Private Equity – Recognising the impact of human capital and culture on growth and value creation

January 29, 2024

Private equity firms generate value through their portfolio of investments. But, investment choices driven by financial and portfolio optimisation decisions can underestimate the impact of human capital on the success of achieving the firm’s strategy for growth.  This article by new MM&K partner, Chris Leonard contains his thoughts and insights, based on first-hand experience.

Stating the obvious – it’s the people

Stating the obvious – strategic, financial, and operational targets are transformed into value through people, yet the focus and effort of having the right culture, leadership and teams is often relegated down the priority list. Private equity firms are paying increasing attention to the people side, but they typically lack the skills and tooling to make impactful, efficient decisions. The economic and competitive environment has resulted in fewer deals, with tougher competition and higher debt costs. The outcome is that hiring has been curtailed and performance is left to the incumbent teams, who are already battling to deliver the value expectations placed upon them.

Looking at performance through the people lens and adding HR skills to investment and portfolio management decisions will accelerate time to value creation. Matching the right profiles to the specific needs of the organization allows a faster achievement of the goals set for the exit strategy.

I’ve seen first-hand how people can make or break an organization’s success. To create value through people across a firm, there are critical elements that need to be in place.

First, having an environment founded on trust is key. It’s important to establish trust with the CEO, board, and portfolio leadership. And then, critically, for the leadership to establish trust throughout the portfolio.

Having the right partner

Next, it’s important to have a knowledgeable and experienced partner alongside the CEO to review, assess and build appropriate capabilities for the business. In early stage growth, lack of scale often results in low or zero investment in a seasoned people professional because capital is channelled to the perceived business “fundamentals”.  Developing the right operating model, a clear approach and metrics to hire against, tools to develop employee capability as the firm grows, an ability to measure performance and promote and reward those who really add value requires skill and deliberate effort to complement the firm’s investment thesis and deliver its strategy.

Culture is paramount. It’s essential for the CEO to set the tone by acting as a role model to define approaches and embed the group’s beliefs and values, particularly around sustainability and ESG. It can be helpful to have a trusted partner with whom to develop the corporate narrative and activate this across the leadership so it speaks with one voice.

We’ve appointed a CEO, reduced the cost base…. Now what?

From a fund perspective, understanding the right time to get involved with the portfolio executive teams with your “sleeves rolled up” and apply investment skills to critical areas of growth is another important element. However, it is hard to do this without a partner who fully understands the human components, including:

  • capability assessment,
  • investment of time and effort into building relationships with executives
  • understanding what works, what does not and how it can be fixed
  • allocating capital, whether time, money, or improving quality in delivering solutions and
  • deploying solutions across the portfolio businesses that require attention.

As businesses evolve, it’s important to ensure that the appropriate frameworks exist for assessing performance, designing incentives and, most importantly, ensuring that behaviours in the leadership team and throughout the firm support the growth objectives, not hamper them.

Engaging with portfolio business CEOs and CFOs to establish a performance framework with clear processes to assess KPIs for financial, operational, and behavioural metrics can help ensure that the right goals are being set and met. Whilst financial and operational metrics are easy to measure, the behavioural areas are less clear and it takes education, training and practice to embed these into the way an organization operates and holds itself accountable.

Creating a clear map and model for talent across the firm and portfolio companies is a foundational tool. It helps to establish a clear process for annual review by the leadership teams and for reporting to the board. If the right “talent infrastructure” exists, it can become as important as a strategic lever as any. Being able to identify the talent with the right behaviours, capabilities and drive to reach the next phase of growth with speed and confidence will hugely enhance the probability of success.

Additionally, it’s important to establish a reward model for both the fund and the portfolio companies that aligns with fund and portfolio strategy and growth objectives.

What can MM&K do?

MM&K offers a range of services to help firms achieve their growth plans. These include pre-deal planning, transaction, post-deal announcement, 100 days and ongoing performance delivery. We can help with leadership assessment, operating model, governance, performance benchmarking, leadership, mentoring, collaboration, communication and change.

After a deal announcement, we can help with the integration plan for a new portfolio company. This includes efficiency assessment, transition management and support, 100-day plans for leadership and outcomes, culture alignment, assessment and alignment of incentives and rewards to overcome inertia, and communication.

And we can help with business as usual (BAU) activities, including coaching, counselling, and mentoring portfolio CEOs. We can function as a conduit/bridge to the group to maximize friction-free working. We can partner to establish best practice talent and reward practices aligned with group objectives, build trust across the leadership, develop the leadership bench, get the right leaders in the right roles and give them full support.

If you’re interested in learning more about how MM&K can help your organization achieve its strategic, financial, and operational targets, please do not hesitate to contact Christopher Leonard or call +44 (0) 207283 7200.

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