Common recruiting challenges in private equity-backed companies

Private equity investors may be facing delayed exits and approaching new deals with caution, but one thing remains true: Portfolio companies need great talent to continue growing.

In fact, many investors are using prolonged holding periods as an opportunity to improve their businesses beyond what they initially planned.

Think of it like flipping a house. If the market isn’t favorable for selling and you’ve already replaced the heating and cooling systems, why not upgrade the plumbing next? When the market improves, you’ll have an even more valuable property to sell.

The same logic applies to private equity-backed businesses. When an exit gets pushed back, investors have more time to strengthen their portfolios, improve operations and build more valuable businesses.

That often requires new leadership.

At Charles Aris, we help private equity firms identify their portfolio companies’ talent needs and determine which executive hires will create the most value. Early in an investment, that might mean hiring a new CEO or CFO. Further into the hold, the priority could shift toward a COO, strategy leader or another executive who can help execute the next phase of growth.

Regardless of the role, we’ve noticed several recruiting challenges that are particularly common in private equity-backed businesses. Here are six worth considering before launching your next search.

1. Leadership alignment can make or break a search

One of the biggest challenges in portfolio company recruiting is getting everyone involved in the hiring decision to agree on what they’re looking for.

We’ve seen searches change direction multiple times as leadership teams refine their priorities. Sometimes, a search gets placed on hold indefinitely because stakeholders can’t agree on the ideal candidate.

Private equity also moves quickly. A new acquisition, revised investment thesis or unexpected leadership departure can change hiring priorities overnight.

Before beginning a search, the portfolio company and its investors should agree on what success looks like, which qualifications are essential and who has the final say in hiring decisions. Otherwise, even the strongest candidates may not make it across the finish line.

2. The best candidates aren’t waiting for your call

The executives our private equity clients want to hire are typically successful in their current roles. They’re compensated well, have strong professional networks and receive recruiting inquiries regularly. In other words, they don’t need another job.

This creates an interesting challenge for hiring teams. You’re competing against their current employer and any other companies interested in hiring them, which makes both a long interview process and any communication breakdown liabilities for hiring your preferred candidate.

If you have found a candidate who meets your requirements and demonstrates genuine interest, it’s important to move fast. Know who needs to interview them, establish a realistic schedule and be prepared to act when your team is aligned on making an offer.

The strongest candidates have options, and they won’t necessarily wait for yours.

3. Equity can make great executives difficult to recruit

One of the most attractive features of working for a private equity-backed business is the opportunity to earn equity through a successful exit. Unfortunately, that same incentive can make recruiting executives from other portfolio companies especially difficult.

Imagine identifying a CFO who has spent four years helping a sponsor-backed business improve its financial performance. They’ve worked toward a transaction that could generate a substantial pay out, but the company’s exit has been delayed.

Even if your opportunity offers a better title and stronger compensation, convincing that person to walk away from their equity proceeds will be difficult. Why leave now when the reward they’ve been working toward could be just around the corner?

Hiring teams need to understand what candidates may be leaving behind and whether a new compensation package can reasonably offset those sacrifices.

Sometimes, the answer is to structure a more attractive offer. Other times, it’s recognizing that an otherwise perfect candidate simply isn’t available yet.

4. Candidates want a believable exit strategy

Equity can be a powerful recruiting tool, but its value is theoretical unless you can explain the precise steps to get there.

An executive considering joining a portfolio company wants to understand the investment thesis, the expected holding period and how their work will influence the eventual exit. No investor can guarantee an exit date or valuation, and sophisticated candidates understand that. But you can be transparent.

Be prepared to explain the company’s growth strategy, the major milestones ahead and the assumptions behind its projected exit. A realistic discussion will build more confidence than an overly optimistic promise.

5. Requiring private equity experience can limit your options

There’s a reason private equity firms prefer executives with previous portfolio company experience.

These leaders understand the pace and accountability that comes with institutional ownership. They’ve likely worked with demanding boards and managed businesses against a defined investment thesis.

We’ve also encountered talented executives from publicly traded companies, founder-owned businesses and other environments who possess the exact skills a portfolio company needs. Sometimes, these candidates get passed over simply because they haven’t worked for a private equity sponsor.

Consider a manufacturing business that needs a COO to improve plant performance and expand margins. An executive who has successfully led similar initiatives at a publicly traded industrial company may be an excellent candidate, even without direct private equity experience.

The key is separating the skills required to succeed from the background you’d prefer someone to have. A candidate’s ability to execute your value creation plan should carry more weight than whether they’ve previously worked under private equity ownership.

6. Compensation expectations are changing

Finally, private equity firms need to recognize that hiring exceptional executives can cost more than initially anticipated.

Strong candidates aren’t necessarily willing to leave comfortable positions for modest salary increases and the possibility of an eventual equity payout, particularly when a candidate is being asked to leave behind unvested compensation or take on a difficult transformation.

For hiring teams, this means compensation expectations should be established before the search begins, not after finding the ideal candidate.

Market data can help determine what’s competitive, but flexibility is equally important. If the candidates who meet your requirements consistently expect more than you’ve budgeted, you’ll likely need to revisit either the compensation package or the candidate profile.

Paying more doesn’t guarantee a successful hire. However, refusing to adjust to market expectations can eliminate your best options before negotiations even begin.

The right hire is worth getting right

Private equity firms can’t control when market conditions will improve or when their next exit will take place. They can, however, control how they prepare their portfolio companies for those opportunities.

Whether you’re replacing a CEO, professionalizing a finance function or building a leadership team capable of scaling the business, the recruiting process should begin with a clear understanding of what the company needs to accomplish.

From there, leadership alignment, competitive compensation, realistic timelines and a willingness to consider unconventional candidates can make all the difference.