Crossing the great divide

A leading executive-search pro shares her insights into what motivates top executive talent to take the private equity leap. By Fran Minogue

A ripple of close interest circled the news that Tony DeNunzio left the top job at Asda Wal-Mart in the UK to work with Dutch retailer Vendex, a Kohlberg Kravis Roberts portfolio company. Like Mr. DeNunzio, a steady stream of executives with public company credentials have moved from high profile positions to take the helm at companies controlled by private equity firms.

Corporate governance pressures from Sarbanes Oxley in the US and Higgs in the UK, and the unyielding requirement for ever better results from the markets, have made private equity look like an increasingly attractive executive option over the past few years. But even as these executive moves make news, tougher trading conditions are giving executives who were possibly feeling more confident about a move to private equity pause to look before they leap.

With top management talent long acknowledged as an accelerator and multiplier on the returns from a deal, it's a good time for private equity firms to think about what lies beneath the choices of key individuals to move to privately owned companies and away from the thrills and spills of publicly quoted life.

Scratch the surface of many of these moves and you'll find a fertile partnership between private equity and executive search that makes good business sense on both sides. Our own experience points to the fact that when the two professions are working closely as a team, the results speak for themselves. We advocate more openness and access for search people to enable them to get involved earlier in the process, particularly around the early appraisal of the quality of people who might tip the attractiveness of a deal.

When a search is actually underway for a new senior level executive who will lead a key investment, it's very tempting for the private equity client to want to get heavily involved too early in the process.

On one hand, this commitment to finding the right person is to be applauded. The rigour with which private equity approaches an appointment is far greater than that we usually see from corporate clients, particularly around the softer issues such as cultural fit. But the truth is that too much involvement could be quite obstructive in the early stages of a search and slow it down. It's completely understandable as there is inevitably more skin in the game, but watch out for striking that balance and stand back and let the search team do its job.

Acknowledging balance is important on both sides; the brass tacks of an executive's exit package (often mid-contract), can take a lot of negotiation. The search firm should be on hand to help sketch out both the compensation and advise on the exit, but once the executive is fully engaged, it's probably best that the search firm steps aside and allows the executive to bring in their own people on board to help finalise the finer detail of equity and contracts.

In the current market, any notions that executives will switch to private equity and cut their salary in lieu of equity should be banished. Ever since the dotcom boom and bust, parity on salary and benefits and a more attractive all-round package are the very least that people are aiming for in negotiations.

There's no doubt that senior people are more aware of the opportunities presented by private equity and that attitudes towards it have changed. It's not the hard sell it used to be thanks to reporting around the successes of some high profile people who took the risk and who were amply rewarded. But there's a cool wind of reality blowing through certain sectors with a flattening out of business and successful exits not as unequivocally assured

It is important to be realistic about what it is going to take to attract and motivate the right people to move into private equity. Recognising this and acting on it to improve talent strategy and process will deliver a distinct advantage over less down to earth private equity firms who are perhaps clinging onto slightly out of date impressions of how attractive they are to key executives.

But ultimately it's about personality type. Not every successful executive is driven by the need to keep achieving in new situations. There are fewer places and people to stand amongst in a private equity line-up than in a typical public company, and individual performance is therefore much more exposed. Without the appetite for it, no end of relevant experience and financial reward will succeed in attracting someone who is sitting comfortably in their current position.

Private equity firms often believe it to be within their remit to know the best people in a particular industry, to the extreme where it's sometimes frowned upon to use professional search. But knowing people in the way you do if you meet them occasionally at industry functions is very different from having interviewed them in depth. Even where there is a long-standing relationship between people who were at business school together, for example, it's not the job of private equity to benchmark someone against their industry peers. Our advice is to let the experts do what they are best at and recognise that search can offer up context and a comprehensive analysis of who else is in the marketplace.

Market mapping (where search firms literally plot out who is in which role and where, in a particular industry), comes in very handy when what you really need is someone who you can pick up the phone to in complete confidence and ask, ?Who could run X? But being able to ask not only ?who could? but ?who might be persuaded to? is another level of knowledge altogether that only comes from being in touch with senior people on a regular basis with the appropriate level of access and trust.

This level of access is only possible where there are ongoing relationships in place. Beware search people who will work speculatively in the hope of picking up a future deal. The reality of the situation is that a good search team will want (and should merit) working on a retainer. A retainer assures you of a consistent level of attention and ensures there's a serious basis for a proactive approach in future. The major benefit is an ?always on service where your search partner takes the responsibility of building the firm's network, gaining insights into people to the point where they know immediately who could be available in a particular field if the right opportunity were to arise.

Having people on the extended team with a very good feel for the key people in a particular industry can also help build enthusiasm for projects. But added to that hands-on feel for the marketplace, the bigger international firms are also able to look beyond national borders to bring a wider perspective. As the talent pool shrinks at Clevel, the ability to throw the net out internationally and tap into a worldwide network can save a lot of time and reveal some uniquely qualified individuals.

Being prepared to acknowledge and hand over the responsibility for the human factor and the investment of time it demands is important, particularly in countries where there are cultural as well as language challenges to leading a business. Identifying nationals who have spent time away from their native countries and persuading them it's time to go home is a useful facet that a search firm that works across international borders can bring to a private equity firm.

Finding out who's out there and interested in moving beyond the obvious candidates is thus a by-product of a search partnership that is humming along nicely. But don't fall into the trap of thinking that's it's enough to know names; motivation is every bit as important. Not everyone has a price. At the most senior levels, it's often less about the compensation and much more about what drives the individual that needs to be discovered and incorporated into an approach that will succeed.

Trust is key, and the way to use it is to confide in your search team and bring them into your confidence earlier. Focus on what you can gain; rather than setting hares running too early in the game by talking to people, you'll find that there's a lot your search people can probably tell you about a particular business without even having to go and talk to anyone. This kind of hands-off appraisal can help ensure prior knowledge of who is weak and who is strong in the composition of the current board and senior management line-up.

The ability to assess management teams is a useful addition to the search service. But clearly this consulting work needs to be carefully delineated from the search arm of the business with the appropriate Chinese walls in place. Search people could otherwise feel compromised if their firm's recommendation to replace someone meant they won a search assignment as a result. Don't be afraid to probe if there's any ambiguity on that score. The right advice will tell you how good the current management team is before you even go there with the option of full leadership team appraisals once you're in.

And finally, search can also help during the critical assessment phase of a deal:due diligence is another area where a search firm with a depth of capabilities and functional expertise can be useful in identifying candidates. For example, a CFO practice within a search firm can deliver a thorough overview of who is available or about to come onto the market with robust knowledge of a particular sector.

Fran Minogue is Managing Partner, Global Retail Practice for executive search firm Heidrick & Struggles. She specializes in high-level assignments, frequently on a cross-border basis. Prior to moving into search in 1998, Minogue held a number of senior positions in multi-national fmcg and retail companies