Good morning, Term Sheet readers. Senior editor at large Geoff Colvin here.
It’s funny where you can end up when you follow a new bit of data down a trail. For me recently, it was learning that a vast majority of the new CEOs in the S&P 500 last year—82%—were company insiders, a typical rate in recent years. But it wasn’t always so. Before 2000, the rate was much lower. CEOs were much more mobile. So what happened?
One factor turns out to be the rise of private equity, as I explain in a new article. The U.S. has 22,956 PE-owned portfolio companies, and each one needs a CEO. The PE firm installs a new CEO at the time of the buyout in 70% of the cases. That new CEO is usually from outside the portfolio company and in many cases was a CEO at a publicly traded company, lured away by the riches available when a portfolio company is offloaded successfully three to seven years later. Rather than bid against PE firms for outsider CEOs, companies are increasingly promoting first-time CEOs from within.
But wait—there’s another plot twist. PE is growing fast, and there just aren’t enough CEOs at substantial companies for PE firms to swipe. The number of U.S. publicly traded companies has been falling for years; the recent total was only about 3,700. So PE firms are digging deeper for portfolio company CEOs, often hiring away division presidents and COOs. The trouble is, those executives are often the potential insider CEO candidates that their previous employers may be counting on. In July, KKR hired Barry Lyon, an executive at a subsidiary of Danaher, to be CEO of Industrial Physics, which KKR had recently acquired. Blackstone in June brought in Ross B. Shuster to run its newly acquired Copeland, formerly part of Emerson; Shuster had been running a subsidiary of Chart Industries, a maker of cryogenic equipment.
Bottom line: Private equity has grown into a rival universe, creating a highly competitive market for CEOs. Researchers at the business schools of Harvard University, the University of Chicago, and Georgetown University crunched vast amounts of data to estimate CEO pay at public and PE-owned companies. They found that on average, PE-owned companies pay more.
That finding, they wrote, “suggests that top executives at public companies have an outside option with private equity funded companies that is at least as lucrative as their public company pay.”
What’s next? One thing we know for sure is that markets equilibrate. In proxy season next spring, as editorialists condemn CEOs’ staggering pay packages, it will be worth considering that in the CEO market, just maybe the reported pay of public company CEOs is being pulled upward by the unreported pay of PE-owned portfolio companies.
By Thursday evening…More than 470 venture capital firms—including GGV Capital, Oak HC/FT, and 8VC—had signed a joint statement expressing support for the State of Israel and the Jewish people in the aftermath of the Hamas attacks this weekend and subsequent war in Gaza and Israel. The open letter follows statements issued earlier this week from General Catalyst and Insight Partners that condemned the Hamas attacks, expressed support for Israeli founders, and pledged financial aid.—Jessica Mathews
Geoff Colvin
Joe Abrams curated the deals section of today’s newsletter.
