Accelerating value creation through talent management | Private Equity's return on people

In the world of private equity (PE), leadership and talent management have traditionally taken a back seat to financial imperatives. Whilst PE firms acknowledge the importance of strong executive leadership, their approach to talent management is often limited to replacing top executives, particularly the roles of CEO and CFO. However, the evolving landscape of the PE industry, characterised by fierce competition and changing market dynamics, necessitates a fresh perspective on leadership and talent management.

PE firms openly recognise that effective leadership and talent play a pivotal role in realising successful value creation in newly acquired portfolio companies. Two key aspects are frequently highlighted:

• People—referring to capable leadership who understand their current and evolving roles and have the required support to excel post-deal, and;
• Digital—an increasingly influential factor in today's business landscape.

How can PE firms accelerate their value creation and achieve a higher return on investment on people? The following article is the first in our new series, ‘Private Equity’s return on people’, where our experts explore results-driven approaches to talent management in PE.

Providing leadership coaching from the outset

Following a PE deal, approximately 75 per cent of CEO’s exit, with 54 per cent of these departures being unplanned. During the transaction and pre-deal phase, the target company’s leadership often receive substantial support from external advisers (such as deal advisory specialists, accountants, or lawyers) as they navigate the preparation and negotiation of the deal.

However, once the deal concludes, the portfolio company’s leaders are thrust into a different world. Founders, especially those new to PE investment processes, find themselves without adequate support and are often grappling with a new Board who may come with distinct decision-making processes and new philosophies, as well as robust growth targets which founders or leadership are now accountable for. These new demands must be met whilst managing significant internal changes and is often an overwhelming transition process for leadership teams who are not accustomed to external stakeholders.

To mitigate untimely leadership exits, it is crucial to equip leaders with ongoing, comprehensive leadership support, guiding them through the deal process as well as their transition to their new PE-driven operations.

Understanding a business’ current state and their priorities for change

During the due diligence process, much of the focus remains on the financial side of the deal. Without determining the financial viability of an investment, a deal wouldn’t take place, but it is wise to consider other elements of due diligence to ensure the buyer is mitigating risk and getting the best value they can.

While an increasing number of PE firms are adding other elements into their due diligence process, including People and Technology, it is often done at a superficial level and mostly focuses on structure, incentive schemes, and compliance. It is critical to get these elements right, but they are not necessarily the factors that will drive growth and determine the company’s overall performance.

Immediately following a deal, the focus is often on achieving rapid growth and accelerating the portfolio company's value in the next three to five years, and less on rebuilding the foundations of a business that is being fundamentally restructured. Businesses that try to scale rapidly but not sustainably will struggle in the medium- to long-term as their structure and roadmaps are not clearly defined, and their people are not adequately informed.

Organisations that are successful in both rapid and sustainable growth will bring their people on the growth journey by talking to leaders, employees, and customers to understand what has been critical to the organisation’s success, what needs to be protected, and what is limiting their growth.

Whilst addressing processes and systems is important, some of the most critical elements to long-term success and value creation are around leadership and culture.

Effective post-merger integration

Research suggests 70-90 per cent of all mergers fail to achieve their strategic targets, and half of all post-merger integration (PMI) efforts perform poorly. These failures can be largely attributed to unaddressed people elements. If companies and PE firms with significant experience in M&A still struggle with PMI, it begs the question of how companies with leaders who have never navigated these complexities, will fare.

The stressors and weaknesses of the businesses undergoing a merger are often magnified in the PMI process. In situations where people are the core value of the acquisition, which is often the case, the most significant issue is the unplanned exits of talent who were counted on to achieve growth.

Developing a robust integration plan that considers the human element is crucial for the success of any deal. However, the human element is frequently overlooked or only considered at a basic level —focusing on ensuring compliance and that employees are merely "signed up" to their new roles.

The process is rarely straightforward and beyond retaining key talent, an investment in people is an investment in the collective skills and expertise of the portfolio company, which in turn, ensures the long-term value and success of the PE investment.

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Our new article series, ‘Private Equity’s return on people’, will explore some of these areas in greater detail and provide actionable insights to help PE firms and their portfolio companies minimise risk and maximise their value creation via talent management. For help in your talent management strategies, contact us to talk with our specialised team.