While the world looks optimistically on the next few months, and some in the private equity world are too. In fact, Bain and Company found that “global buyout deal value is 60 percent higher than the average of the first two months for the past five years” based on 2021 data through February.
However, in a survey to evaluate the strategies and struggles of PE firms across the country, Comhar Partners found that firms with broad industry focus are feeling uncertain about what the future looks like. In the post-COVID era, they’re remaining cautious about taking any major steps.
As we look at where the industry is headed and what obstacles are in front of us, it’s important to address the challenges of all firms. Here are a few key findings to consider about the firms with a broad industry focus and how they feel about the future.
Firms with a Broad Industry Focus are Less Optimistic
Firms with a broad industry focus feel less confident about their potential for growth in the coming year compared to niche firms and more specialized PE companies. According to the Comhar Partners survey, only 46 percent of firms with a broad industry focus feel optimistic about growth this year compared to 61 percent of specialized firms.
The main concern with these broad-range firms is whether or not the COVID-19 pandemic is actually ending. More importantly, whether or not the worst economic fallout is over. While 62 percent of niche firms believe the worst is over, only 31 percent of broad-range PE firms believe this period of economic uncertainty has reached its end.
These perceptions of America’s economic future impact a variety of business operations within the firm. For example, firms that are more cautious about the future are less likely to change their investment approach and exit strategies. This can impact how well they’re able to recover as the industry returns to a new sense of normal.
Private Equity Firms Struggle with Talent Acquisition
Macroeconomic changes aren’t the only issues facing broad-focus PE firms. Internally, these companies are worried about talent acquisition and retention. To face uncertain times and prepare for the future, you need the best people.
While only 50 percent of private equity firms are concerned about the talent shortage within their organizations, this number jumps to 83 percent for firms with a broad industry focus. When asked where their primary concerns are in regard to the talent shortage, PE firms with a broad focus were more concerned about financial leadership, 58 percent vs 47 percent, and sales, 50 percent vs 44 percent, than other firms in their industry.
Not only do these firms know they need to hire qualified candidates, but they need to be sure critical employees, like those in sales and financial leadership, stay with the company. At the same time, culture remains a high priority for broad focus PE firms. Three-quarters (77 percent) of these firms hire based on culture match, compared to the industry average of 69 percent.
Most PE Firms Face Similar Leadership Problems
The team at Comhar evaluated portfolio CFOs across all industry levels to understand the current pain points firms have with these leaders. Regardless of whether a PE firm offered a broad industry focus or not, most companies reported the same challenges:
- Providing incomplete, inaccurate, or unreliable data
- Inability to prioritize, organize, and execute
- Opting for a reactive, rather than proactive, approach to problem-solving
While these were the top three issues across the board, PE firms with a broad industry focus reported higher levels of frustration than their peers. These firms highlighted how they’re likely more affected by these weaknesses.
For example, 83 percent of broad-range PE firms are concerned about data compared to 74 percent of total responses. Similarly, 83 percent of broad-focus firms want proactive leaders compared to 59 percent of total firms who identify this CFO weakness.
General Talent Acquisition is a Larger Issue Than Leadership
While a good leader can be invaluable to a company, PE firms with a broad industry focus are more concerned about general talent acquisition and retention. According to the survey, 77 percent of broad-range PE firms said that is one of the biggest issues keeping them up at night compared to 57 percent of the total respondents.
Furthermore, broad-focus firms are only slightly more likely to replace leadership within their firms. They have only a 62 percent replacement rate for leadership compared with 54 percent for the industry as a whole.
While leadership concerns at broad-range firms are similar to those at other companies, broad-range firms are more likely to feel the effects of poor leadership. In a time when leadership is more important than ever, this makes recovering that much harder for firms with a broad industry focus.
The Future of Broad Industry Firms is Uncertain
For PE firms with a broad industry focus, the challenges of the future will significantly impact the next few months, and even the rest of 2021 and beyond. These firms will limit how they change their portfolios, create protections for themselves and their clients and hire more carefully than other firms. While these precautions may slow them down and limit their ability to make short term gains, they could help them succeed in the long run. In times of uncertainty, firms need the best people on their team, and the right leadership development and acquisition plan can set a firm up for success well after a crisis has passed.
Bernard Layton has over 27 years of mid-level and senior-level executive search experience within the Industrial, Engineering, Construction, Business Services, Consumer Products, Professional Services and Financial Services industries. Prior to founding Comhar Partners, he built and lead the Chicago office of Stanton Chase since 2008. Previously, Bernard operated his own search practice (Peoplenext, Nicholas Partners) for over 15 years, assisting both U.S. and multi-national clients with their senior management needs.
Paul Herrerias has over 30 years of executive search and leadership consulting service in the Bay Area. He has conducted hundreds of search assignments in the professional and financial services, consumer products, technology, and wine industries. Prior to becoming Managing Director of Comhar Partners’ San Francisco office, he ran the Stanton Chase San Francisco office for 13 years and co-founded three additional executive search and organization development consulting firms.