charged with simply hiring at the portfolio company level, then it’s a matter of bringing the right recruiter in, and most market participants agree that private equity experience isn’t necessary for that.
However, the consensus among the recruiters and CTOs pfm spoke with was to avoid candidates who only corporate HR experience, as these executives tend not be to able adapt to the nimble, fast-paced culture of the asset class. The role will include advising members of senior management at multiple companies on their staffing issues, and he or she needs to command their respect.
“Whether they honed their skills in a corporate environment, at a recruiting firm, or at another private equity firm, the candidate must have the gravitas to build trust with their CEOs when their team needs performance development or if they have gaps on their team that have to be addressed quickly,” says Giarman.
“I had some investment banking experience to complement my recruiting background, which was valuable,” adds Deegan. “I was able to discuss balance-sheet issues and value-creation initiatives, which led to far more substantial conversations with both candidates and portfolio companies.”
Solomon had already created the role at one private equity firm before joining Genstar. “From that, I learned the cadence and rigor required for success in private equity which can be different than that at a public company,” says Solomon.
Some argue private equity experience can be useful, but not at the expense of more important skills. Conversely, someone who worked in HR in private equity firm may need to add some skills.
What all candidates need is the ability learn fast and manage multiple projects. “These executives can’t get lost in dealing with one issue at a single portfolio company, to the detriment of broader, pressing strategic issues in the rest of the portfolio,” says McGrath.
GPs hiring for the role need to know what they want, carry out the search effectively and then provide the ideal candidate with the support they need. n
Don’t just hire a CTO, support them
“In a sense, the CTO is an internal service provider for the portfolio,” says Giarman. “But that CTO, like any service provider, needs to have the resources beneath them to handle the more mundane details so that they can offer the most strategic counsel possible.”
One of the popular misconceptions is that a single CTO can handle all aspects of talent management alone, while the reality is many have one or two members of staff working beneath them or a budget to work with outside consultants. In many cases, they will have both.
“I have two people on my team,” says Moore. “One focused on internal staff matters and the other on our various portfolio projects.” But perhaps the most vital resource a CTO needs is the trust of the firm’s senior leadership; recruiters and people in the role stress the need for GPs to empower them to use their skills.
“The partners grant me real decision-making power and agency,” says Moore. “And our CEOs realize the sponsors have given me power and a voice to help them.”
Without that power or voice, the CTO remains little more than in-house consultant, defeating the purpose of hiring someone to take human capital off the senior partners’ desks.