CHROs linked to big wins in private equity exits

Companies that hired chief human resources officers (CHROs) during private equity (PE) investment periods outperformed their peers by a significant margin, according to the 2024 Leadership Capital Report from LCap Group. The report, which analysed over 1,400 private equity-backed companies that exited during FY 2023-24, found that 30% of top-performing firms brought in CHROs during the investment period compared to only 5% of lower-performing companies.

In a year defined by economic instability these HR-focused leadership interventions helped businesses boost growth and achieve higher exit valuations. The data shows that having the right HR leadership in place is essential to staying ahead of the competition.

CHROs at the heart of strategic leadership

At first glance it may seem surprising that CHROs were a common factor in high-performing businesses. After all, HR is traditionally viewed as a support function. But today’s CHROs are far more than that. They are central to fostering innovation, ensuring alignment between human capital and business strategy and navigating the increasingly complex workforce challenges that have come to define modern business landscapes.

The report highlights that CHROs in top-quartile companies played an active role in shaping organisational culture, engagement and leadership development. In fact, 20% of top-quartile businesses had a CHRO in place at the time of exit, compared to just 9% in the lower quartile.

Timing was a critical factor. A notable 28% of companies in the top two quartiles made changes to their HR leadership within the first two years of the investment period. This early intervention helped businesses optimise their talent and engagement strategies, setting the stage for faster growth and improved operational performance. CHROs not only supported employee engagement and productivity but also acted as curators of leadership succession, ensuring stability and strategic continuity in uncertain times.

Speed is of the essence

One of the most striking findings from the LCap Group’s analysis was the sheer volume and speed of leadership changes. According to the data 63% of high-performing companies implemented major leadership changes within the first 12-18 months of investment.

Top-quartile companies made more leadership changes and they did so earlier and faster than their peers. On average top-performing companies made 9.7 leadership changes during the hold period – a 160% increase on the previous year (3.7 changes). 

High-performing businesses were faster across the board, making c-suite changes within an average of 9.6 months compared to 11 months for lower-performing firms. The lesson is clear: companies that act swiftly on leadership decisions, particularly around HR, are more likely to thrive.

CHROs and the rise of tech-savvy leadership

Another trend highlighted in the report is the growing importance of domain expertise in leadership. Top-quartile companies increasingly sought leaders with deep industry knowledge. Companies that hired c-suite executives with tech specialisms were better equipped to respond to the demands of a digital-first economy, integrating data analytics and workforce technology to enhance decision-making and improve operational efficiency.

The partnership between CHROs and other c-suite leaders, particularly chief technology officers (CTOs), was crucial in driving this transformation. Together CHROs and CTOs aligned people strategies with technology-driven innovation, creating agile, adaptable teams that could respond to the rapidly changing business environment. 

Broader lessons from the 2024 Leadership Capital Report

The role of CHROs was only one part of the overall success formula identified by the 2024 Leadership Capital Report. Beyond HR leadership several key elements emerged as critical to driving performance in PE-backed businesses:

1. Leadership change and optimisation

• Volume of leadership change: Top-performing businesses make significantly more leadership changes during the hold period compared to lower-performing ones. On average, top-quartile firms make 9.7 leadership changes while the poorest performers make only 8.1 changes​​. The pace of change is also important, with top companies introducing new c-suite members (CEO, CFO, COO, etc.) early in the hold period (usually within the first 18-24 months).
• Frequent adjustments: Adjustments to leadership throughout the investment cycle help top companies maintain agility and adapt to market changes and operational challenges​.

2. Board composition and leadership team size

• Larger leadership teams: Top-performing firms tend to have larger, more balanced leadership teams, averaging nearly 7 leaders compared to just 4.4 in lower-quartile companies​​.
• Functional expertise and diversity: The best firms focus on building a strong, diverse team with a broad range of functional expertise, including the presence of c-suite roles such as CFOs, COOs, CHROs and specialist roles like CTOs​.

3. Succession planning

• Founder succession: A significant finding is that founder-led businesses in the top quartile actively plan for succession with 38% of these companies having a formal succession plan in place, compared to none in the bottom quartile. Early and strategic succession planning is crucial for ensuring leadership continuity and long-term growth​.
• CEO and leadership transitions: Successful PE-backed companies proactively manage CEO transitions, often bringing in new leadership early in the investment period to guide the company through growth and operational improvements​.

4. Emerging leadership roles

• Merger and acquisition directors (M&A) and executive chairs: The report identified the growing importance of roles like M&A directors and executive chairs in PE-backed firms. CHROs help drive employee engagement and optimise leadership while M&A directors focus on maximising bolt-on acquisitions​​. Executive chairs play an active role in influencing the value creation journey​.
• Technology leadership: The presence of CTOs and other technology leaders is increasingly important, with 30% of top-quartile firms employing a CTO or other tech leader to drive digital transformation and innovation.

5. Active leadership strategy

• Leadership alignment with growth strategy: Top-performing businesses are active in aligning their leadership strategy with value creation objectives. This includes ensuring that leadership teams have the right mix of domain, functional and situational experience. Leaders with deep market expertise and situational awareness are prioritised to drive operational improvements and respond to market challenges. The report identifies pragmatism, agility, curiosity and execution (PACE) as key behavioural drivers of performance​.

6. Value creation levers

• Shifting value creation strategies: Since the pandemic the focus has shifted from leverage and multiple expansion to operational improvements and margin expansion. Margin improvement’s role in value creation has doubled to 22% and is expected to grow further in the coming years​. The best-performing businesses are focusing on operational efficiency, digital transformation and strategic bolt-on acquisitions to drive value​​.

7. Gender diversity

• Diversity as a competitive advantage: Although there is still a gap in gender diversity within PE-backed leadership teams (with fewer than one in five leaders being female), a subset of businesses is bucking the trend. Companies with at least one female c-suite member tend to have a more diverse and effective leadership team​. However, female representation is down overall by 25% on PE boards compared to the average board.

8. Interim leadership

• Interim leaders for turnarounds: Lower-performing companies tend to rely more on interim leaders to stabilise their business, especially in times of distress. These interims are often CFOs or CTOs brought in to manage financial or technological challenges. Top-performing companies, however, use interim leadership more sparingly​​.

CHROs as catalysts for success

The 2024 Leadership Capital Report offers invaluable lessons for HR professionals and people leaders. Companies that invest in CHROs and other strategic leadership roles early in the investment period see far better outcomes than those that don’t. CHROs are no longer just the stewards of HR processes, they are at the centre of shaping business success in PE-backed firms.

As the report shows, the best-performing companies didn’t just make more leadership changes, they made them faster and with a sharper focus on aligning talent and leadership with growth strategies. 

Lessons for HR leaders

• Early HR leadership changes are critical: High-performing companies made changes to their HR leadership within the first two years of investment, ensuring their talent strategies were aligned with business growth early on.
• CHROs are essential to success: Firms that hired a CHRO during the investment period saw markedly better exit outcomes, reinforcing the value of HR in driving business performance.
• Agility matters: Companies that implemented leadership changes faster (within an average of 9.6 months) outperformed those that took longer, underscoring the need for speed in decision-making.
• Collaboration with technology leaders Is key: The most successful companies paired their HR leadership with strong technology expertise, leveraging data to make more informed, strategic decisions.
• Focus on people and growth: CHROs were instrumental in fostering cultures of innovation, engagement and diversity, all of which contributed to higher valuations at exit.