May 22, 2019 – Some people like to compare a private equity investment to a marriage. Many steps are necessary in order to build a strong foundation and to be aligned for the future. PE investors and leaders strongly depend on one another to achieve returns and value within an agreed period of time. If the arrangement proves unsuccessful, either party might find themselves breaking bonds in pursuit of greater rewards.
“When a private equity firm invests in or acquires a company, it needs to have a deep understanding of the company and its structure,” said Susanne Sahli, a partner at Stanton Chase, in a new report. “The firm needs to know the customer landscape, the financial details, the industry and upcoming trends and challenges.”
But with whom do you finally join forces? “Probably not with a detailed spreadsheet or a fancy product,” Ms. Sahli said. “You will say ‘I do’ to the people who will execute your vision and put your strategic plans into action. Therefore, a careful evaluation of the human assets not only during the diligence process (buy) but also post-investment (build, bind) is indispensable. Without it, even the best formulated plan can fall apart even before you start creating value.”
The notion of the growing importance of human capital in the PE industry is not new, but it is gaining traction. Harvard Business Review recently published “PE Firms are Creating a New Role: Leadership Capital Partner.” The authors outline what Ms. Sahli said her firm sees in its daily work in PE executive assessment: namely, leadership is as important as financials.
Buy – Build – Bind
According to Forbes, portfolio firms fail to achieve the return their investors expect almost half the time. “This is most often because the PE firm has chosen the wrong CEO or other CXO, and/or waited too long to replace these positions when things went awry,” said Lucas Schellenberg, co-author of the report and managing partner at Stanton Chase. “Having a positive impression and gut feeling about the leadership team during the evaluation process is certainly essential. However, thoroughly assessing the key players is critical in the buying process in order to minimize the risk of a post-investment fallout.”
Susanne Sahli combines her entrepreneurial and corporate background in the area of leadership/organizational development, executive assessments and executive search. She delivers projects for corporations, both multinationals and SMEs, across diverse industries, universities and government bodies in Asia and Europe. At Stanton Chase, Ms. Sahli focusses on C-level mandates, delivering top class talent and assessments to her clients. As a thought leader in the burgeoning talent field, she is one of a growing number of go-to experts for executive assessments, organizational development and leadership projects.
“When PE firms focus solely on tangible assets, this can lead to ignoring critical decisions that need to be made on the people front,” he said. “The consequence of acting in purely good faith with regard to the ‘intangibles’ is that the momentum can be easily lost.”
Human capital aspects such as talent management and team effectiveness nowadays require a more proactive and dynamic approach, according to Bain & Company’s Global Private Equity Report 2018. Portfolio companies must attain a deep understanding not only of the “what” and “how,” but also of the “who” in this process in order to succeed and accelerate growth, said Stanton Chase.
Suppose, for example, that you have created your roadmap and value creation plan but that they include a level of expectations and complexity that the team has not experienced yet, said Ms. Sahli. “If you acquire a company that is used to a top-down leadership approach, your innovative strategy may not match the leadership culture and values,” she said. “Therefore, soft factor topics have become increasingly important in the new world of PE investments, particularly when investing in a small to medium enterprise, such as mid-market sized businesses whose owners or founders are connected with strong emotional ties to their babies.”
“This issue can be addressed by either hiring an internal leadership expert or working with credible external partners and leadership coaches,” said Ms. Sahli. “These experts can not only help to build the bridge between the investor group and the leadership team, but also give valuable real-time feedback to both parties and help to create a supporting people strategy.”
Lucas Schellenberg is managing partner at Stanton Chase International (Schweiz) AG, which he founded in 2006. He leads the firm’s global sector alternative investment and private equity specialization unit. In addition to this, he headed the global technology practice group prior to leading the supply chain, logistics and transportation practice group until the end of 2012.
Stanton Chases suggested the following questions that PE firms should ask themselves in order to ensure that there is a match between what they want to buy and where they want to go:
- Is the leadership team aligned with the investors, and is the strategic plan fully understood?
- What leadership skills and traits are required to effectively execute this plan?
- Does the existing leadership team fulfil the requirements? Where are the gaps and how do you evaluate these?
- Has the team bought into your strategic direction and your plans and are they committed to pursue it at great lengths? How do you ensure and assess this progress?
- Is the leadership motivated and ready for change or does it require an immediate replacement?
- What is your post-investment strategy for the leadership team involved?
- What support does the team need to show exceptional performance?
- If you have identified gaps during the buying process, how will you close these?
- How do you identify and organize the talent pipeline?
- How to you continuously assess the leadership team and the organization to ensure that the strategy is on track?
- What long-term talent programs will help you to consistently work with a high performing leadership team, hence achieve great dividends for the investors?
- How do you initiate a sustainable succession planning process?
- How do you ensure the team shows the necessary stamina and remains focused even during the most challenging times?
- Have you embedded a feedback culture and how it is put to live in your organization?
This latest research report from Hunt Scanlon Media examines the growing talent dilemma unfolding at private equity firms – and offers an array of solutions to win the widening war for leadership. According to Hunt Scanlon, the PE sector can expect to see an expanding bidding war for top talent over the next decade. Driving the trend: persistent global talent shortages across the C-suite in most industries and functions, including finance, healthcare and biotech, digital and technology.
Linking talent to value is this report’s overriding theme. Hunt Scanlon has surveyed private equity leaders and their chief talent officers as well as leading executive recruiters specializing in the sector. Their expert commentary and advice is contained in this year’s report. Click here to read more!
- How do you nurture your company’s culture so it binds and attracts top talent?
To summarize, Stanton Chase offered the following outline of the top five critical activities that will support a firm’s human capital decisions throughout the process of buy-build-bind:
- Be clear about the expectations and capabilities needed.The team’s current culture may not match with the investor’s vision. What are the key roles and behaviors required to build a successful company? PE investors and the leadership team should have an open dialogue in order to lay the ground for a human capital roadmap which is aligned with the overall strategic direction.
- Thoroughly assess your key leaders in the buying process.Replace leaders in a timely manner when expectations cannot be met. Once on board, check progress regularly so you can initiate the necessary steps to build the relevant skill-set and strengthen the commitment (bind) of the key players for the long term. For example: building effective teams, managing complexity, giving direction in times of ambiguity and managing multiple stakeholders are a few critical skills of relevance which should be assessed regularly.
- Identify and build a talent pipeline.Based on the analysis and knowledge gained during the above-mentioned phases, consider leaders for future decisions, overall enhancement of the workforce and the company’s direction.
- Review the strategic plan regularly.This also includes having an open and organized feedback culture so you can swiftly react when necessary (what worked, what did not?)
- Work with leadership experts/coaches to support the team and investors.This is essential in the critical first months and beyond. From experience, working in regular intervals with a leadership coach in a safe setting is highly beneficial for the CEO not only to act as a sounding board for his/her ideas and concepts, but also to quickly remove potential roadblocks or find alternative strategies.
“By focusing not only on figures but also human capital,” said Ms. Sahli, “your business will be poised to elevate and propel itself to the top ranks of the increasingly competitive landscape of the private equity industry.”
Contributed by Scott A. Scanlon, Editor-in-Chief; Dale M. Zupsansky, Managing Editor; Stephen Sawicki, Managing Editor; and Andrew W. Mitchell, Managing Editor – Hunt Scanlon Media