More Than Coaching: How the Right Advisor Can Help Untangle the Human Dynamics that Derail Portco Value Creation

October 22, 2024 – When private equity investors make their pitches, they often point out their ability to provide organizations with the support that creates value – typically meaning financial and operational support. However, most PE firms find it challenging to help their portcos manage the inevitable human capital challenges, which are typically enormously complex and time-consuming for even the most experienced leaders, according to a recent report from Chris Mitchell, principal, private equity at FMG Leading.

“The irony is that the very act of PE investment puts people issues front and center at a very intense and highly charged moment,” he said. “In acquiring organizations, PE firms and their operating partners automatically upend internal status quos and power dynamics, which brings individuals’ fears, egos and other differences to the surface. Without meaning to, firms can become an intimidating presence met with skepticism and mistrust. The resulting us versus them dynamic prevents PE investors and management teams from achieving the alignment required to tap into organizations’ full potential. Instead, people issues fester under the surface, and show up as roadblocks to value-creation efforts. This generates high levels of frustration and distraction, preventing leaders from delivering on their investment theses. Ultimately, growth slows, and the investment suffers.”

To meet this challenge, executive advisors who engage with PE clients must seek to recognize, understand and break down barriers between the investment’s key players – general partners, operating partners, portfolio company leaders and the organization, according to Mr. Mitchell. He notes that by enhancing communications and building alignment, coaches can get these parties working metaphorically – and perhaps literally – from the same side of the conference room table.

The Dual Depth of Understanding

For advisory partners to ensure they’re delivering outsized returns on their work with private equity investors, both parties should understand what’s required to make such investments most successful, the FMG Leading report explains. While this includes an ability to recognize and solve the PE-specific people issues that arise, other areas of knowledge and fine-tuned perspectives also become vital for value-creation efforts.

“Additionally, coaches and clients who understand the profound benefits of initiating work at the very beginning of PE acquisitions typically get the most value out of engagements,” Mr. Mitchell said. “Their ability to prioritize and bring in coaches early – often pre-close – best ensures that senior management teams charged with driving organizational value at this key inflection point are working together as seamlessly and productively as possible.”

Mr. Mitchell also notes that when coaches and advisors work in close partnership with their PE clients and bring a deep understanding of private equity’s unique dynamics and contextualized best practices, they have every ability to repair strained professional relationships. Better yet, he says that they can keep them from fraying in the first place. By convening the right conversations, they can recalibrate and/or preserve critical bonds between key parties, creating and maintaining the alignment required to accelerate value creation.

Coaching and Advising the Private Equity-Backed CEO

An executive coach’s ability to recognize key patterns among CEOs of PE-backed companies enhances their ability to harness leadership potential and meaningfully accelerate value creation, according to the FMG Leading report. As mentioned earlier, the most successful PE advisory engagements go beyond sessions with CEOs; they incorporate a variety of other stakeholders, seeking to instill in organizations a “coaching mindset.”

Chris Mitchell is principal, private equity at FMG Leading. He is an experienced and grounded leader, advisor, and business coach with over 30 years of experience. His expertise lies in his ability to guide executive leaders and teams through periods of rapid scale, ambiguity, and strategic change. Mr. Mitchell partners with senior leaders, investors, and boards to accelerate growth and create value. He brings a holistic approach to both corporate strategy and individual development, aligning overall business context and goals with the human capital capabilities required for organizations to thrive. Mr. Mitchell guides executive leaders through complex and nuanced situations where the stakes are high, primarily advising middle-market private equity-backed executives and investors, as well as senior leaders from a wide range of industries. His specialty is preparing executives to build and lead high-performing teams as they take on new growth expectations and the increased pace commonly associated with an infusion of growth capital.

“Still, the fact remains that chief executives play a singularly pivotal role in driving value creation in a business,” Mr. Mitchell said. “This means that the advisors working with them must deeply understand their unique challenges, which are often more pronounced and complex in private equity portfolio companies. While serving as a CEO is, by nature, immensely challenging, those who take on these positions at PE-backed companies face unique challenges. Namely, businesses that have accepted investments from private equity firms have tight and strict timelines to hit aggressive financial milestones – targets that tend to creep up on executives faster than they anticipate, causing significant stress.”

Advising Private Equity-Backed Management Teams

Experienced advisors can accelerate value creation by helping management teams perform at their best and build productive, high-trust working relationships, Mr. Mitchell explains. “When a private equity portfolio company CEO invites their executive coach to also advise their management team, they are inviting the coach to serve as a convener and centralizing force that continually reminds the players that we’re all on the same team and we win together,” he says. “This can accelerate value in a way that nothing else can, especially when you consider the human elements that can run amuck under the kind of pressure that historically comes with growth and scale.”

For private equity firms to realize expected returns within their desired accelerated timeframes, management teams within their portfolio companies must be completely aligned on key focus areas and priorities, the FMG report notes. “Executive advisors can play a critical role in helping these leaders achieve such alignment early in the investment lifecycle, enabling them to hit targets in a shortened timeframe that results in heightened multiples,” it said. “When PE firms buy a business, they usually retain some of the existing management team while replacing others – adding capabilities that will be required for growth and scale. These leaders, many of whom are new to each other and the business, are expected to immediately accelerate performance across the business to meet the ambitious financial targets outlined in the value creation plan.”

