Turmoil and disruption in the business environment make leadership and talent strategy more important than ever for private equity firms and the companies they invest in. They will need new capabilities—and a stronger, more strategic approaches to leadership.

For eight consecutive years, AlixPartners has monitored the most-significant trends and developments affecting leadership in the private equity (PE) industry, through our annual survey of executives in PE firms and portfolio companies (portcos). This year our research is supplemented with insights from IPEM, a Paris-based association of European PE firms. To learn more, see the section “About Our Eighth Annual PE Leadership Survey” at the end of this report.

The 2023 PE Leadership Survey documents the importance of leadership as PE firms and portcos confront a difficult economic environment and a disrupted business climate; it also reveals how the challenges and opportunities businesses face put new and different demands on leaders in the industry. Leadership is essential as PE firms and portcos address a set of macroeconomic difficulties—a slowdown or recession, inflation, steeply rising interest rates, and geopolitical risks—alongside ongoing supply chain disruptions, accelerating technological change, a continuing war for talent, and a growing need to address environmental, social, and governance issues.

To meet those tests, both PE firms and portcos must look to their leadership for strategic ideas, smart initiatives, and strong execution. Leaders and leadership teams will need to be more capable. However, as the report shows, many players in the industry say that their leadership is not good enough or its ranks are too thin. Indeed, only a bare majority of respondents say their portfolio companies have the right leaders in place to deal with the multiple issues their enterprises face.

Global economic conditions in 2023 seem custom-designed to cause fits for PE. Slowing economic growth plus the danger—in some economies, the reality—of recession have flattened demand. The International Monetary Fund projects 2023 growth will be just 1.2% in advanced economies, less than half of what it was in 2022. Meanwhile, inflation, though slowing from its 2022 levels, remains stubbornly and dangerously high, especially outside the energy sector. That in turn has provoked central banks to raise interest rates, in turn raising the price of debt and reducing its availability. It is likely that the March collapse of Silicon Valley Bank will cause already jittery banks to be even more reluctant to lend except to the very highest-quality borrowers. Some public pension funds, which had been ardent investors in PE, are reducing their commitment to the industry. 

About half of PE industry leaders expect, therefore, that deals will be fewer and take longer, and that exits will be harder and holding periods longer.

What this means: With deals delayed or more expensive, exits put on hold, and low economic growth, PE firms and the companies they own will be less able to create value through financial engineering. They cannot expect to be helped by the overall economy; instead, they are likely to be riding into economic headwinds or buffeted by the unexpected crosswinds of disruption. To deliver on their promises to investors and stakeholders, firms and companies in the PE industry will have to rely on their own energy, ingenuity, and execution. The PE industry will have to prioritize leadership and think hard about how leaders lead so that they create maximum value for their enterprises and enjoy the support of the rank and file.

The economy will take a bite out of portco profitability as well as out of PE firm dealmaking. With debt more expensive and revenue growth slowed or nonexistent, portco executives will have to work harder for every dollar of EBITDA. For some, conditions will be rough indeed: Nearly half the PE leaders surveyed—47%—say they expect more portcos to become distressed, and another 17% have their fingers crossed, unsure of how their portcos will fare.

What this means: For some time, the PE industry has faced diminishing returns from financial engineering, as a growing amount of capital chases an unchanging number of potential deals, thus competing away the advantage that capital can create by itself. The tough economics of 2023 make it even clearer: The road to value runs through operating partners and portco executives.

Leadership is the key: the ability to set goals and a vision, establish priorities, and motivate and organize people. The next two sections of this report describe some of those challenges in more detail. As we will see, there are significant differences in emphasis between PE firms and their portco managers about what leadership capabilities are necessary to achieve these goals—but both of them clearly see that strong leadership and efficient execution define the path to success.

A down market puts pressure on operations, as companies try to keep costs commensurate with revenues. Nearly four out of ten companies told AlixPartners last fall that they had already prepared action plans for a downturn, with expense reduction at the top of the list of actions they had taken.

Efficiency is not enough, however, as the PE Leadership Study data show. Unless cost-cutting is accompanied by rethinking how work gets done, organizations get thinned out and brittle; they lose both resilience and the ability to respond quickly to disruption.

