Annual private equity survey: replacing a portfolio company CEO comes at a high cost

Market conditions are forcing private equity (PE) firms to hold their investments longer than ever. Seeking new ways to create value, they are eyeing the clear links between a portfolio company’s overall performance and its talent, culture, organizational design, and—in particular—its leadership team.

Our second annual private equity survey, performed jointly with AlixPartners focuses on the relationships between PE owners and portfolio company CEOs. These relationships at the top can either promote stability or cause disruption, with significant consequences for the overall value of the asset as well as for the asset’s executives and employees.

In an ideal world, PE investors and portfolio company CEOs would align on how they work together and lead the business long before a deal closes. In reality, our 2017 survey findings reveal that such an understanding is rarely the case. Instead, CEO turnover rates are alarmingly high, potentially disrupting strategic milestones and the owner’s exit timeline.

What’s more, we discovered that underlying that churn are issues that could have been detected much earlier—during due diligence. The survey findings (1) shed light on why PE–CEO relationships unravel so frequently and (2) underline the importance of moving early and quickly to shore up relationships between PE owners and portfolio company CEOs.


The 104 survey respondents from across the PE industry in the United States, Europe, the Middle East, and Africa were PE investors (38%) andPE-owned-portfolio-company executives (62%). CEOs of portfolio companies made up the survey’s largest respondent group (42%), and PE managing directors made up the largest investor group (24%).


PE respondents reported a strong tendency to replace CEOs within the first two years o fan acquisition,with an astonishing 73% of CEOs likely to be replaced during the investment life cycle. 58% of replacements occur within two years(figure1).



According to investors, the most common reason for replacing a CEO is a lack of fit with the portfolio company’s new strategic direction. This response highlights the critical importance of an accuratepre-deal review of a CEO’s suitability and fit for the future role. For example,doestheincumbentCEOhavethecapabilities, motivation, and knowledge needed to implement the new strategy Can those qualities be developed within a reasonable time frame?

Investors also cited failure to deliver results in line with expectations, highlighting underperformance as a key reason for replacing CEOs. Taken together, these results suggest that thorough pre-deal screening and market referencing would reveal many if not most deficiencies well before a deal closes.


PE respondents consider experience as a CEO in the PE environment a key success factor. From their point of view, PE experience enables their portfolio company leaders to get up to speed quickly.In the absence of an experienced PE CEO, we explored where PE firms turn.

Are high-performing portfolio company executives with first-hand knowledge of the PE environment stronger bets than CEOs from public companies who will need time to adapt?

The survey findings show that PE firms prioritize CEO experience above direct PE experience. Portfolio company executives, by contrast, championed the value of promoting high-potential individuals who have proven they can operate effectively within PE-owned companies (figure 2).



According to PE executives, 73% agreed that they prioritize a CEO candidate’s record of success above all.More than half (55%) also scrutinize whether a candidate has faced strategic challenges similar to those facing the portfolio company in question. People-leadership skills was the third-most-important CEO characteristic required, with 48% of respondents agreeing on that point.


It can be a challenge to piece together a comprehensive portrait of the executives brought in to lead portfolio companies. Some qualities are more difficult than others to analyze and understand. Characteristics such as financial acumen are relatively easy to assess, with 90% of PE respondents feeling confident in their ability to gauge that skill. A similar percentage expressed confidence in their ability to assess sales and marketing skills.

On the other hand, 50% of PE investors said their greatest challenge was to assess an individual’s fit into a portfolio company’s culture, and 35% agreed it’s difficult to evaluate a CEO’s leadership skills. It’s especially important to correct these shortcomings, because investors are eager to derive value from the human capital dimensions of their investments.


Disagreement between investors and portfolio company CEOs can be avoided if both sides know what to look out for. An overwhelming 78% of PE investors named pace of change the most significant source of conflict between PE owners and portfolio company CEOs. The subject of performance targets and metrics was the second-most-contentious issue, with which 50% of respondents struggled.


PE owners and portfolio company CEOs also appear far apart on the question of the frequency of contact and communication. When asked about their expectations regarding the availability of portfolio company CEOs, 3% of PE investors said they were happy relying on scheduled monthly meetings. By contrast, 31% of CEOs prefer planned monthly meetings with investors. When it came to being on call around the clock, 33% of PE investors held that expectation while only 14% of CEOs thought that was acceptable (figure 3).


Such stark differences indicate that it’s critical to establish clarity and alignment around expected meeting cadence in the early days of the holding period. In fact, discussions about communication and meeting cadence expectations can reveal differing perspectives about the desired pace of change— and may therefore ease many of the tensions in PE investor–CEO relationships.




The survey results clearly revealed a disturbingly high rate of portfolio company CEO turnover in the PE industry, as well as key areas of chronic misalignment between CEOs and investors. Replacing a CEO is disruptive and comes at a cost. The cost to investors can be measured in lost time. Additional losses stem from the impact of disruption on the portfolio company’s workforce, such as increased employee uncertainty and turnover which ultimately reduces employee productivity. The timing of CEO replacements is also worrying, because replacing a CEO post-acquisition can disrupt—or at least delay— the implementation of a new strategy.

Gathering confidential information about a CEO and his/her management team can enhance pre-deal diligence. Paying closer attention to the key drivers of CEO replacement can help investors make those decisions earlier. Preparing a detailed pre-deal overview of the market in the form of identifying advisers, suppliers, customers, competitors, former colleagues and potential CEO’s all of whom can provide critical advice will enhance due diligence, reduce risk and provide an overview of potential CEO successors well before a search may be commissioned.

When replacing a CEO, it is imperative that the PE owner should act quickly. To find and select the right CEO, investors can use robust search and assessment techniques to identify an executive whose strengths are closely aligned with investment thesis objectives. The larger issue that PE firms have to address involves the approach and the capability of their investors to size up CEOs and management teams during pre-diligence. This research creates an argument for better selection and development of investors to improve their skills in people judgment and relationship management. Such skills ensure that a CEO’s fit with the strategic direction gets assessed early and misalignment is minimized.

When it comes to strengthening and stabilizing investor–CEO relationships, two critical topics to discuss in the early days of an investment are

investors’ expected pace of change and preferred oversight meeting cadence. Portfolio company CEOs should gain clarity on those expectations quickly— especially if PE investors have not explicitly outlined a preferred approach. To drive down disruptive turnover and bolster portfolio company performance, the topic of alignment should be on every investor’s agenda. 

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