The Modularity Assumption.
The default model of leadership assessment in private equity treats the executive as an independent variable. A CEO is rated as strong or weak. A CFO is assessed as capable or insufficient. The investment committee typically receives a condensed talent summary, often a categorical scorecard or heatmap, as a standard component of deal papers. The format compresses nuanced assessment data into a decision-ready signal: green, amber, or red. The implicit logic is mechanical. If the component is rated green, it will perform. If it is rated red, it should be replaced.
This model assumes that executive performance is a stable, portable attribute of the individual rather than the result of a complex system. It assumes that a leader who performed well in one context will perform comparably in the next. It assumes that replacing an underperformer with a proven operator produces a predictable improvement. Each of these assumptions is empirically questionable.
Bertrand and Schoar (2003) established that individual managers do carry measurable fixed effects on firm policies. CEOs have identifiable styles that influence capital allocation, acquisition behaviour, and financial strategy. This finding is real and important. It is also routinely overapplied. The existence of managerial fixed effects does not mean that those effects are context-independent. It means that managers have consistent tendencies. Whether those tendencies produce strong performance depends entirely on the match between the tendency and the operating environment.
Recent research estimated that CEO effects account for approximately 15-20% of the variance in firm profitability. The number is significant but frequently misread. Twenty percent is not one hundred percent. The remaining variance is driven by industry dynamics, firm-level resources, team composition, and organisational context.
The Portability Problem.
If leadership capability were a fixed property of the individual, it would travel. When a high-performing executive moves to a new organisation, their performance should persist. The evidence shows it does not.
Groysberg, Lee, and Nanda (2008) illustrated that analysts who changed firms experienced an immediate and significant decline in performance that persisted for at least five years. The decline was most acute among those who moved alone to firms with lesser capabilities. Notably, analysts who moved with their teams or to firms with stronger capabilities showed no significant decline, suggesting the portable unit was not the individual but the working system around them.
Bidwell (2011) extended the finding to a broader population. External hires received higher compensation than internal candidates promoted into equivalent roles, yet received lower initial performance evaluations and exhibited higher rates of voluntary exit. The premium paid for external talent did not purchase equivalent performance. It purchased the appearance of capability detached from the context in which that capability had been demonstrated.
The application to private equity is direct. When a fund identifies a “proven operator” and deploys them into a portfolio company, it is making a portability bet. The evidence suggests that this bet is structurally riskier than the confidence with which it is typically made.
The Interaction Effect.
The modularity assumption fails not because individual capability is irrelevant, but because it is necessary and insufficient. What determines post-acquisition performance is not the CEO’s talent in isolation. It is the interaction between the CEO’s capabilities and the demands of the specific value creation plan, executed by the specific team, within the specific organisational context.
Kaplan, Klebanov, and Sorensen (2012) found that execution-oriented capabilities predicted company performance significantly more than interpersonal or communication skills. The implication is not that interpersonal skills are irrelevant. It is that the dominant informal assessment process systematically overweights the dimension with less predictive power while underweighting the dimension with more.
But even this correction is incomplete if it remains at the individual level. A CEO with strong execution capability still requires a team that can convert strategic direction into operational reality. Three commercially gifted executives and no operational leader is not a balanced team. It is a structural vulnerability.
Hackman (2002) formalised this in research on team effectiveness. His central finding was that performance is primarily a function of enabling conditions: the structure of the team, the organisational context, and the quality of the direction it receives. A strong individual in a poorly structured team underperforms. A less exceptional individual in a well-structured team often exceeds expectations. The system moderates the individual, not the reverse.
The Replacement Cascade.
The portability illusion does not only distort pre-close assessment. It shapes the most common post-close intervention: the executive replacement.
When a portfolio company underperforms, the default response is to change the leader. Heidrick and Struggles (2025) report that cumulative CEO replacement rates in PE-backed companies exceed 70% over a typical hold period. AlixPartners found that 55% of that turnover is unplanned. Each unplanned transition consumes six to twelve months in hold period extension alone, with research suggesting the incoming leader’s team does not reach full effectiveness for eleven to fourteen months. In a five-to-six-year hold, that is 10 to 20% of the ownership window consumed by a problem that better pre-close measurement might have prevented.
The replacement itself introduces a second-order effect. When a fund replaces a CEO or inserts an external operator, it changes the system. The incoming leader disrupts existing networks of relationships, informal authority structures, and institutional knowledge. Krug (2003) found that post-acquisition executive turnover persists at elevated levels for up to nine years. The pattern reflects a cascade: the departure of one senior leader destabilises the conditions that kept others in place.
The Composition Deficit.
The structural gap in current practice is not that individual leaders go unassessed. It is that the unit of analysis stops at the individual. No standard process in PE diligence produces a team-level composition diagnostic: a model that maps how capabilities are distributed across the leadership team relative to the specific demands of the value creation plan.
The consequence is predictable. Individual assessments produce confident ratings for each executive. The investment committee sees a row of green indicators. What the ratings do not reveal is that three of the four highly rated leaders share the same strength profile and the same blind spot. Commercial capability is triple-covered. Operational capability is absent. The integration workstream has no natural owner.
Kozlowski and Ilgen (2006) synthesised decades of team effectiveness research and established that team-level phenomena are emergent properties that cannot be inferred from individual-level data. A team is not the sum of its members. It is a system with properties that exist only at the collective level. Assessing the parts and inferring the whole is a methodological error with predictable consequences.
Conclusion.
The failure of leadership assessment in private equity is not a failure of talent identification. It is a failure of the unit. Assessing leaders as individuals, rating them against generic competencies, and treating replacement as a modular operation are practices designed for a world in which performance is an individual attribute. The evidence indicates it is not.
Leadership capacity is a system property. It emerges from the interaction between an individual’s capabilities, the team around them, and the operating environment they face. When any element of that system changes, as it does in every acquisition, the output changes with it. The question for investors is not whether their leadership assessment identified the right individuals. It is whether their assessment measures the system in which those individuals will perform.