FRESH TAKES ON BIG IDEAS

As companies stay private for longer, and private firms outnumber public ones three to one, demand for CEOs who can thrive under private equity (PE) ownership will accelerate. According to recent McKinsey analysis, 62 percent of European private company CEOs were first timers in the role, and that share is likely to increase. It’s crucial to ensure these leaders are equipped to excel.

For decades, PE sponsors have focused on choosing the right CEO—and rightly so, as leadership remains a critical driver of portfolio company success. But many sponsors question whether enough leaders are fully prepared for the challenges ahead. The turnover rate of a portfolio company’s CEO has remained around 60 to 70 percent over the past 15 years, with the majority of replacements happening in the first few years of PE ownership. 

Some of these CEO replacements are driven by performance issues or a lack of fit with the investment thesis. But some reflect a lack of development and support. As traditional leadership playbooks risk becoming outdated in the AI era, I wonder if it is time to rethink how PE CEOs are developed and prepared for the role. The issue might be framed as “build” versus “buy.” 

The PE industry has historically tended to “buy” when it comes to senior talent—hiring external talent as the default, rather than developing it within portfolio companies or across the ecosystem. There may be drawbacks to this as an isolated approach. A new PE CEO search can take six to 12 months, or longer. During that window, the incumbent leader is often operating under a cloud of uncertainty. In some cases, the organization can face a leadership vacuum. 

PE firms might instead consider what it takes to “build” CEO talent. What if time and attention spent on searching for a new CEO were redirected toward a structured, high-velocity development program for the existing CEO? This program could include objective milestones and performance metrics. Sponsors could gain clearer insight into a leader’s potential while reducing disruption to the business.
 
Some forward-thinking human-capital leaders are refocusing on talent development. As Courtney della Cava, the former global head of portfolio talent and organization at Blackstone, told me in a conversation about building the next generation of leadership, “Let’s make—not take—our leadership talent, especially in mission-critical roles where market supply is severely constrained. By developing the next generation of leaders internally, we can retain, strengthen, and deploy them across our portfolio—where they both create and capture the greatest value.”

“What if time and attention spent on searching for a new CEO were redirected toward a structured, high-velocity development program for the existing CEO?”

One of the strongest early indicators of CEO potential is how quickly leaders can grasp new information, recalibrate their mental models, and adapt their behavior. As John Kelleher, managing partner and global head of the operating team at CVC, said during a recent McKinsey webcast: “You cannot surround a poor-performing executive team with a strong operating team and expect them to outperform. We are looking for CEOs who have high horsepower—both talent and pace—low ego, and endless curiosity.”

What does this look like in practice? McKinsey’s research across nearly 300 CEOs in PE-backed companies over three-plus years, combined with broader CEO excellence findings, highlights three practices that consistently differentiate those who outperform.

The implications of prioritizing leadership development extend beyond any single CEO decision. Sponsors that build reputations as genuine partners in leadership development—known for making CEOs better, not replacing them faster—will attract a higher caliber of executive talent. They will become the sponsors of choice for operators, management teams, and the next generation of PE-ready CEOs.

Before launching their next search, sponsors can consider asking three questions: Can this CEO learn with the agility and velocity that the investment thesis demands? What evidence could confirm potential? And what would it take, in the time a search would consume, to find the answers to these questions and develop this CEO? 

—​Edited by Arshiya Khullar, senior editor, Gurugram

ABOUT THIS AUTHOR

Marla Capozzi is a partner in McKinsey’s Boston office.