How private equity firms are disrupting the Fortune 500 CEO pipeline

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.

VENTURE DEALS

- Agomab Therapeutics, a Ghent, Belgium-based drug developer, raised $100 million in Series C funding. Fidelity Management & Research Company led the round and was joined by EQT Life Sciences, Canaan, Dawn Biopharma, and others.

- Capital Rx, a New York City-based pharmacy benefit manager, which manages prescription drug benefit programs for health plans, raised $50 million in funding from Atlantic Health System, Banner Health, Hawai’i Pacific Health, Inova Health System, and others. 

- Mojo Vision, a Saratoga, Calif.-based developer of micro-LED display technology, raised $43.5 million in Series A funding. New Enterprise Associates, Khosla Ventures, and Vanedge Capital led the round and were joined by Shanda Grab Ventures, Dolby Family Ventures, Advantech Capital, Liberty Global Ventures, Drew Perkins, and others.

- Perch Energy, a Boston, Mass.-based platform that connects solar power providers with homeowners, renters, and businesses, raised $30 million in Series B funding from Nuveen.

- Scope3, a remote emissions monitor and provider of emissions reduction solutions for advertising companies, raised $20 million in Series B funding. GV led the round and was joined by Room40 Ventures and Venrock.

- Pickle, a New York City-based clothing rental platform, raised $8 million in seed funding. FirstMark Capital and Craft Ventures led the round and was joined by Burst Capital.

- Parsec, a remote analytics dashboard provider for crypto and other blockchain-based markets, raised $4 million in funding. Galaxy led the round and was joined by Robot Ventures, Uniswap, CMT Digital, and others.

- Aclid, a New York City-based platform that automates security and compliance for biotechnology companies, raised $3.3 million in seed funding from 2048 Ventures and IA Ventures. 

PRIVATE EQUITY

- Aquiline Capital Partners acquired California Medical Legal Specialists, a Fresno, Calif.-based services medical evaluations provider, and California Medical Evaluators, a Los Angeles, Calif.-based network of physicians that perform med-legal services, like worker’s compensation evaluations. Financial terms were not disclosed. 

- Discovery Education, backed by Clearlake Capital Group, acquired DreamBox Learning, a Bellevue, Wash.-based education technology provider. Financial terms were not disclosed. 

- Movate, a portfolio company of Capital Square Partners, acquired TSD Global, a Carmel, Ind.-based sales, customer service, and back-office services provider, like inventory management, for businesses. Financial terms were not disclosed. 

- Reynolda Equity Partners acquired a majority stake in Conquest Research, a Winter Park, Fla.-based clinical trial services provider. Financial terms were not disclosed. 

OTHER

- Stagwell acquired Left Field Labs, a Culver City, Calif.-based company that partners with companies to create technology products, platforms, and services. Financial terms were not disclosed. 

PEOPLE

- Elsewhere Partners, an Austin, Texas-based investment firm, promoted Cody Younkin to senior associate. Formerly, he was with D.A. Davidson.

- One Rock Capital Partners, a New York City-based private equity firm, hired Thierry Morin as an operating partner. Formerly, he was with Valeo.

Correction, Oct. 13, 2023: The online version of this newsletter has been corrected to reflect that Agomab is based in Ghent, Belgium.