How Private Equity Firms Hire CEOs

They do it a lot and have learned what to look for.

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CORPORATE BOARDS often say that succession planning is their top priority, but at publicly traded companies, directors rarely get to turn that planning into action: The average CEO tenure at S&P 500 firms is nearly 10 years. That’s in sharp contrast to the private equity world. PE firms hold investments in dozens of companies, and after making an investment, they nearly always replace the CEO. As a result, although a typical public company director might help hire a CEO a few times in a career, veteran PE executives hire multiple CEOs each year and many dozens over the course of a career, giving them a far greater ability to observe trends and learn from successes and mistakes.

To tap this expertise, Jeffrey Cohn, of the executive search firm DHR International, and J.P. Flaum, of the consulting firm Green Peak Partners, surveyed and interviewed the managing partners of 32 private equity firms (including Blackstone, Carlyle, KKR, and Silver Lake) about their CEO search process and how it has changed over time. Among the surprises: Executives said they’ve learned to pay less attention to attributes such as track record and experience, the criteria typically most prized by recruiters, and to give more weight to softer skills. “There’s a big difference in philosophy, economics, and process” between PE firms and public company boards, Cohn says. “The private equity firms have a lot more skin in the game – so they feel the burn if they make a bad selection.”

The researchers drew five conclusions: