A New Lever for Private Equity Value Creation: Talent Optimization

Talent innovation is becoming one of the most powerful private equity value creation levers. Yet the growing talent shortage threatens to widen knowledge gaps, slow critical work and initiatives, and cripple ROI for private equity portfolios. It’s a less-than-ideal outlook for a sector that thrives on speed. Here is an exclusive first look at new market intelligence from Business Talent Group.

May 25, 2022 – The very nature of private equity’s value proposition demands continuous evolution, innovation, and quick, nimble strategy. Historically speaking, however, private equity value creation levers have remained relatively static over time, generally shifting only in response to significant external pressures, according to a new report from Business Talent Group (BTG).

The timeworn, “if it ain’t broke…” adage certainly applies, as these traditional initiatives are still highly effective when employed properly; but with COVID receding and the job market continuing to tighten, leading PE firms are looking for new ways to resource initiatives to take advantage of market opportunity, accelerate transformation, and drive value creation within their portfolios. The Business Talent Group report says that the interesting thing is: The Great Resignation just might be creating its own solution. “For all the doors that COVID closed for many businesses, it opened just as many windows of opportunity for others,” the report said. “In the PE realm, buy and build—identifying and leveraging synergies to revive and strengthen organizations—is still a popular approach. Yet the growing talent shortage threatens to widen knowledge gaps, slow critical work and initiatives, and cripple ROI for private equity portfolios. It’s a less-than-ideal outlook for a sector that thrives on speed.”

As such, Business Talent Group says that talent innovation is becoming one of the most powerful private equity value creation levers. For firms that can provide private equity portfolio companies with access to talent and infrastructure to support their use at scale, it’s also a huge competitive advantage.

Talent Prioritization and Reallocation

Many professionals quitting their jobs during the Great Resignation are leaving the traditional workforce. They still plan to work—particularly those with specialized expertise and decades of high-level experience. According to Upwork, “64 percent of professionals at the top of their industries are increasingly choosing to work independently.”

“This, along with a COVID-spurred shift toward remote work, has actually opened up the labor market globally, creating a broader, richer talent pool from which to draw,” the Business Talent Group report said. “For PE firms—whose portfolio companies comprise a wide range of investment strategies, growth opportunities, and market positions and, as such, require a wide range of talent needs—this growth of the on-demand talent pool offers a distinct advantage.”

“Even before COVID-19, PE firms were beginning to consider the workforce through a fresh lens, and the pandemic has accelerated thinking about a comprehensive talent agenda at their portfolio companies—one that focuses on the employee, the business, and the value derived from an optimized workforce,” reported EY. Business Talent Group says that despite identifying independent talent as a tremendous resource, many firms have failed to make the most of it, ultimately sticking to traditional hiring strategies and missing out on potential innovation. Now that the labor market has tightened, however, PE firms find themselves with few other options. Fortunately, in this case, the on-demand option is also the best one, the report said.

Talent optimization might be the value driver, but—as always, in the world of PE—speed is the key. Alpha returns and successful exits are intrinsically tied to prioritizing talent decisions as part of the value creation plan. Bain & Company found that “92 percent of PE professionals said that waiting too long to take action on talent issues had resulted in portfolio company underperformance.” On the flip side, “80 percent of portfolio companies that match the right talent to critical roles from the start return 2.5x the initial investment,” according to McKinsey Quarterly.

Private Equity Recruiting and What it Takes to Find the Right Candidates
Executive search firms continue to have plenty of assignments from private equity firms and their portfolio companies. But there are challenges to finding talent for the sector. In a recent interview with Hunt Scanlon Media, Joseph Blass, founder and CEO of Ezekia, discussed those hurdles, and more.

In a separate report, McKinsey said that talent and resources for private equity portfolio companies need to be dynamically reallocated on a granular and ongoing basis. Active reallocation yields significant returns: “Within 20 years, the dynamic reallocator will be worth twice as much as its less agile counterpart—a divide likely to increase as accelerating digital disruptions and growing geopolitical uncertainty boost the importance of nimble reallocation.”

Retaining Speed and Agility with On-Demand Support

Private equity has long been at the forefront of innovation, and talent optimization should be no different. As BTG co-CEO Jody Greenstone Miller said in a recent podcast with Tim Sanders, VP of customer insights at Upwork: “If you think about PE as an engine of economic innovation… I think they really do have the potential to be the leader in innovating on talent…they just need to be able to implement it as well and as fast as possible. And it’s hard not to see the most innovative firms figuring out quickly that this is an important piece of how to get that done.”

Related: Private Equity Firms Invest in Raising Their Talent Game

For decades, private equity firms have employed multiple strategies to create value within their portfolios. BTG points out that they have included initiatives such as:

  • M&A and inorganic growth – “buy and build.”
  • Operational excellence and margin improvement.
  • Technology implementation and transformation.
  • Digitization and automation.
  • Market, channel, and customer expansion.

