The ‘System Problem’ in Private Equity CEO Turnover, According to Lee McCabe

In a recent LinkedIn post, Lee McCabe delves into the alarming rate at which Chief Executive Officers are replaced in private-equity-backed companies, questioning the underlying systemic issues within the industry.

Lee McCabe highlights a stark reality: “Nearly 70% of CEOs in private-equity–backed companies get replaced during the hold period. Most don’t survive the first 12 months.” This statistic, he argues, points to a deeper problem than individual leadership failures.

The Pervasive Issue of CEO Replacement

McCabe presents data from various studies to underscore the scale of CEO turnover under private equity ownership. He cites research indicating that a significant majority of companies hire a new CEO post-acquisition, with a substantial portion of these changes occurring within the first year.

“A recent-ish study of large U.S. buyouts found that 71% of companies hired a new CEO under PE ownership.”

This high turnover rate, as McCabe points out, prompts critical questions about the private equity model itself. He probes whether the issues lie in the initial diligence, the underwriting process, the expectations set for new leadership, or a more fundamental lack of clarity on what constitutes effective CEO performance within the PE context.

Identifying the ‘System Problem’

McCabe posits that the frequent replacement of CEOs is not merely an isolated leadership issue but a symptom of a larger “system problem” within private equity firms. He argues:

“Because if nearly seven out of ten CEOs fail under PE ownership, that’s not a CEO problem. That’s a system problem.”

According to McCabe, the consequences of this system failure extend beyond financial metrics. The disruption caused by frequent leadership changes can lead to significant detrimental effects on business operations, including:

• Lost momentum in strategic initiatives.
• Cultural whiplash affecting employee morale and productivity.
• Strategic drift that hinders growth and value creation.

These factors are particularly damaging given that private equity firms typically operate with a defined investment horizon, where maximizing value within a specific timeframe is paramount.

Neglected Discipline in Value Creation

The core of McCabe’s critique centers on the apparent neglect of leadership as a critical driver of value creation within the private equity industry. He poses a pointed question to industry practitioners:

“If leadership is the single greatest lever in value creation… why is it still the most neglected discipline in the industry?”

In McCabe’s view, private equity firms must re-evaluate their approach to CEO selection, onboarding, and ongoing support. He suggests that a more robust understanding of leadership dynamics and a systemic focus on nurturing effective CEOs from the outset could mitigate the high turnover rates and unlock greater value creation potential. The onus, he implies, is on the firms to build better systems that support, rather than frequently replace, their leadership talent.