More than half of CEO turnover at portfolio companies is unplanned, leading to longer hold times and lower returns for private equity firms, according to a new survey.

CEO turnover at a portfolio company is unexpected 53 percent of the time, including 31 percent of time when the unplanned turnover is driven by the PE firm and 19 percent of the time when it is both unexpected and mutually agreed to by the PE firm and the CEO, according to the surveyed PE firm executives. AlixPartners, a New York consulting firm, and Vardis, a New York-based headhunter, surveyed executives from 53 PE firms and 63 portfolio companies in the fourth quarter of 2017 for the survey, titled the “AlixPartners-Vardis Third Annual Private Equity Survey.

Private equity firms need to step up their planning and preparation, says Ted Bililies, an AlixPartners managing director. “This year’s survey shows that private equity needs to take further action to avoid costly C-suite turnover,” he says. “They need to undertake more robust CEO assessment during due diligence, move succession planning to the top of their priority list and set clear expectations upfront with CEOs regarding goals, performance metrics and communications.”

Unforeseen CEO turnover comes at a cost for investors. The surveyed PE firm executives say that the impact of unexpected CEO turnover is a worse internal rate of return 46 percent of the time and a longer hold time in 82 percent of the cases.

The AlixPartners-Vardis survey report also points out that most CEO replacements are poorly timed: 58 percent of portfolio CEO replacements are made within one year following a deal closing or one year prior to an exit deal, despite the fact that 39 percent of the PE firm executives say that replacements during those periods cause the most disruption.

Private equity firms are not doing a very good job at identifying what’s required for most CEO positions, Bililies says. Two of the most important factors are leadership skills and strategic thinking, he says, and 36 percent and 28 percent of survey respondents from PE firms say those two factors, respectively, are the hardest to accurately assess.

At the same time, portfolio company executives recognize the importance of the two factors. Of the portfolio company executives surveyed, 67 percent say that leadership skills allow them to perform at the highest level, while 46 percent place a similar importance on strategic thinking.

“They’re either trusting their gut, or they’re going by [the CEO’s] resume,” Bililies says. “They’re not really paying attention to the individual in the challenges that he or she is going to face tomorrow.”

Looking at how private equity firms assess the quality of portfolio company management, 40 percent of the surveyed PE firm executives say conflict management is the hardest trait of a CEO to assess. Yet only five percent of portfolio company executives say this trait is important for high performance in their position. Among portfolio company respondents, leadership skills--cited by 67 percent--and strategic thinking—46 percent-- were rated as the two most important capabilities for high performance on the job. Leadership skills and strategic thinking were also indicated as the second- and third-hardest competencies to assess, after conflict management skills.

Despite the reported high rates of CEO turnover, only 39 percent of private equity respondents say they’ve sharpened their approach to CEO succession to accommodate longer investment hold periods, while 38 percent indicated they’ve made no changes to their approach. Among portfolio company respondents, 63 percent say longer investment holds by their owners haven’t prompted them to alter their approach to succession planning. Despite the need for better succession planning, 64 percent of both PE firm and portfolio company executives in the survey say they don’t have suitable successors identified for the CEO role in their company, or the chief financial officer or chief operating officer roles.

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