Within the financial services sector, the most desirable job opportunities almost always ?follow the money.? Given the eye-popping totals of dollars raised by private equity firms during 2005 and 2006, it is not surprising that there is an equally extraordinary growth in demand for all types of private equity professionals.
Private equity managers want the best and the brightest running their businesses but this time around, the war for talent has a different guise. Previously our clients instructed us to find CEOs who could lead and manage hyper-growth; position the company cleverly in the minds of the investment community; and scrub up well for an IPO. Now, in contrast, the focus is on finding executives with the turnaround skills to take a stagnant company and drive profitability.
Talent is increasingly a differentiator in the minds of private equity investors. As recruitment professionals working frequently with private equity firms, we have watched how this demand influences the ways that the most desirable executives are now sourced and successfully recruited. Typically, we get involved with the PE firms on three distinct types of search assignments.
Bringing aboard ?change agents?
Investors obsess about teeing up the best management team to step in as fast as possible to drive change. Regardless of the industry, this change agent needs to come into the business and effect immediate and sustained operational improvement. Many times, an incumbent is jettisoned, and the board seeks a fresh perspective and new leadership, getting hands-on in the search for the right CEO. Sometimes we are contacted well before a deal closes and given a heads-up so we can be mulling over who might be the perfect fit. In those cases, it also may include an assessment of the incumbent talent on the management team against what the rest of the market has to offer.
Every private equity firm has its unique perspective on what the perfect portfolio company executive will look like, and that's why every search for C-suite portfolio executives will be somewhat different. In our experience, proven transformational skills are an essential requirement in top level portfolio company executives ?and many of our PE clients gravitate to candidates with backgrounds from ?academy? companies like General Electric and McKinsey. Often our brief is to identify and attract leaders with strong global experience. We expect this demand to become increasingly essential, as many funds are pushing beyond the US and Western Europe into emerging markets such as Asia.
Wooing the operators
There's a second type of demand and a growing one for operational talent, which is for executives who will work in-house on a number of deals and prospects concurrently, rather than inside just one portfolio company. Sometimes these people have depth in a particular function, sector or industry; but in other cases they can best be described as a ?generic bright guy? who has tremendous abilities to figure out all types of business situations. These people are highly sought after and in general field multiple options for assuming this kind of role.
Recruiters will look inside Fortune 500 companies that have reputations as the training grounds for best practice in management. In general, it is difficult to dislodge these people from other private equity firms as they tend to be embedded in the fabric of their own fund's culture. That said, typically only those funds at or above $10 billion in assets can justify the $1 million plus ?carry? price tags involved in bringing these high fliers on board.
Established, world class funds grow and groom their own associates, vice presidents and principals. We do not work on these more junior positions. For managing director/ partner searches, funds are looking to hire proven heavyweights with impressive IRR statistics. If the firm has some time to invest in a person, it might consider bringing in a well-rounded ?athlete? and training this person to move into one of these deal-making areas. But that's not a firstchoice strategy. The catalyst for adding to the investment team is usually when a successful fund might be moving into a new geography, or expanding its mandate, necessitating a different kind of deal-making expertise.
Typically, we need to understand whether or not our client wants a managing director or partner who can help them raise money with limited partners – someone who is ?backable?. Very established private equity firms usually don't care about this skill set: they have household name rainmakers who can raise capital easily in today's market.
New firms and teams that have aspirations for a big jump in capital under management, as well as established funds that are diversifying into new sectors (where they have no track record), will care ?a lot ?about a given investor's reputation with the obvious super-wealthy families, pension and endowment funds.
Identifying targets is the simple part, at least when it comes to dealmakers. After all, most of these investors know each other. They have worked together on bids (syndication is more and more commonplace), share similar backgrounds, attended the top business schools and worked for prestigious management consulting firms and/or investment banks.
The secret sauce to recruiting investment professionals is to create balanced deal teams that have complimentary but different skill sets. LPs back teams and like to see their investors hunting for deals in packs. Successful funds are led by two to five senior players whose expertise includes LP relationship management, origination of deals (salesmanship to boards and their shareholders), financial engineering and operational expertise.
Winning the talent war
What does all this mean? For firms of all sizes, we see a trend away from ?rolodex-only? recruiting strategies. Both the mega funds and middle market players come to us when candidates must be sourced from adjacent spaces in the financial services sector, and when industry-specific, geographical, or other factors complicate a search.
How can a firm outshine the competition to recruit the best? Naturally, the compensation package has to make sense. Executive recruiters can provide useful feedback in terms of access to market intelligence and reliable benchmarks. But as with any marketplace, certain other rules also apply. When considering searches for new deal people, it's always hard to convince someone to make a lateral move. People have their relationships with their partners and other colleagues. In most cases, it probably doesn't make sense for them to walk away from one top establishment to go to another one ?just for bigger dollars or shorter-term compensation alone.
So, one must look for other levers that will help convince a highly qualified candidate to make the move. Sometimes, even when the comparison is between two top-flight firms, one shop might be perceived as being better for a candidate, maybe because its size will enable him or her to look at all levels of deals. Another driver could be the opportunity to specialize in a certain industry sector, which could be a significant enticement. Logically, the larger funds can present the greatest opportunity for specialization so we've seen some clients offer a desirable candidate the ability to run an entire practice.
Some firms have top performers with larger-thanlife talent and egos that match. Friction between highly skilled and credentialed professionals might entice someone to make a lateral move. This is not terribly uncommon. That said, in a hot market like this one, at least two out of three of these levers ?money, size, reputation ?need to be present.
When it comes to top operational talent, the compensation issue continues to apply. Though, in today's environment, a top flight executive might be somewhat easier to pry away from a Fortune 500 firm, because of the ?complications? of the public market landscape.
But what if a private equity fund is on a tight budget and doesn't have much money to spend on talent? It is our job to give firms an honest assessment of what's possible when recruiting for executive positions. If a firm can only think in terms of boosting compensation packages by, say, $50,000 at a time, then it's going to be looking at ?trailers?, not top talent. That's the reality.
Unfortunately for us, there are no ?silver bullets? when it comes to recruiting top people. All the enthusiasm and aspiration in the world won't entice a proven commodity to join an emerging group that has no track record. It's a chicken-and-egg situation. You can't recruit someone good if you haven't raised the money and you can't raise the money if you don't have the record or the people to justify it. We're polite, but we won't take on a search if we can't get it done.
Net-net, today's private equity environment would make Charles Darwin proud. Everyone and anyone can put leverage onto a deal – debt is cheap and available to all. The ?fittest? likely to survive a shakeout are those that are able to transform their portfolio companies into world class organizations. In the end, it will be the firms that acquired the most talented managers who'll emerge on top. Naturally, we here at Christian & Timbers expect our clients to be in that group.