The report says that traditional initiatives continue to effectively create value, but ultimately their success depends on phasing the work properly and having access to the right talent to strategize and execute on them. A report from Deloitte found the primary drivers of value for private equity portfolios to be cost transformation and digital transformation, both of which carry significant talent implications. How the talent strategy for each is addressed can yield very different outcomes.

“For most portfolio companies, payroll represents 40 to 60 percent of their fixed costs. In a world where technology and facilities are becoming on-demand, traditional talent models are the cement in the budget,” said Mr. Sanders. “Because on-demand talent can be scaled up or down, they serve to variabilize a portfolio company’s cost structure. Given the never-ending uncertainties of today’s landscape, this should be a priority for any PE firm as they protect their downside.”

BTG notes that high-end independent talent can enable and accelerate value creation for PE firms in a number of ways:

Smoothing Leadership Transitions & Filling Critical Gaps

“C-suite evaluation and change is the first step in a PE firm’s playbook,” says Greenstone Miller. No wonder, seeing how a portfolio company’s leadership has a 10 to 15 percent impact on financial performance and a 25-30 percent impact on market valuation, according to Harvard Business Review.

“At the same time, replacing a member of a portfolio company’s leadership team is often a confidential process that’s slow and lacking critical insight,” the BTG report said. “By bringing in an experienced interim c-suite officer, the executive search can be a much quicker and more open process, and the transition smoother all around. This is equally effective if the departure is voluntary.”

When the CEO of a recently integrated $600 million travel and hospitality company abruptly departed right after acquiring a global insurance company, the PE firm reached out to BTG for an interim C-level executive. BTG connected the firm with a former EVP at a worldwide hotel conglomerate and one of the top three global distribution systems (GDS), who stepped in to stabilize performance and employee morale, revitalize marketing focus, and execute on the remainder of the integration plan. The company was successfully exited three years later.

This interim talent strategy doesn’t have to be limited to an organization’s highest levels, either. BTG found a 189 percent year-over-year increase in requests for interim leadership below the C-suite, reflecting an increasingly prominent role for on-demand talent up and down the org chart.

Improving Performance

“Accelerating growth is among the most common objectives in a private equity value creation plan,” the Business Talent Group report said. “Whether through business model innovation, new products, or adapted go-to-market initiatives, growth initiatives are well suited to the quick action and deep expertise offered by experienced on-demand talent.”

In one case, BTG delivered a former GM executive and Deloitte consultant with 10-plus years leading supply chain transformations to help a PE-backed, fast-growing CPG company resolve numerous supply chain glitches and lead a round of supply chain consolidation. The consultant was able to work with the in-house team to address current issues, immediately begin to create enterprise-level synergies, and develop a go-to-market strategy with a major competitive advantage.

Related: Remote Working in Private Equity

In another case, the SVP of sales/marketing at a multi-billion-dollar software company was concerned about inefficiencies in the global sales process. Legacy systems and old work-flows were clearly part of the issue, but they couldn’t determine what specifically needed improvement. BTG provided a hybrid team—a former McKinsey EM focused on tech companies paired with a lean transformation expert—who delivered a prioritized list of initiatives that increased the productivity of the client’s sales teams and realized a savings of 30 percent.

Advancing Transformations and Digital Initiatives

“Private equity leaders know that speed and innovation are what drives effective—and profitable—technology implementation,” the BTG report said. “By tapping high-level independent talent to provide essential technological expertise, PE firms can quickly and seamlessly advance transformations and execute digital initiatives.”

In one such case, cross-functional IT matrices were contributing to inefficiencies at a PE-backed global financial services firm. Consistency on issues like data center strategy and cloud technology was elusive, and the leadership team was concerned that the company’s IT model would not support its long-term needs. BTG brought in a senior IT transformation expert who had trained at McKinsey to provide objective insight. After analyzing the team’s topline business imperatives and long-term aspirations, he refined their IT operating models based on the company’s internal drivers and delivered a high-level framework and plan that management adopted.

Access to Talent Paired with Best Practices

The opportunity for independent talent as private equity value creation levers is evident, and although these experts can nimbly step into high-level roles and initiatives as needed, most PE leaders don’t yet know how to effectively deploy them, according to the Business Talent Group report. “By developing and implementing a best-in-class strategy up front and incorporating the use of on-demand, independent talent into their overall value creation plan (VCP), PE firms can fully take advantage of the nearly limitless potential afforded by this nearly limitless talent pool,” the study said.

Related: Leadership Dilemma Unfolding at Private Equity Firms

Contributed by Scott A. Scanlon, Editor-in-Chief; Dale M. Zupsansky, Managing Editor; and Stephen Sawicki, Managing Editor – Hunt Scanlon Media

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