Private equity firms excel at finance and technology but too often lag in talent strategy, particularly in portfolio company management. While many private equity firms already assess leaders through interviews and track record analysis, these methods can miss critical predictors of success. Unsurprisingly, more than half of private equity leaders surveyed in 2024 said the most critical challenge in portfolio management was the quality of senior leadership and succession planning.1 They aren’t wrong.
Approximately six out of 10 CEO replacements in portcos occur within the first year following the acquisition.1 This troubling statistic highlights significant gaps in the amount of consideration private equity firms give to talent and leadership before making investments. Clearly, understanding exactly how to identify leadership potential is a pervasive challenge in private equity portfolio management.
As the top firms already know, personality data help identify leadership potential and predict executive team performance. Firms that gather personality data during due diligence know how a potential portfolio company’s leaders are likely to handle stress, communicate, manage conflict, make decisions, establish vision, drive results, and more. Strategic analysis of executive team personality can convey meaningful advantages to forward-thinking private equity firms facing increasingly volatile industry challenges. Plus, these nuanced insights also help create a basis for future executive selection and development.
Challenges in Private Equity Portfolio Management
Among the many challenges in portfolio talent strategy is getting the right executives in place—and keeping them there. More than 70 percent of portfolio companies hire new CEOs under private equity ownership.2 But these CEOs don’t seem to last, even when selected by the private equity firm. Private equity executives aren’t always satisfied with their own choices, either. They attribute poor portfolio company performance to leadership weakness, such as lack of focus, urgency, and adaptability.1
Although private equity firms may think they know how to identify leadership potential in executives, their portfolio management track records say they don’t. That high replacement rate within the first year suggests the need for a better method to identify strategic leadership competencies during due diligence.
Nuanced personality data detailing strengths, challenges, and values can predict whether an executive will effectively lead a high-performing team in a demanding environment—or falter under pressure.
How to Identify Leadership Potential with Personality Assessment
In portfolio companies, CEO turnover isn’t planned more than half the time.3 Assessing leaders during due diligence can not only prevent executive turnover but also predict how leaders are likely to behave in various circumstances. Private equity firms should assess personality to gain insights into any potential portfolio company leader’s behavioural strengths, values, and performance under pressure. Personality also indicates a leader’s likely role in executive team dynamics and how a leader is likely to collaborate with fund managers and other stakeholders. The knowledge can support evaluation of a potential portco’s existing leadership and the direction of an executive search, if needed.
Behavioural Strengths
First, personality predicts leader performance better than traditional metrics used in PE. Current efforts to evaluate leaders during due diligence typically rely on IQ, industry experience, public company experience, and interview performance. Unfortunately, none of these elements reliably predicts leadership success in a portfolio company (or anywhere). Executives evaluated on only these criteria may lack the leadership skills that are particularly essential following an acquisition.
For instance, personality data can indicate whether someone tends to take a careful attitude toward change or fearlessly pursue it. Both tendencies can be helpful in different circumstances. As another example, personality assessment can describe how a leader is likely to approach developing relationships with fund managers and aligning on performance expectations.
Performance Under Pressure
A mere 17 percent of portfolio company leaders have previous experience working directly in PE-owned companies.4 While previous exposure to a private equity environment doesn’t guarantee success, the unique demands can be a challenge for the uninitiated. Personality assessment describes how leaders are likely to perform under pressure, including their degree of emotional resilience, their approach to communication, and their problem-solving acumen.
Personality assessment can provide a preview of how someone handles conflict—whether they tend to resist, withdraw, or give in. One leader might respond to conflict by withdrawing from the team, whereas another might become emotionally explosive. Personality assessment also describes how someone is likely to receive feedback. One executive might bristle when taking direction or criticism, while another might not even recognise a need to change. Talent insights like these can help firms stay ahead of unplanned C-suite turnover.
Executive Team Performance
Finally, personality data also indicate whether a leadership team has the necessary strategic leadership competencies and values. To put this into context, consider one crucial value for portco executive teams to have: achieving financial results. Personality data can pinpoint the degree to which this motivation is present on a potential portco’s leadership team. In fact, Hogan’s data show that established portco leaders tend to score 14 percentile points higher than their enterprise counterparts in valuing commerce and realising profits. An executive team missing this key value might fail to deliver the desired results. Without personality assessment, a gap like this one could go unnoticed until it’s too late.
Similarly, excessive uniformity within an executive team could inhibit agility or innovation. Portfolio company executive teams with a complementary blend of behavioural strengths are most likely to accelerate productivity after the investment. In the best-case scenario, a leadership team’s competencies will include agility, change management, sustainable transformation, and a human-centered culture.5
Assessment during due diligence can help firms identify executive search needs, as well as individual and team development opportunities. Then, after the investment, personality results can accelerate executive team onboarding. This is especially useful for platforms with roll-up strategies. Suppose an executive is accustomed to making decisions based on intuition, while their new executive teammates make decisions based on data. These leaders will all need to rely on strategic self-awareness and socioemotional skills to learn how to collaborate productively at speed. If they lack certain skills, personality can offer a foundation for coaching initiatives to support them in expediting value creation.
The Cost of Inadequate Due Diligence
The cost of poor leadership assessment during due diligence is substantial, with most portfolio company CEOs being replaced during the investment cycle. These replacements typically come too late to prevent strategic delays and can cost up to 200% of the leader’s salary.6 This high executive turnover may stem from flawed due diligence, onboarding, and executive development practices.
Learning how to identify leadership potential among portco executives can be the difference between faster value creation versus expensive leadership transitions. With billions in investments at stake each year, private equity firms cannot afford to continue making errors. Private equity must implement personality assessment during due diligence—before further avoidable executive turnover undermines investment returns and wastes precious time in competitive markets.
*This article originally appeared on Hogan Assessments.