Unfortunately, Mr. Mitchell explains that senior leaders often begin acting before achieving real alignment on the plan and, crucially, without establishing the necessary foundation of trust among themselves, the CEO and the board. “They often don’t realize they’ve missed these fundamental steps until months (or even longer) into the investment’s hold period, creating avoidable problems, headaches and delays resulting in missed performance targets,” he says. “Engaging with the management team at the earliest possible opportunity allows executive leadership coaches to facilitate the initial alignment and trust required to ensure top leaders are entirely in sync and working purposefully, in unison, toward their big-picture objectives. This can de-risk the potential for misalignment and mistrust, which can thwart even the most compelling investment theses, strategic narratives and value-creation plans.”

Laying the Groundwork for Strategic Board Coaching Efforts

“Upon establishing contact with a board, advisors should immediately clarify that their responsibility and loyalty is to no one person or team, but to the investment itself,” Mr. Mitchell says. “The advisor can thus become a valuable forcing function to help all relevant parties stay connected and aligned. And when issues creep in, they can convene mission-critical conversations, using skilled facilitation to help executives stay or get back on track and reach workable solutions.”

Related: Why Investing in Top Private Equity Talent is Key to Future Growth

With this as a backdrop, FMG Leading explains that the best coaches reinforce the necessity of establishing and keeping the trust of their coachees – meaning they’ll need to be able to protect confidentiality. They cannot serve their strategic purpose if they are directed to act as a board’s spy or “mole.” This perception alone can serve to undermine the advisor’s work.

Four Priority Areas For Investor-Level Advisory

When granted a seat among board and C-suite members together for the first time, advisors might not know exactly where to begin concerning the engagement, but Mr. Mitchell points out that they can never do wrong prioritizing four core areas:

• Alignment. A savvy advisors’ first immediate goal should be to proactively, intentionally and consistently press for alignment with big-picture strategy – from the board through the business leaders and down into the business. Such advocacy is essential because there is often no one else in the room taking on this crucial responsibility. This serves to exemplify why teams can work against each other and an overarching plan even after they’ve spent extensive time preparing and reviewing it together.

Transforming Portfolio Companies and Driving Value Creation via Human Capital
At the beginning of last year, Gartner predicted a 20 percent rise in turnover rate across industries. Heightened inflation, rising interest rates, post-pandemic priority shifts, and hybrid work preferences have created a fierce scrimmage for companies worldwide trying to hire the people necessary to drive long-term profits.

• Role Clarity. Advisors should always seek to prioritize role clarity among board members and management team members. Time spent detailing and discussing parties’ individual mandates and how they intersect can help establish a foundation of trust and respect among parties that can help prevent relationships from fracturing in the face of internal and external pressures.
• Power Dynamics. The power and relational dynamics between key investment stakeholders are nuanced and complex and often materialize in ways that jeopardize investment strategies. This can take the form of conscious or unconscious favoritism, hiding critical information, egotism and fear-based thinking – all issues that can pull organizations out of alignment. An experienced outside voice can bring the objectivity and expertise needed to keep these dynamics positive and constructive and repair them when they become dysfunctional.
• Focus. It’s too easy for PE stakeholders to lose sight of the most important business problems they are solving together, which extend well beyond the P&L and the bounds of mere spreadsheets. An expert advisor can help all parties stay focused on organizations’ most critical issues, which nearly always have a human element and require a deeper layer of strategic thinking.

“PE advisors should also apply their acquired knowledge of specific boards to enhance their engagements with their respective CEOs,” Mr. Mitchell said. “The enormity of the chief executive’s job includes navigating stakeholder alignment, including the nuances and complexity of boards and the relationships therein. Advising CEOs on this complex work frees them to devote scarce time and attention elsewhere. While executive advisors are rarely invited to offer their insights at the board level, the ability to join investors behind the curtain offers a singular opportunity to exponentially enhance the client value they deliver, extending the alignment they’re facilitating to the highest-level sphere.”

Mr. Mitchell explains that PE-backed companies can maximize partnerships with experienced executive coaches and advisors in ways that go far beyond how most organizations elect to engage these professionals. “By asking the right questions, aligning on partnership goals, and understanding the range of areas that qualified outside advisors can impact, investors and management teams can build early alignment throughout the organization, and create the momentum required to ensure a successful exit,” he said. “The most effective PE advisors contribute to these partnerships by earning the trust of their clients while ensuring their sensitivity to the nuances and pace of private equity is always at the forefront. Coaching and advising in the private equity context is different – and the best advisors turn that difference into a competitive advantage.”

To read the full report, please click here!

Related: Keys for First-Turn Portfolio Companies Using Executive Search Firms

Contributed by Scott A. Scanlon, Editor-in-Chief and Dale M. Zupsansky, Executive Editor  – Hunt Scanlon Media