The numbers have been run, the tyres kicked. Legal experts have weighed in on regulation and intellectual property issues. Your due diligence has been thorough, and your business case is airtight.
But one nagging concern remains: can the management team actually deliver the performance shift required?
In private equity, and investing in general, people-related changes are a typical, and integral, part of the equation. In fact, according to a recent study by Alix Partners, 73% of portfolio company CEOs are likely to be replaced following a leveraged buyout, and for 58% this happens within two years.
Management transition is more common than not – and management reliability and performance central to delivering on most investment theses, particularly in a market where capital is plentiful, valuations are high and exits challenging.
Yet even the most sophisticated and well-resourced investment houses often view human capital issues as ones only to be addressed post-investment, if at all. They fail to lean on systematic people-assessment and people-management practices that can prevent problems before they occur – and pave the way towards commercial upside.
As human capital experts who have worked extensively with investment houses, ranging from large-scale global players to niche and start-up firms, we solve some of the most sensitive and complex people-related problems in the industry – both within the firms themselves, and their portfolio companies. But regardless of firm size or strategy, we recommend that all of our clients put in place the following core practices – ones that are feasible, repeatable, and that bring results:
- Have a clear, and clearly articulated, position on what “good leadership” looks like for your portfolio. Do your CFOs need to have developed strong Treasury teams before? Is the CEO expected to be a smooth public speaker and front-man for the company at exit-event time? To what degree does the senior marketing team need to be engaged with your investment professionals? The clearer your expectations, the more likely you are to find and retain a team that delivers
- Begin management planning – not just management assessment – at the due diligence phase. Many or most IC processes require at least a cursory assessment of management – but few ask the plan for the resulting action step: If the CEO isn’t capable enough, who would be – and how do we find the leader we need? Having an action plan, and not simply an assessment, in place early is key to achieving success
- Commit IC, and then PRC, time to uncomfortable, in-the-weeds questions about leadership quality and motivation. Doing so sends a powerful signal that “getting the people part right” is important, challenging, and everyone’s job – not a pesky side-matter to be kicked to the portfolio-operations team post close
- Have as consistent and regular a performance review process for your portfolio company managers as you do for your investment staff. Communicate expectations, evaluations, and requests for different or improved behaviours early and regularly – when they occur and be corrected, and before they become a valuation-limiting problem
- Make people-decision stories and case studies a regular part of investment team discussions. Investment judgement is based on pattern recognition – on having seen and been engaged with a similar investment situation before. The more your up-and-coming investment staff “see” people problems, the more savvy they will become in handling, and avoiding, them.
- Train investment staff how to have critical conversations. That young MBA graduate who just joined your team, while analytically brilliant, probably doesn’t have experience managing a seasoned operating team through a difficult turnaround situation. But the more skilled he is at pushing back gracefully, providing feedback that motivates, or discussing ambitious goals, the more likely your investment is to yield a good return