The need to avoid sacrificing resilience on the altar of cost is particularly clear in supply chain operations. Though stories about supply chain disruption have moved off the front pages of newspapers, 52% of executives say supply chain disruption is more of a challenge for their company than it was a year ago. PE firms feel the impact most in their ability (or inability) to pass on costs with higher prices; 51% of PE executives cite that issue, vs. 34% of portco leaders. Portcos are more acutely affected by the impact of supply chain disruption on forecasting: 42% say supply chain disruptions have led to difficulty in forecasting revenues and profits, compared to just 34% of PE leaders. 

What this means: There’s tension between short- and long-term responses to supply chain disruption and other operating issues: on one hand are the just-raise-prices quick fix and the desire to see results within a year; on the other is the intention to make deep changes in structure, supplier networks, and capabilities.. The job of leadership is to resolve these tensions—not by picking one over the other, but by finding and demanding solutions that achieve both. For example, it is possible to build supply chain control towers powered by AI and to do it within months. As hold times lengthen, it will become more important for PE-owned enterprises to do the structural work. Another promising avenue: make progress in two directions by adding not just more suppliers, but also more woman- and minority-owned suppliers that could also support long-term efforts to reduce dependence on overseas suppliers.

There is a clear change in the technology agenda for PE-owned businesses. While table-stakes technology capabilities like cybersecurity, automation, and cloud migration remain critical, companies are shifting a greater percentage of their investment into technologies that provide real-time data and analysis for decision support. Interestingly, PE firms emphasize technology more than portcos do almost across the board—the reverse of what we see with operations and supply chain issues.

PE leaders see three kinds of benefits from their portcos’ use of technology. About three out of five (61%) envision big opportunities from turning data into insights—seeing the business better. Half (52%) want portcos to use technology to push productivity up and costs down—running a tighter ship. Third, there is a strongly emerging emphasis on revenue-enhancing opportunities from technology—driving organic growth. Substantial numbers of PE leaders are urging their portcos to employ technology that helps them acquire more customers (35%), to devise new, higher-revenue business models (34%), and to increase customer intimacy (30%). It’s a shift from digital on the inside (operations and control) to digital on the outside (customer experience and revenue).

Except for data visualization, the portcos seem less convinced—or perhaps less certain—about how to establish priorities. In the AlixPartners Disruption Index survey, 94% of the fastest-growing companies say they have enough resources for their technology investments—but even so, 65% say they felt change was happening so fast they couldn’t keep up. In this environment, PE-owned companies might have an advantage from ownership support. Among CEOs overall, 83% say that their board of directors impedes the process of adopting new technology. But the PE Leadership survey data show the reverse: PE leadership—the owners—are highly supportive of digital investment. Perhaps what’s missing are concrete plans to turn that enthusiasm into profitable projects.

What this means: PE-owned businesses—like all others—are making the shift from digitization (using digital to increase efficiency, cut costs, and automate) to digital transformation (using digital to fundamentally change how work is done, how customers are served, and how value is created). This shift puts new responsibilities and pressures on leaders, who must themselves become more digitally savvy than their predecessors. More than that, they need to be digital in a practical way: that is, to understand where and how digital can be part of the solution to the business problems they face, rather than to pursue tech for tech’s sake. By prioritizing business goals first, leaders can then prioritize technology moves. PE firms, for their part, can play a valuable role in sharing insight, knowledge, and perhaps technology across their portfolios.

PE executives are keenly focused on the team at the top, the portco leaders with whom they interact frequently. Asked about the most important talent issues to focus on, they are twice as likely to cite the quality of the executive team as portco leaders are. (Those portco leaders are the team in question, of course.) For their part, portco leadership is far more concerned with overall talent strategy than PE investors are—71% more concerned.

Underlying this difference are profoundly divergent views of what leaders ought to be doing. Both PE firm and portco executives recognize the critical role of leadership in setting enterprise strategy. But when it comes to turning strategy into reality—from vision to plan, from forecast to results, and from deal thesis to value creation—there’s a difference. 

What this means: Operating partners rightly zero in on the first year of ownership—the critical first few quarters during which they and their portco counterparts need to capture synergies and get a running start on value creation. Hence, too, their emphasis on focus and urgency. It’s very important that portco executives understand and share views about those priorities so that communication between ownership and management can be open and clear; success in those early quarters builds both trust and capabilities for the out years, when the leadership agenda changes.

What this means: Portco leaders want their operating partners to spend more time with them in developing strategic perspectives and building relationships—and they need more understanding and support from investors about the long-term leadership capabilities the company will need to thrive. Portcos place less value on operating partners’ efforts to lead change than the partners themselves do.

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