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How Private-Equity Investors Hire CEOs

What is Private Equity?

Private equity or PE refers to capital investment in non-publicly traded firms. Private equity is a form of investment money that originates from high-net-worth individuals (HNWI) and corporations that buy holdings in private companies or take control of public companies with ambitions to take them private and delist them from stock markets. As a result, when it comes to appointing a CEO for such businesses, private-equityinvestors often pick an outsider for a variety of reasons, some of which are outlined in this Chicago Booth Review article.

Why private-equity investors hire external CEO candidates

According to the article, when publicly traded companies in the United States want a new face at the top, they look within the organization. The article suggests that 80% of new CEOs at S&P 500 companies from 1993 to 2012 were internal hires, according to research by Peter Cziraki of the University of Toronto and Dirk Jenter of the London School of Economics. As a result, the article contends that this reveals a lack of a market for CEOs and raises the question of why CEOs are paid so much.

According to Harvard’s Paul A. Gompers, Chicago Booth’s Steve Kaplan, and Georgetown’s Vladimir Mukharlyamov, the numbers for private-equity-backed enterprises are radically different. They discovered that between 2010 and 2016, three-quarters of new CEOs at large private equity-owned corporations in the United States came from outside. According to the research, there are two plausible explanations for the substantial variations in CEO choices between publicly traded and private equity-backed firms.

Firstly, public corporations are often larger and have a wider reservoir of internal talent. As a result, the article implies, they may be able to appoint good CEOs from within, with nothing to gain by seeking external candidates. Another type of theory that the article holds is that public boards do not pick the greatest CEOs, probably because the directors are risk averse and have relatively weak incentives because they often do not own much of the company’s shares. Private-equity investors, on the other hand, possess huge shares in target firms and often dominate the boards. As a result, they have stronger incentives than most public-company boards to maximize shareholder value, and they may be more ready to recruit superior, outsider CEOs.


There is a huge distinction between publicly listed corporations appointing insiders as CEOs and private-equity-backed companies hiring outsiders as CEOs. The preceding text explains why private-equity investors employ outsiders as CEOs.

You can gain deeper insights into the current business best practices at a global level and improve your own career prospects with Chicago Booth Accelerated Development Program (Chicago Booth ADP) offered by the University of Chicago Booth School of Business.


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