The heat is on for private equity – deliver performance, or else, according to AlixPartners survey

NEW YORK (March 26, 2024) – As if private equity firms don’t have enough to worry about with higher-for-longer interest rates and expensive debt, historically long holding periods and impatient investors, and an ultra-competitive market for talent, they also must manage underperforming assets and executive weakness and turnover in their portfolios. This confluence of disruptive forces has left PE portfolios with about $3 trillion worth of companies, many well past their “sell-by” dates, creating sizeable EBITDA and cash pressures. AlixPartners’ 9^th Annual Private Equity Leadership Survey revealed that a third of PE executives see an increase in underperforming assets in their portfolio making it imperative that cash flow is optimized, liquidity enhanced, and EBITDA boosted.

The performance problem: growth

The higher cost of debt capital is a big issue for PE firms and portfolio companies (portcos) alike and is one reason they are demanding greater revenue and aggressive margin management. A year ago, nearly half the PE executives we surveyed worried that the number of distressed assets in their portfolios would increase, and that has come to pass. 64% of PE firm leaders say meeting value creation milestones is the top challenge portcos face, followed by top-line growth (56%) and operational effectiveness and margin management (42%).

“The pressure to produce returns has never been greater, and every lever of value creation needs to be pulled. In this new era for the private-equity industry, leadership and talent will make a significant difference—maybe the most important difference—between success and failure in investing,” said Ted Bililies, Partner & Managing Director and Head of the Transformative Leadership practice at AlixPartners.

The leadership problem: turnover

Leadership is the key to sustained value creation, but the PE industry is not taking steps to produce sustained leadership excellence. Leadership issues dominate the list of challenges created by longer hold times, according to the survey. For PE firms, the quality of leadership and succession planning are three times as important as portfolio rationalization, almost four times more important than cybersecurity, and almost twice as important as the hottest topic in management today, making and monetizing investments in artificial intelligence. Failure to pay enough attention to leadership pipelines and succession practices can be a significant destroyer of value.

One might expect PE firms and portcos to pay a lot of attention to succession planning and talent development. But only a minority have successors in mind for key positions.

Asked why not, a majority—55% of portcos, 54% of PE firms—say succession planning is not a priority and/or they have no process in place. Almost all the rest—47% of portcos, 43% of PE firms—say they cannot find internal candidates. That’s a failure of talent management and leadership development. A majority of survey respondents say the risk of executive turnover is increasing. 53% of PE executives and 51% of portco leaders say executive retention risk has increased in the past year. But turnover continues into the holding period; nearly two in five operating partners tell us that they intend to remove at least one CEO in the next 12 months, and some say they will yank several. 

Finger-pointing isn’t helping

23% of portco executives say their investors take little or no ownership for the challenges the companies face. The portco executives’ biggest complaint (named by 31%) is that the PE firm lacks operational expertise and business acumen. More than a quarter of PE leaders, but only 11% of portco executives—a 15-point gap—say that a lack of clear vision and strategy is a major obstacle to transformation efforts. About half the private equity leaders we surveyed said that a lack of urgency and unfocused execution were major causes of poor performance by portco executives—a diagnosis those executives decisively reject. Portco leaders have a different view of why things go wrong. The biggest cause, they say, is that their investors lack operational expertise. Tension between portcos and PE firms is inevitable given high stakes and short timelines.

But there’s hope

Private equity firms and portfolio companies can agree on something: meeting financial performance targets is their top priority this year and the most urgent challenge they face. They also generally agree that the most important thing they can do to achieve the financial results they demand is to pay attention to leadership and talent, with 60% of PE firms and 81% of portcos citing talent recruitment and retention as significant challenges in the next 12 months. But while both PE and portco leaders recognize the value of leadership and talent, they have not done enough to institutionalize leadership development and strengthen talent management.

“Disruption has become the norm for the PE industry. Rapidly evolving economic and competitive dynamics, the proliferation of AI across industries, expensive debt and underperforming assets, and anxious investors are all contributing to uncertainty and risk. One thing is certain: PE firms and their portcos need to be aligned to attract and deploy the best leaders to retain an edge," said Jason McDannold, Partner & Managing Director and Americas Co-Leader of Private Equity.

About the survey

Each year, findings from the AlixPartners PE Leadership Survey deliver valuable insights on themes relevant to the success of private equity (PE) investments. This year’s survey was administered online from October through December 2023. Respondents consisted of 129 PE firm managing directors, operating partners, or founders and 56 portfolio company (portco) directors, the majority of whom are CEOs or CFOs. Seventy-five percent of the PE firm respondents are with companies based in North America, as are 89% of the portco respondents. The largest share of portco respondents (36%) were with companies registering annual revenues of $100 million to $500 million, with another 28% coming from companies with annual revenues of less than $100 million. Forty-nine percent of PE firm respondents reported their firms’ assets under management (AUM) as less than $5 billion; another 29% have assets under management of $5 billion to $20 billion.

Please contact Ed Canaday for more detailed survey results.

About AlixPartners

AlixPartners is a results-driven global consulting firm that specializes in helping businesses successfully address their most complex and critical challenges. Our clients include companies, corporate boards, law firms, investment banks, private equity firms, and others. Founded in 1981, AlixPartners is headquartered in New York and has offices in more than 20 cities around the world. For more information, visit www.alixpartners.com.